NASAA Series 63 — All Questions

An adviser's website says it was named a top regional adviser in a magazine's ranking. It paid the magazine a fee to license the badge. What must accompany the rating?

• a.Nothing, since a ranking by an independent magazine needs no disclosure from the adviser at all
• b.The date and period, who created it, and that the adviser paid for obtaining or using it✓
• c.Only the name of the magazine, which is enough to identify the source to anyone reading it
• d.The adviser's own net-of-fee performance, shown for the same period that the rating covers

Rule 102(a)(4)-1(m)(3) allows a third-party rating in an advertisement only if the adviser has a reasonable basis to believe the survey was not built to produce a predetermined result, and clearly discloses the date and period the rating covers, the identity of the party that created and tabulated it, and, if applicable, that compensation was paid directly or indirectly in connection with obtaining or using it. The magazine's name alone leaves out the date, period and payment. Net performance is a separate requirement for performance presentations, not a rating condition.NASAA Model Rule 102(a)(4)-1(m)(3)

A current client posts an unpaid, positive review of her adviser, and the adviser features it in an advertisement. Which disclosure still applies?

• a.A statement that the review reflects the average result achieved across all of the adviser's clients
• b.That the client was paid, together with a written agreement describing the payment that was made
• c.None, because an unpaid review sits outside the advertising rule since nothing was paid
• d.That it was given by a current client; no compensation terms or written agreement are needed✓

A testimonial is a statement by a current client, and Rule 102(a)(4)-1(m)(2)(i)(A) requires clear and prominent disclosure that it was given by a current client. Where no compensation was provided, the compensation disclosure and written-agreement conditions do not apply. The feature is still an advertisement, so it is not outside the rule. A statement about average client results is not part of the testimonial conditions.NASAA Model Rule 102(a)(4)-1(m)(2)(i)(A), (m)(2)(v)

A broker-dealer agent in a state that has adopted the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation reviews four client files. Which client is an "eligible adult" under the Act's definition?

• a.A 62-year-old client who has named a trusted contact on the account
• b.A 59-year-old client who recently signed a power of attorney
• c.A 55-year-old client who retired from full-time work early
• d.A 66-year-old client who shows no sign of diminished capacity✓

The Act defines an eligible adult as a person 65 or older, or a person subject to the state's adult protective services statute. Age alone qualifies the 66-year-old, with no showing of impairment. Naming a trusted contact, signing a power of attorney, or retiring early says nothing about age or adult protective services coverage, so none of the younger clients qualifies on that basis.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §2(3)

An investment adviser representative reasonably believes that a 71-year-old client's nephew, who holds a power of attorney, is draining the client's account through unexplained transfers. Under Section 3 of the NASAA Model Act, what must the representative do?

• a.Promptly notify both Adult Protective Services and the state securities commissioner✓
• b.Wait for the client's written complaint, then notify the commissioner of securities only
• c.Notify only the firm's compliance staff, who then decide whether any agency hears of it
• d.Notify law enforcement and the SEC, since state agencies play no role under the Act

Section 3 requires a qualified individual who reasonably believes exploitation may have occurred, been attempted, or is being attempted to promptly notify Adult Protective Services and the commissioner of securities. Keeping the matter inside compliance, waiting for a client complaint, or going to law enforcement and the SEC instead omits the two agencies the Act names, and the duty does not depend on a complaint or on proof.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §3

A qualified individual under the NASAA Model Act suspects that a client is the victim of financial exploitation. According to the Act's commentary, what must be true before the Section 3 duty to notify the Agencies arises?

• a.The individual holds the belief, and it is objectively reasonable✓
• b.The individual can show by a preponderance that the taking was unauthorized
• c.The individual's honest suspicion alone, however thin the facts behind it
• d.A court or Adult Protective Services has already found that exploitation occurred

The commentary describes reasonable belief as both subjective and objective: the person must actually believe exploitation may have occurred, and that belief must be reasonable. A prior finding or a preponderance showing sets the bar far higher than the Act does, while a purely subjective hunch ignores the objective half of the test and would invite unsubstantiated reports.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §3 and commentary

At an investment adviser that serves eligible adults, which of the following people is a "qualified individual" under the NASAA Model Act?

• a.The outside accountant who audits the firm's financial statements
• b.A client's adult child who holds a power of attorney over the account
• c.The firm's chief compliance officer, who never meets clients✓
• d.A bank teller who refers depositors to the firm's advisers

A qualified individual is an agent, an investment adviser representative, or a person serving in a supervisory, compliance, or legal capacity for the broker-dealer or adviser, so the compliance officer counts even without client contact. An attorney-in-fact for a client, an outside auditor, and a referring bank employee are not in any of those roles at the firm.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §2(7)

A broker-dealer agent files a Section 3 report about a client's suspected exploitation, acting in good faith and with reasonable care. The client later threatens to sue over the report. What protection does Section 4 give the agent?

