NASAA Series 65 — All Questions

Rebalancing a portfolio back to its target allocation after a strong stock rally typically involves which action?

• a.Putting all new contributions into the asset class that rose, so its weight keeps climbing past the target
• b.Selling the underweighted classes and buying more of the rally leader to follow the trend
• c.Waiting until the rally fades before making any trades
• d.Selling some of the appreciated asset class and buying underweighted classes✓

Rebalancing restores target weights by trimming the asset class that has grown beyond its target and adding to those that have fallen below it. This enforces a disciplined 'sell high, buy low' behavior and controls risk. Directing money to the winner, or selling the laggards to buy it, increases concentration and moves the portfolio further from its targets. Waiting for the rally to fade leaves the portfolio overweight, and therefore riskier than intended, in the meantime.

Under current federal rules, long-term capital gains (on assets held more than one year) are generally taxed:

• a.At a higher rate than ordinary income, because the 3.8% net investment income tax applies only to long-term gains
• b.At a flat 28% rate, the same rate that applies to gains on collectibles such as art and coins
• c.At preferential rates lower than ordinary income rates✓
• d.Not at all for any taxpayer, as long as the shares are held in a taxable account for more than one year

Long-term capital gains on assets held more than one year are taxed at preferential rates (generally 0%, 15% or 20%) that are lower than ordinary income tax rates; Internal Revenue Code Section 1(h) caps the tax on net capital gain. Short-term gains, on assets held one year or less, are taxed as ordinary income. The 3.8% net investment income tax applies to both short- and long-term investment income for higher earners and does not raise the long-term rate above the ordinary rate. The 28% rate applies to collectibles gains, not securities, and long-term gains are not tax-free for every taxpayer.26 U.S.C. 1(h)

Tax-loss harvesting is a strategy that involves which of the following?

• a.Selling winners to offset the tax due on unrealized losses
• b.Buying more of a losing position to lower its average cost and claim a deduction for the added shares
• c.Selling securities at a loss to offset realized capital gains✓
• d.Selling a losing position and repurchasing the same security the next day to keep the market exposure

Tax-loss harvesting sells losing positions to realize capital losses that can offset realized capital gains and, up to $3,000 a year, ordinary income. Investors must observe the wash-sale rule, which disallows the loss if substantially identical securities are bought within 30 days before or after the sale, so repurchasing the same security the next day defeats the purpose. Losses on unrealized positions are not deductible, and buying more of a loser creates no loss until a sale occurs. The strategy improves after-tax returns.26 U.S.C. 1091, 1211(b)

The wash-sale rule disallows a tax loss if the investor buys a substantially identical security within what period?

• a.The same trading day only
• b.60 days before the sale only
• c.7 days before or after the sale
• d.30 days before or after the sale✓

The wash-sale rule disallows a capital loss deduction if a substantially identical security is purchased within 30 days before or after the sale, a 61-day window in total. The disallowed loss is added to the cost basis of the replacement shares. This prevents investors from claiming a loss while maintaining the same position.

An investor's asset allocation should shift toward more conservative holdings as which of the following changes?

• a.Their account balance grows substantially, so a larger portfolio can no longer tolerate equity volatility
• b.Stock market valuations rise above their long-run averages, regardless of the investor's own timeline
• c.Interest rates fall to record lows
• d.They approach the time when they will need the funds✓

As an investor nears the point of needing the funds, such as retirement, reducing exposure to volatile assets protects accumulated wealth from a poorly timed downturn, because a shorter time horizon leaves less time to recover from losses. This is the rationale behind glide-path strategies in target-date funds. A larger balance does not by itself change the horizon, and market valuations are not an investor-specific change. Falling interest rates alone are not a reason to move away from growth assets.

The Capital Asset Pricing Model (CAPM) expresses the expected return of a security as a function of which of the following?

• a.The security's standard deviation only, a figure that captures the security's total risk instead of its beta
• b.The risk-free rate plus beta times the market risk premium✓
• c.Only the security's dividend yield
• d.The company's book value alone

CAPM states that a security's expected return equals the risk-free rate plus its beta multiplied by the market risk premium (the market return minus the risk-free rate). It links expected return to systematic risk as measured by beta. Total risk measured by standard deviation is not the CAPM input.

Alpha in portfolio performance measurement represents which of the following?

• a.The portfolio's total volatility as captured by the standard deviation of its periodic returns
• b.The sensitivity of the portfolio's returns to movements in the benchmark index
• c.The portfolio's return in excess of the risk-free rate divided by its standard deviation
• d.The return earned above or below what the portfolio's risk (beta) would predict✓

Alpha measures the return a portfolio earns above or below the return predicted by its beta and the market, indicating value added by management. A positive alpha suggests outperformance on a risk-adjusted basis. Total volatility is captured by standard deviation, sensitivity to the market by beta, and excess return per unit of total risk by the Sharpe ratio.

A client wants current income and capital preservation with low risk. Which allocation is most suitable?

