Investment Company and. Variable Contracts Products Principals (Series 26) Practice Exam

When will an investment adviser contract be automatically terminated?

1. Upon board approval

2. Upon majority vote

3. If the investment adviser relocates

4. If the investment adviser assigns the contract to another person

The correct answer is: If the investment adviser assigns the contract to another person

An investment adviser contract will be automatically terminated if the investment adviser assigns the contract to another person. This provision is in place to protect the interests of clients, ensuring that they continue to receive services from a qualified adviser whom they originally engaged. When an adviser assigns their responsibilities to a third party without the client's consent, it can lead to a loss of trust and may not provide the same level of service or expertise as originally agreed upon. Contracts typically include clauses that detail the conditions for termination to ensure transparency and protect the rights of both parties. Assignment refers to the transfer of contractual rights or duties from one party to another, and most investment adviser contracts explicitly state that such assignment results in automatic termination of the contract. This prevents situations where clients may find themselves dealing with an adviser they did not choose or who may not be adequately qualified to manage their investment strategy. The other options do not constitute an automatic termination of an investment adviser contract under customary regulations in the financial industry. Board approval or a majority vote generally relate to governance matters rather than contractual obligations, and the relocation of an adviser does not inherently affect the validity of the adviser-client relationship unless otherwise specified in the agreement.