• a.Immunity from administrative, civil and criminal liability arising from the report
• b.Immunity only if Adult Protective Services later substantiates the exploitation
• c.Immunity from civil suits, but not from administrative action by the commissioner
• d.Immunity from administrative or civil liability for the report itself✓

Section 4 immunizes a qualified individual who reports in good faith and with reasonable care from administrative or civil liability, including liability for failing to notify the customer of the report. It gives no protection against criminal liability, does not wait on a later finding by Adult Protective Services, and covers administrative as well as civil exposure.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §4

A client has designated her son as an emergency contact. Her agent now reasonably believes the son is pressuring her into transfers that deplete the account. Under Sections 3 and 5 of the NASAA Model Act, what is correct?

• a.Notify the agencies the Act names, but make no disclosure to the son about the suspicion✓
• b.Notify the agencies and the son together, since the client chose him in advance
• c.Notify the son first, and notify the agencies only if he fails to act within a reasonable time
• d.Notify the son only, because a designated contact replaces the duty to notify the agencies

Section 3 still requires notice to Adult Protective Services and the commissioner. Section 5 lets the firm tell a person the client designated in advance, but it forbids disclosure to a designated person who is suspected of the exploitation or other abuse. A designation therefore neither replaces the agency notice nor permits telling the suspected son.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §§3 and 5

A 79-year-old client asks her broker-dealer to wire $90,000 to a new payee and to sell a block of stock. After an internal review, the firm reasonably believes the wire may result in financial exploitation. Under Section 7 of the NASAA Model Act, what may the firm delay?

• a.Neither, until Adult Protective Services issues a written order approving a hold
• b.The sale only, because the sale is what turns securities into spendable cash
• c.Only the wire, because the Act covers disbursements, not trade executions✓
• d.Both the wire and the sale, because the Act lets a firm hold any request it doubts

Section 7 authorizes a delay of a disbursement after an internal review gives the firm a reasonable belief that the disbursement may result in exploitation. The commentary says the drafters chose holds on disbursements and rejected delaying trade executions, which could conflict with federal rules governing execution. No agency order is needed before the firm acts.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §7(1)

A firm delays a disbursement requested on a Monday, and no holidays fall in the next two weeks. Counting business days from the requested disbursement, when must the firm give written notice of the delay and notify the Agencies, and when must it report its internal review results to the Agencies?

• a.Notice by Wednesday of that week; review results by Monday of the next week
• b.Notice by Wednesday of that week; review results by Wednesday of the next week✓
• c.Notice by Wednesday of that week; review results by Friday of that same week
• d.Notice by Wednesday of the next week; review results by Monday three weeks later

Section 7(1)(b) gives two business days after the requested disbursement for the written notice and the Agency notice, which is Wednesday. The review results are due within seven business days: Tuesday through Friday is four, the next Monday is five, Tuesday is six, and Wednesday is seven. Counting seven calendar days would land on Monday, and fifteen business days is the outer limit of the delay itself.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §7(1)(b)

A firm first delayed a disbursement from an eligible adult's account under Section 7 of the NASAA Model Act, and its review never concludes that the disbursement is safe. An Agency asks the firm to extend the delay. Counting from the first day of the delay, how long may it last at most without a court order?

• a.20 business days, which is five beyond the standard expiry
• b.30 business days, which is fifteen beyond the standard expiry
• c.15 business days, since an Agency request cannot lengthen the delay
• d.25 business days, which is ten beyond the standard expiry✓

Absent an earlier determination that the disbursement is safe, the delay expires fifteen business days after it began. If either Agency asks for an extension, it may run to no more than twenty-five business days after the first delay, so ten additional business days, unless an Agency ends it sooner or a court orders more.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §7(2)

An Adult Protective Services agency asks a broker-dealer for records connected to a suspected financial exploitation of an eligible adult. Under Section 9 of the NASAA Model Act, which statement is correct?

• a.The firm must provide relevant records, and they are not public records✓
• b.The firm may release the records only after the client gives written consent
• c.The firm must provide the records, which then become public under state law
• d.The firm must give the records to the commissioner only, not to APS or police

Section 9 requires the firm to provide access to or copies of relevant records to adult protective services and law enforcement, as part of a referral or on request in an investigation. Records provided this way are not public records under state law, and no client consent is needed. The commissioner's own examination authority is left untouched, not made exclusive.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §9

Which statement correctly contrasts the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation with FINRA Rule 2165, as NASAA's legislative commentary on the Act describes them?

• a.Rule 2165 requires firms to share records with adult protective services and law enforcement agencies, while the Act has no record-sharing provision
• b.Rule 2165 gives firms immunity from civil liability for reports to government agencies, while the Act grants no immunity for such reports
• c.The Act mandates reports to state agencies, while Rule 2165 does not require them✓
• d.Rule 2165 requires firms to report suspected exploitation to state securities regulators, while the Act leaves reporting voluntary

NASAA's commentary says the requirement to report suspected financial exploitation to state regulators or adult protective services agencies is unique to the Model Act, as are the requirement that firms share records with those agencies and with law enforcement and the civil and administrative immunity for disclosures. Rule 2165 only lets firms place temporary holds and does not require reports, record sharing or immunity. Any description that gives Rule 2165 the mandatory reporting, record-sharing or immunity features, or makes the Act's reporting voluntary, has the two regimes backwards.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, Legislative Commentary (7/2023), 'Adoption of FINRA Rule 2165 and its Relationship to the Model Act'

Under the NASAA Model Act's definition of "financial exploitation," which act involving an eligible adult's assets qualifies?