• a.Emerging-market equities and commodities
• b.Long-term zero-coupon bonds and growth stocks, chosen to compound toward the largest possible balance
• c.A mix of high-quality bonds, dividend-paying stocks, and cash equivalents✓
• d.High-yield bonds and master limited partnership units, chosen for their large current income payouts

A client seeking income and capital preservation with low risk is best served by high-quality bonds, dividend-paying blue-chip stocks and cash equivalents. These emphasize stability and steady income. Emerging-market equities and commodities are volatile. Zero-coupon bonds pay no current income and long maturities carry heavy price risk, and high-yield bonds and MLP units pay high income but carry default and price risk that conflicts with capital preservation.

An investment adviser recommending a strategy must ensure it is suitable. Which action best supports suitability?

• a.Recommending the product with the lowest fees available without asking about the client's other holdings, since cost is the only factor that matters
• b.Applying the firm's model portfolio uniformly to every client of the same age, because age alone fixes the right level of risk
• c.Obtaining the client's signature on a disclosure that waives suitability, so the adviser is relieved of responsibility for the recommendation
• d.Documenting the client's objectives, risk tolerance, and financial situation before advising✓

Suitability requires understanding and documenting the client's objectives, risk tolerance, financial situation and needs before making recommendations. Choosing on cost alone, or assigning one portfolio by age, ignores individual circumstances. A client cannot waive an adviser's duties with a signature: as a fiduciary, an adviser owes the client a duty that cannot be disclaimed and must also fully disclose risks and conflicts.

Which retirement plan feature is characteristic of a defined benefit plan?

• a.Contributions are made only by the employee, and the benefit depends on how the employee's chosen investments perform
• b.The employer bears no funding obligation, and the Pension Benefit Guaranty Corporation does not insure the benefit
• c.The employer promises a specified retirement benefit, often based on salary and years of service✓
• d.The employee chooses the investments and bears the risk that the account falls short of retirement needs

A defined benefit plan promises participants a specified retirement benefit, commonly calculated from salary history and years of service, and the employer bears the investment and funding risk. These plans are generally insured by the Pension Benefit Guaranty Corporation. Employee-only contributions, an outcome that depends on the employee's own investment choices, and employee-borne investment risk describe defined contribution plans, where the ultimate benefit depends on contributions and investment performance.

A step-up in cost basis at death generally means which of the following for inherited appreciated securities?

• a.The unrealized gain is taxed to the estate at death as ordinary income
• b.The heir's basis is the lower of the decedent's cost or the market value when the decedent died
• c.The heir's basis is adjusted to the fair market value on the date of death✓
• d.The heir takes the decedent's original cost as basis, the same carryover treatment that applies to a lifetime gift

When appreciated securities pass to an heir, the basis is generally stepped up to the fair market value on the date of death (or the alternate valuation date), potentially eliminating the built-in capital gain. If the heir later sells near that value, little or no gain is recognized. The gain is not taxed to the estate at death, and carryover basis applies to lifetime gifts, not inherited property. The lower-of-cost-or-value rule is the dual-basis rule for gifts sold at a loss.26 U.S.C. 1014(a)

An efficient frontier graph plots portfolios according to which two dimensions?

• a.Liquidity and after-tax return of each holding
• b.Expected return and risk (standard deviation)✓
• c.Required return and systematic risk (beta), as on the security market line
• d.Dividend yield and price-to-earnings ratio of each security

The efficient frontier plots portfolios by expected return on one axis and risk, measured by standard deviation, on the other. Portfolios on the frontier offer the maximum return for a given level of risk. Points below the frontier are inefficient because a better trade-off is available. Plotting required return against beta describes the security market line, a different graph, and liquidity, tax efficiency, yield and price-to-earnings are not the two axes.

A client in a high tax bracket seeking tax-advantaged income would most likely benefit from which of the following?

• a.High-yield corporate bonds
• b.Municipal bonds✓
• c.Certificates of deposit
• d.Money market funds

Municipal bond interest is generally exempt from federal income tax, making munis especially valuable to investors in high tax brackets on an after-tax basis. Corporate bonds, CDs, and money market funds generate fully taxable interest. Advisers compare yields on a taxable-equivalent basis to confirm the benefit.

A bond ladder strategy is designed primarily to accomplish which of the following?

• a.Place the entire portfolio in the longest maturity available to capture the highest yield on the yield curve
• b.Hold bonds only at the very short and very long ends of the maturity range, with none in the middle
• c.Time the market by buying each rung only after interest rates have peaked and prices have bottomed
• d.Spread maturities over time to manage interest rate and reinvestment risk✓

A bond ladder staggers maturities across several dates so that portions of the portfolio mature and can be reinvested at regular intervals. This smooths reinvestment risk and reduces sensitivity to any single interest rate environment, and it provides periodic liquidity. Concentrating in the longest maturity is a bullet approach with heavy interest rate risk, holding only short and long maturities is a barbell, and a ladder does not depend on predicting rate peaks.

Which statement about a 529 college savings plan is accurate?