• a.A daughter who obtains a copy of the adult's statement after the adult authorizes it in writing
• b.An adult who gives to charity after discussing the gift with her adviser for several weeks
• c.A guardian who pays the adult's care-facility bills from the account under a court-approved budget
• d.A guardian who uses undue influence to seize control of the adult's assets and deprive her of them✓

The definition reaches wrongful or unauthorized taking of an eligible adult's assets, and any act, including one done through a power of attorney, guardianship, or conservatorship, to gain control through deception, intimidation, or undue influence and deprive the adult of use or ownership. Authorized, court-approved payments, a requested statement copy, and the adult's own considered gift involve no wrongful taking.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation §2(4)

A broker-dealer agent opens a brokerage account for a customer at a desk inside a bank branch where retail deposits are taken. Under the NASAA Model Rules for Sales of Securities at Financial Institutions, when and how must the agent disclose that the securities are not FDIC insured?

• a.At or before the time the account is opened, both orally and in writing✓
• b.At account opening, orally, with the written version sent after the first trade
• c.Before the first trade, in writing, if the customer asks to see it
• d.Within 30 days after the first trade, in writing on the confirmation

The rules require disclosure at or prior to account opening, given orally and in writing, that the products are not FDIC insured, are not deposits or obligations of the institution or guaranteed by it, and carry investment risk including possible loss of principal. Delivering it after the first trade, relying on the confirmation, or giving it only on request misses the timing, the dual form, or both.NASAA Model Rules for Sales of Securities at Financial Institutions (C)(3)(a)

A customer at a bank-branch brokerage office receives the required oral and written disclosures but declines to sign an acknowledgment of them. What do the NASAA Model Rules require of the broker-dealer?

• a.A signed acknowledgment in every case, so no account may be opened without one on file
• b.A bank officer's signature in place of the customer's, since the customer declined to sign
• c.A second oral disclosure, which replaces any need for a written acknowledgment
• d.Reasonable efforts to obtain it, though a continued refusal need not bar the account✓

The rules require the broker-dealer to make reasonable efforts to obtain a written acknowledgment during account opening. They do not make the signature a condition of opening the account, do not allow someone else to sign for the customer, and do not let a repeat oral disclosure stand in for the effort to get the written acknowledgment.NASAA Model Rules for Sales of Securities at Financial Institutions (C)(3)(a)(ii)

A broker-dealer wants to use the shorter, logo-format disclosure in a brochure it distributes on a bank's premises. Which wording matches the NASAA Model Rules?

• a.Not FDIC Insured / No Bank Guarantee / May Lose Value✓
• b.Not FDIC Insured / Bank Guarantee Optional / May Lose Value
• c.Not Federally Insured / No Principal Guarantee / Market Risk
• d.Not a Deposit / Not Government Backed / Value May Vary

The model rules name three logo-format statements that may stand in for the full disclosure when displayed conspicuously: Not FDIC Insured, No Bank Guarantee, and May Lose Value. Paraphrases that capture the idea but use different words are not the wording the rule lists, and a bank guarantee that is optional misstates what the institution does.NASAA Model Rules for Sales of Securities at Financial Institutions (C)(4)(b)(i)

Under the NASAA Model Rules for sales at financial institutions, which promotion may omit the standard investment-risk disclosures, provided the omission would not make it misleading?

• a.A message shown on the bank's ATM screens
• b.A radio spot lasting 30 seconds or less✓
• c.A television commercial lasting 30 seconds
• d.A brochure handed to customers in the lobby

The rules excuse the disclosures for radio broadcasts of 30 seconds or less, for electronic signs such as time-and-temperature or ticker signs, and for banners and posters used only as location indicators. Television, online services, and ATM messages are expressly excluded from the electronic-sign exception, and a brochure must carry the disclosures or the logo format.NASAA Model Rules for Sales of Securities at Financial Institutions (C)(4)(b)(ii)

A broker-dealer enters a networking arrangement to sell securities inside a credit union. Under the NASAA Model Rules, which term must the arrangement contain?

• a.Premises access for the firm's supervisors and, where allowed, state regulators✓
• b.An oral understanding of compensation, as long as the duties are in writing
• c.Credit union responsibility for supervising the agent's securities recommendations
• d.Credit union approval of each recommendation before the agent communicates it

The arrangement must be a written agreement setting out the parties' responsibilities and compensation, and it must allow the broker-dealer's supervisory personnel and, where state law authorizes, state securities regulators to enter the premises to inspect the broker-dealer's books and records. Management of the broker-dealer, not the credit union, remains responsible for the arrangement.NASAA Model Rules for Sales of Securities at Financial Institutions (C)(2)

An investment adviser registered in a state serves clients whose assets are held at an independent bank. Under the NASAA custody rule, which arrangement gives the adviser "custody"?

• a.Authority to withdraw client funds on the adviser's own instruction to the bank✓
• b.Receipt of duplicate quarterly statements that the bank also sends to each client
• c.A recommendation that the client open the account with that particular bank
• d.Authority to buy and sell securities in the account through the bank's trading desk

Custody includes any arrangement under which the adviser may withdraw client funds or securities from the custodian upon the adviser's instruction. Trading authority, receiving duplicate statements, and recommending a custodian do not give the adviser the ability to take assets out of the account.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (d)(2)(A)(ii)

A client mails an investment adviser a check made payable to the client's property-tax collector, expecting the adviser to pass it along. To avoid having custody under the NASAA custody rule, the adviser must forward the check within what period?

• a.Five business days of receiving it, with a note placed in the client file
• b.Thirty days, since the check was never payable to the adviser
• c.Ten calendar days, provided the client approves the delay in writing
• d.Three business days of receipt, keeping the required records✓

A client's check payable to a third party does not amount to custody if the adviser forwards it within three business days of receipt and keeps the required records. A longer window, even with client approval, or the fact that the check is not payable to the adviser does not preserve the exception.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (d)(2)(B)

Which of the following can serve as a "qualified custodian" of client securities under the NASAA custody rule?

• a.A futures commission merchant holding client stocks unrelated to futures contracts
• b.The adviser's affiliate, which is not a bank, broker-dealer or futures commission merchant
• c.A broker-dealer registered here and with the SEC that holds the assets in customer accounts✓
• d.A foreign financial institution that mixes client assets with its own proprietary assets

Qualified custodians are FDIC-insured banks and savings associations; broker-dealers registered in the jurisdiction and with the SEC that hold client assets in customer accounts; futures commission merchants, but only for futures-related assets; and foreign financial institutions that segregate client assets from their own. An unregulated affiliate and a foreign institution that commingles fail the definition, and a futures commission merchant is limited to futures.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (d)(6)

An investment adviser's only custody arises from its authority to deduct advisory fees from client accounts held at a qualified custodian. To use the fee-deduction exception to the annual independent verification, what must the adviser do each time it deducts a fee?

• a.Send the Administrator a copy of each invoice on the day of the deduction
• b.Send the client a statement of the fee within 30 days after the deduction is made
• c.Send the custodian an invoice and the client an itemized fee statement at once✓
• d.Obtain the client's fresh written consent before each deduction is processed

The exception requires, among other things, written client authorization and Form ADV notice to the Administrator, and with each deduction the adviser must concurrently send the custodian an invoice and the client a statement itemizing the fee, including the formula, the assets under management it is based on, and the period covered. Standing written authorization suffices, so fresh consent each time is not required, and the Administrator receives no copy of each invoice.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (b)(3)

During its surprise examination of an advisory firm's client assets, an independent CPA finds a material discrepancy. Under the NASAA custody rule, what must the written agreement with the CPA require?

• a.A Form ADV-E due 30 days after the examination, plus notice to the Administrator within one business day
• b.Notice to the Administrator at year-end, and Form ADV-E within 120 days of the examination
• c.Notice to the Administrator within four business days, and Form ADV-E filed 120 days after the exam date
• d.Notice to the Administrator within one business day, and Form ADV-E within 120 days of the examination✓

The CPA must notify the Administrator within one business day of finding a material discrepancy, by fax or e-mail followed by first-class mail, and must file a Form ADV-E certificate within 120 days of the time the CPA chose for the examination. Four business days is the deadline for reporting a resignation or termination of the engagement, and waiting until year-end is too late.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (a)(6)

A state-registered adviser is the general partner of a private fund and plans to rely on the exception for limited partnerships subject to an annual audit. Which condition applies?

• a.Audited financial statements reach the limited partners within 90 days after the calendar year-end
• b.The adviser's own accounting staff performs the audit, since the adviser controls the fund's records
• c.Audited financial statements reach every limited partner within 120 days of the fiscal year-end✓
• d.Limited partners get one statement a year, since the audit makes quarterly statements unnecessary

The exception requires at least quarterly statements to the limited partners, an annual audit by an independent, PCAOB-registered CPA, and distribution of the audited financial statements to the limited partners within 120 days of the fiscal year-end. A self-audit by the adviser or a reduction of the quarterly statements does not qualify.NASAA Model Rule 102(e)(1)-1 (Custody Requirements for Investment Advisers) (b)(4)

An agent's sales piece quotes a mutual fund's current yield. Under the NASAA Statement of Policy on investment company shares, the piece must also give:

• a.Average annual total return for 1, 5 and 10 years, plus yield versus total return explained✓
• b.The yield of a comparable bank certificate of deposit, with the date it was quoted
• c.The fund's sales charge schedule, with an explanation of how yield is annualized
• d.The fund's expense ratio for the last fiscal year, with the portfolio manager's tenure

Stating or implying a fund's yield or income without also disclosing the most recent average annual total return for the one-, five- and ten-year periods under Form N-1A, and explaining how yield and total return differ, is a dishonest or unethical practice. Sales charge schedules, expense ratios, and a CD comparison do not cure an incomplete performance picture.NASAA Statement of Policy, Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares (adopted 4/27/97) §C.1

An agent tells a prospect that a short-term bond fund "works like a CD but pays more." Under the NASAA Statement of Policy on investment company shares, what must the agent also disclose?

• a.That the comparison is acceptable if the fund invests only in investment-grade securities
• b.That the fund is not FDIC insured or guaranteed, and how its risks differ from a CD's✓
• c.That the fund's yield is higher than the CD's, supported by the most recent quarter's figures
• d.That the fund pays dividends monthly, whereas a CD pays interest only at maturity

Comparing fund shares to a savings account or certificate of deposit requires disclosure that the shares are not insured or guaranteed by the FDIC or any government agency, along with the relevant differences in risk, guarantees, and fluctuation of principal or return. Yield data, payment frequency, or investment-grade holdings do not make the comparison fair and complete.NASAA Statement of Policy, Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares (adopted 4/27/97) §C.2

An agent promotes a bond fund by stressing that most of its holdings carry private bond insurance. Under the NASAA Statement of Policy on investment company shares, what else must the agent disclose?

• a.The insurer's financial rating and the date the insurance policy was originally issued
• b.The fund's expense ratio over the last fiscal year and any sales load on the insured bonds
• c.Nothing further, since insured bonds carry no risk that the policy addresses
• d.Other relevant risks, such as interest-rate, market and liquidity risk, that can cause loss✓

Stating or implying insurance, credit quality, or guarantees on portfolio securities requires disclosure of other relevant risks, including interest rate, market, political, liquidity, and currency exchange risk, which can cause loss or fluctuation of principal despite the creditworthiness of the holdings. Describing the insurer or the fund's costs does not supply that disclosure.NASAA Statement of Policy, Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares (adopted 4/27/97) §C.3

On the first day, both a broker-dealer agent and an investment adviser representative begin using discretion in a new client's account, relying only on the client's spoken say-so. Under the NASAA policies, when must each have written discretionary authority?

• a.The agent has ten business days after the first trade; the representative needed it beforehand
• b.The agent needed it before the first trade; the representative has ten business days after it✓
• c.Both needed written authority in hand before the first discretionary trade was placed
• d.Both have ten business days after the first discretionary trade to obtain written authority

The broker-dealer policy bars exercising discretion without first obtaining written discretionary authority, so the agent was already out of compliance on day one. The investment adviser model rule instead allows oral authority at the start and requires the written grant within ten business days after the first transaction placed under it. The other pairings give the agent the adviser's grace period, give the adviser the agent's stricter timing, or reverse the two registrants.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.g; NASAA Model Rule 102(a)(4)-1 (Dishonest or Unethical Business Practices of Investment Advisers) (b)

An adviser holds no written discretionary authority from a client. Which of the client's instructions would make the adviser's discretion subject to the written-authority requirement of the NASAA investment adviser model rule?

• a.Buy 500 shares of XYZ on whatever day this month the adviser chooses
• b.Sell 300 shares of XYZ at whichever price the adviser considers best today
• c.Buy 500 shares of XYZ only if the price falls to $40 or lower
• d.Buy up to $20,000 of whichever technology stock the adviser judges best✓

Discretion over which security to buy or how much to spend is general discretion, so it requires written authority within ten business days after the first trade. Discretion limited to the price or the time for an order involving a definite amount of a specified security is excepted, which covers the first two instructions. A fixed price limit leaves the adviser no discretion at all.NASAA Model Rule 102(a)(4)-1 (Dishonest or Unethical Business Practices of Investment Advisers) (b)

A customer leaves for a two-week trip after telling her agent she is thinking about selling her 400 shares of ABC. While she is away the price jumps, and the agent sells the shares. She approves by phone when she returns. How should the agent's conduct be classified when the sale occurred?

• a.Time-and-price discretion, because she had named both the security and the quantity
• b.Acceptable conduct, because her later approval supplied the missing authority
• c.Executing a trade without authorization, even though she accepted the sale later✓
• d.Discretionary trading needing written authority only within ten business days afterward

She had said only that she was considering a sale; she gave no order, so nothing authorized the trade when it was executed. The violation is complete at execution, and approval afterward does not cure it. Time-and-price discretion applies only to an order the customer has actually given. The ten-business-day window belongs to investment adviser discretion that began under oral authority, not to a broker-dealer trade with no instruction.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.f

A customer tells her agent, "Buy 200 shares of QRS, and choose the day and the price that work best." The agent buys 200 shares on Tuesday, then buys 100 more on Thursday because he thinks the stock is cheap. Which statement is correct?

• a.All 300 shares fall within time-and-price discretion, since the customer delegated the timing
• b.The extra 100 shares are valid if the customer gets a confirmation and does not object
• c.The first 200 shares fall within time-and-price discretion; the extra 100 shares were not authorized✓
• d.All 300 shares required written discretionary authority, including the first 200 shares

The customer fixed the security and the quantity and left only the time and price to the agent, which needs no written discretionary authority. Buying 100 more changes the quantity, which the customer never delegated, so those shares were executed without authorization. Silence after a confirmation does not authorize a trade in advance.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §1.f and 1.g

An investment adviser representative manages a client's taxable account under a written discretionary agreement. The client has never given any authority, oral or written, over her IRA at the same custodian, yet the representative places a trade in it. Under the NASAA investment adviser model rule, the trade is:

• a.An order placed without authority, because the agreement did not reach the IRA✓
• b.A custody violation only, since one custodian holds both of the client's accounts
• c.Acceptable if written authority for the IRA is obtained within ten business days
• d.Acceptable, since authority over one account extends to the client's other accounts

Authority comes from the client for each account. The ten-business-day period applies only after a first trade made under oral discretionary authority, and here none was given. Using the same custodian does not turn the trade into a custody matter, and discretion over one account does not carry over to another.NASAA Model Rule 102(a)(4)-1 (Dishonest or Unethical Business Practices of Investment Advisers) (d)

A client's brother, who has no account with the adviser, phones to tell the adviser to sell the client's 1,000 shares of DEF. The client had said by phone that the brother may give instructions, but nothing is in writing. The adviser places the order. What is the problem under the NASAA investment adviser model rule?

• a.The adviser acted on a third party's instruction without the client's prior written authorization✓
• b.The rule forbids acting on any third party's instruction, even if the client authorizes it in writing
• c.The adviser acted on oral third-party authority and received no written confirmation within ten business days
• d.There is no problem, since oral approval from the client is enough for a non-discretionary sale

The rule requires written third-party trading authorization from the client before the adviser places an order on a third party's instruction. The ten-business-day grace period applies to discretionary authority given orally by the client, not to a third party's instruction. A client may authorize a third party, but in writing and in advance, so oral approval does not satisfy the rule.NASAA Model Rule 102(a)(4)-1 (Dishonest or Unethical Business Practices of Investment Advisers) (e)

For one quarter, a customer's account shows purchases of $180,000, costs of $9,000, and equity of $36,000 at the start and $54,000 at the end. Using average equity, turnover rate is purchases divided by average equity, and cost-equity ratio is costs divided by average equity. What are the two figures?

• a.Turnover rate of 4.0 and cost-equity ratio of 20%✓
• b.Turnover rate of 3.3 and cost-equity ratio of 16.7%
• c.Turnover rate of 4.0 and cost-equity ratio of 5%
• d.Turnover rate of 5.0 and cost-equity ratio of 25%

Average equity is ($36,000 + $54,000) / 2 = $45,000. Turnover is $180,000 / $45,000 = 4.0, and the cost-equity ratio is $9,000 / $45,000 = 20%. Dividing by the starting equity gives 5.0 and 25%, dividing by the ending equity gives 3.3 and 16.7%, and dividing the costs by purchases gives 5%. Rule 2111 names these measures but sets no number at which trading becomes excessive.FINRA Rule 2111.05(c) (Regulatory Notice 20-18)

FINRA Rule 2111 requires a reasonable basis to believe that a series of recommended transactions is not excessive. Which list contains the factors the rule itself names as relevant to excessive activity?

• a.Concentration, liquidity, and the customer's use of margin borrowing
• b.Turnover rate, cost-equity ratio, and the use of in-and-out trading✓
• c.Turnover rate, cost-equity ratio, and a fixed ceiling on the number of annual trades
• d.Commission rate, account size, and the number of agents servicing the account

The supplementary material lists turnover rate, cost-equity ratio, and in-and-out trading, and it states that no single test defines excessive activity. A fixed ceiling on annual trades therefore does not exist, and commission rate, account size, staffing, concentration, liquidity and margin are not the factors the rule names.FINRA Rule 2111.05(c) (Regulatory Notice 20-18)

A customer going abroad gives his agent an executed stock power for 800 shares so that a sale can be completed while he is away. Under the NASAA broker-dealer policy, accepting and holding it is:

• a.Permitted when the agent gives the customer a written receipt for the document
• b.Acting as custodian of a customer's executed stock power, which is unethical for an agent✓
• c.Permitted for a short period when the customer will be out of the country
• d.Permitted when the agent holds it for the broker-dealer, not for himself

The policy lists lending or borrowing money or securities from a customer, and acting as a custodian for a customer's money, securities or executed stock power, as unethical practices for an agent. It carves out no time limit, no receipt requirement, and no exception for holding on behalf of the firm.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.a

An investment adviser that is not a lending institution lends $15,000 at a market interest rate to an advisory client, an individual, who signs a promissory note. Under the NASAA investment adviser model rule, the loan is:

• a.Permitted if the client consents in writing after the conflict is disclosed to him
• b.Permitted if the loan is secured by assets held in the client's advisory account
• c.Prohibited, because the adviser is not a lending institution and the client is not an affiliate✓
• d.Permitted, because a signed note carrying a market rate of interest removes the conflict

The rule bars loaning money to a client unless the adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the adviser. Neither exception applies, and a note, market interest, collateral or written consent does not substitute for them.NASAA Model Rule 102(a)(4)-1(g)

An agent agrees with a customer to share 20% of the profits and losses in the customer's account. The customer signs a written authorization, but the agent never tells his firm. Under the NASAA broker-dealer policy, the arrangement is:

• a.Unethical, because the firm's written authorization is also required, along with the customer's✓
• b.Acceptable if the firm is informed in writing within ten business days afterward
• c.Acceptable, since only the customer's written authorization is required by the policy
• d.Acceptable, because the agent bears part of the risk alongside the customer himself

Sharing in a customer's profits or losses is unethical unless both the customer and the broker-dealer the agent represents authorize it in writing. Taking on risk does not change that, and the policy has no after-the-fact grace period for telling the firm.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.d

An agent pays 25% of a commission to a friend, a CPA who is not a registered agent of any firm, for introducing a new customer. Under the NASAA broker-dealer policy, the payment is:

• a.Acceptable if the customer is told of the payment in writing before the account opens
• b.Acceptable, because the friend is a licensed professional who made a real introduction
• c.Unethical, since the friend is not an agent of the same firm or one under common control✓
• d.Acceptable if the friend is an agent of a different, unaffiliated broker-dealer firm

An agent may split commissions or other compensation only with someone also registered as an agent for the same broker-dealer, or a broker-dealer under direct or indirect common control. A professional license, disclosure to the customer, or registration with an unrelated firm does not meet that test.NASAA Statement of Policy, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (as amended 4/7/2025) §2.e

Regulation Best Interest defines a retail customer as:

• a.Any customer that does not qualify as an institutional account under FINRA's definition of that term
• b.A natural person whose net worth is below the accredited-investor threshold, whatever the use of the advice
• c.Any natural person who opens an account with the broker-dealer, whatever the purpose of the recommended purchase
• d.A natural person, or legal representative, using the recommendation primarily for personal, family or household purposes✓

Retail customer status turns on who the person is and how the recommendation will be used: a natural person using it primarily for personal, family or household purposes. Opening an account, net worth, and FINRA's institutional account category are not the test.17 CFR 240.15l-1(b)(1)

A representative recommends 14 trades over three months in a retail customer's account, and each trade, taken alone, is in the customer's best interest. What further point does the Care Obligation of Regulation Best Interest require the representative to consider?

• a.Whether the series of trades together is not excessive and is in the customer's best interest✓
• b.Whether total costs stay below a fixed percentage of the account's average value
• c.Whether a principal approved each trade in the account before it was executed
• d.Whether the customer received Form CRS in writing before the first trade was placed

The Care Obligation has a series-of-transactions element: a reasonable basis to believe the recommended trades, even if in the customer's best interest alone, are not excessive and are in the customer's best interest together. The rule sets no cost percentage, does not require principal pre-approval of each trade, and Form CRS delivery is a separate requirement.17 CFR 240.15l-1(a)(2)(ii)(C)

Which practice falls within the group that Regulation Best Interest requires a broker-dealer to identify and eliminate?

• a.A payout grid in which the percentage rises with a representative's total annual revenue
• b.A flat annual bonus based on the firm's overall profit for the whole year
• c.A level commission rate on every mutual fund that the representative sells to customers
• d.A cash bonus for the top sellers of one fund family during a single quarter✓

The elimination requirement covers sales contests, quotas, bonuses and non-cash compensation based on sales of specific securities or types of securities within a limited period. A grid keyed to total revenue, a level rate, and a bonus tied to firm profit are not tied to particular securities in a limited period, though a firm must still identify and mitigate any conflict they create.17 CFR 240.15l-1(a)(2)(iii)(D)

Beyond the policies required for conflicts of interest, what does the Compliance Obligation of Regulation Best Interest require of a broker-dealer?

• a.A written annual certification from every representative that each of the recommendations met the standard
• b.An independent audit report on its retail recommendations, filed with the SEC every calendar year
• c.Written policies and procedures reasonably designed to achieve compliance with the regulation overall✓
• d.Principal pre-approval of each recommendation to a retail customer, before the recommendation is made

The Compliance Obligation requires the broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with the regulation, in addition to the conflict policies. It does not prescribe representative certifications, pre-approval of every recommendation, or a filed audit report.17 CFR 240.15l-1(a)(2)(iv)

A representative recommends a speculative biotech stock to the chief financial officer of a manufacturing company, for investing the company's surplus cash. Which standard applies to the recommendation?

• a.The Regulation Best Interest Care Obligation, since a broker-dealer made a recommendation
• b.FINRA Rule 2111 suitability, because the recipient is not a retail customer✓
• c.The Regulation Best Interest Care Obligation, since the CFO is a natural person
• d.Neither, because recommendations to a company are exempt from conduct rules

Regulation Best Interest covers recommendations to a retail customer, a natural person using the recommendation primarily for personal, family or household purposes. Company cash is a business use, so the recommendation is governed by FINRA Rule 2111, which does not apply to recommendations covered by Regulation Best Interest. Being a natural person or making a recommendation does not bring it under the regulation, and no exemption removes it from conduct rules.FINRA Rule 2111.08 (Regulatory Notice 20-18); 17 CFR 240.15l-1(b)(1)

A representative who lacks control over the account of an LLC customer recommends 40 trades in one quarter. Regulation Best Interest does not apply to the LLC. After the amendments effective June 30, 2020, how does FINRA Rule 2111 treat the activity?

• a.It does not apply, because Regulation Best Interest replaced Rule 2111 for every type of customer
• b.It applies only if the LLC complains in writing about the trading to the firm's principal
• c.Quantitative suitability still applies, because the control element was removed from the rule✓
• d.It does not apply, because quantitative suitability requires actual or de facto control

The 2020 amendment deleted the requirement of actual or de facto control from quantitative suitability, so the representative needs a reasonable basis to believe the series of trades is not excessive and unsuitable for the customer. Regulation Best Interest displaces Rule 2111 only for recommendations to retail customers, and the rule does not wait for a complaint.FINRA Rule 2111.05(c) (Regulatory Notice 20-18)

A retail advisory agreement says, "Adviser does not act as a fiduciary toward the client." How does the SEC's interpretation of the adviser's fiduciary duty treat that sentence?

• a.It removes the duty of loyalty but still leaves the duty of care in place for the client
• b.It is effective if the adviser repeats the statement in Part 2A of its Form ADV
• c.It is effective if the client initials the sentence after reading the whole agreement
• d.It cannot waive the duty, which still applies as shaped by the agreed scope of the relationship✓

The interpretation states that the federal fiduciary duty may not be waived, though it applies as shaped by the agreed scope of the relationship. A provision purporting to waive the duty generally, such as a statement that the adviser will not act as a fiduciary, is inconsistent with the Advisers Act. Initials and Form ADV disclosure do not change that, and the duty is not divisible into a waivable loyalty part.SEC Release IA-5248 (June 5, 2019), Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Part II.A (fiduciary duty may not be waived)

An adviser has an ongoing relationship with a client and charges a quarterly asset-based fee. The agreement does not say how often the account will be reviewed. According to the SEC's interpretation, what governs how often the adviser must monitor the advice?

• a.Only when the client asks for one, since monitoring is optional unless the agreement requires it
• b.Once each quarter, to match the quarterly billing period on which the asset-based fee is calculated
• c.At a frequency in the client's best interest, relatively extensive for an ongoing asset-based fee✓
• d.Once each year, matching the annual updating amendment the adviser files for its Form ADV brochure

The duty of care includes monitoring at a frequency that is in the client's best interest, given the scope of the relationship. With an ongoing relationship and a periodic asset-based fee, the interpretation says the duty will be relatively extensive. It sets no fixed annual or quarterly schedule and does not make monitoring depend on a client request.SEC Release IA-5248, Part II.B.3 (duty to provide advice and monitoring)

A trust governed by the Uniform Prudent Investor Act holds mostly diversified equities. The trustee adds a 5% position in a volatile commodity fund that would be very risky on its own. How is the decision judged?

• a.As prudent only if the fund outperforms the trust's equity holdings over the next year
• b.As imprudent, since the Act lists commodity funds among the restricted investments
• c.By the fund considered alone, since a highly volatile holding is imprudent by its very nature
• d.By its role in the whole portfolio, since no type of investment is inherently imprudent✓

Section 2(b) requires decisions on individual assets to be judged in the context of the portfolio as a whole, and section 2(e) lets a trustee invest in any kind of property or investment consistent with the Act's standards. The Act contains no list of restricted categories, and results over a later year are not the test.Uniform Prudent Investor Act (1994) §2(b), §2(e)

A trust holds one block of stock with a very low tax basis, and selling it would trigger a large capital gains tax. When may the trustee refrain from diversifying under the Uniform Prudent Investor Act?

• a.Only after a court has approved the decision to hold the stock instead of diversifying the trust's assets
• b.Whenever the trust is too small to hold a diversified portfolio without joining a pooled fund
• c.When the trustee reasonably finds that special circumstances, like a tax cost, better serve the trust✓
• d.Whenever the stock has paid steady dividends over the last decade and shows no sign of cutting them

Section 3 requires diversification unless the trustee reasonably determines that special circumstances make the trust's purposes better served without it, and the official comment gives the example of a gain whose tax cost may outweigh the benefit of diversifying. No court approval, dividend history, or trust size is the test.Uniform Prudent Investor Act (1994) §3