• a.Earnings grow tax-deferred and qualified education withdrawals are tax-free✓
• b.The account owner must be the student beneficiary, so a parent or grandparent cannot own the plan
• c.Funds can be withdrawn tax-free for any purpose
• d.Contributions are deductible on the federal return up to the annual gift tax exclusion amount

A 529 plan allows investments to grow tax-deferred, and withdrawals used for qualified education expenses are free from federal income tax. The owner does not have to be the beneficiary, since a parent or grandparent commonly owns the account. Contributions are not federally deductible; they are treated as completed gifts, and some states offer a state tax benefit. Non-qualified withdrawals of earnings are taxed and may incur a penalty.26 U.S.C. 529

An investor holds a portfolio of 30 stocks across many industries. Which risk remains that cannot be diversified away?

• a.Systematic (market) risk✓
• b.Business risk of one company
• c.Default risk of a single issuer
• d.Industry-specific risk

Broad diversification across many companies and industries reduces unsystematic risks such as business, industry, and single-issuer default risk. However, systematic or market risk, arising from factors affecting the entire market like recessions or interest rate shifts, cannot be diversified away. This residual risk is measured by beta.

A required minimum distribution (RMD) generally applies to which type of account?

• a.A Roth IRA during the original owner's lifetime
• b.A traditional IRA once the owner reaches the applicable age✓
• c.A 529 education savings plan
• d.A taxable brokerage account

Traditional IRAs and similar pre-tax retirement accounts require minimum distributions beginning at the age set by law, ensuring the deferred amounts are eventually taxed. Roth IRAs are not subject to RMDs during the original owner's lifetime. Taxable brokerage and 529 accounts have no RMD requirement.

An adviser evaluating two portfolios with equal returns should generally prefer the one with which characteristic?

• a.The lower standard deviation✓
• b.The higher beta
• c.The lower correlation to Treasury bills
• d.The higher standard deviation

When two portfolios offer the same expected return, the one with lower standard deviation carries less risk and is therefore more efficient. Rational, risk-averse investors prefer less volatility for the same reward. This risk-adjusted thinking underlies measures like the Sharpe ratio.

The present value of a future stream of retirement income needs is most affected by which assumption?

• a.The number of accounts the client holds, because each account must be discounted separately at its own rate
• b.The assumed inflation and discount rate applied to future cash needs✓
• c.The client's current salary only, because the present value of income needs always equals one year of pay
• d.The historical average return of the stock market over the past decade, rather than assumptions about future inflation and discounting

Retirement income planning discounts future spending needs to present value, and the assumed inflation and discount rates strongly influence how much must be saved today. Higher inflation raises future needs, while a higher discount rate lowers present value. The number of accounts does not change the total needed, a single year of pay is not the present value of a stream of needs, and past market returns are not the assumptions that drive the calculation.

Which order type guarantees execution but not price?

• a.A buy limit order
• b.A limit order
• c.A stop-limit order
• d.A market order✓

A market order is executed promptly at the best available price, guaranteeing execution but not a specific price. A limit order guarantees the price or better but may not execute. Stop-limit orders combine a trigger with a limit and likewise are not guaranteed to fill.

A sector rotation strategy involves which of the following?

• a.Holding a fixed, unchanging allocation forever
• b.Rebalancing back to fixed long-term asset class targets on a set schedule regardless of the economic cycle
• c.Shifting investments among industry sectors based on the economic cycle✓
• d.Moving from stocks into bonds on a fixed schedule as the investor ages, with no view on industry sectors

Sector rotation shifts portfolio emphasis among industry sectors expected to outperform at different stages of the business cycle, such as favoring cyclicals in expansions and defensives in downturns. It is an active, tactical approach. A fixed allocation held forever is buy-and-hold, rebalancing to set targets regardless of the cycle is strategic allocation, and an age-based shift from stocks to bonds is a glide path.

A durable power of attorney is an estate planning tool that does which of the following?

• a.Allows a designated agent to act on someone's behalf, remaining effective if they become incapacitated✓
• b.Remains effective after the principal's death until the estate is settled
• c.Takes effect only if the principal becomes incapacitated, and ends when he or she recovers
• d.Transfers the principal's assets to named heirs at death without probate

A durable power of attorney authorizes a designated agent to make financial or other decisions on the principal's behalf and, unlike an ordinary power of attorney, remains valid if the principal becomes incapacitated. It ends at the principal's death, so it does not continue to settle the estate. A springing power is one that begins only on incapacity, which is a variation rather than the defining feature of a durable power. Passing assets to heirs is the job of a will, a trust or beneficiary designations, and a power of attorney has no direct effect on estate taxes.

A revocable living trust offers which primary benefit during the grantor's lifetime and at death?

• a.Assets are removed from the grantor's taxable estate, so no federal estate tax is owed at the grantor's death
• b.Income is taxed to the trust rather than the grantor, so the grantor owes less income tax each year
• c.It guarantees a fixed investment return
• d.Assets can avoid probate while the grantor retains control during life✓

A revocable living trust lets the grantor retain control and amend or revoke the trust during life, and assets held in it generally pass to beneficiaries outside of probate at death. Because the trust is revocable, its assets remain part of the grantor's taxable estate and its income is taxed to the grantor, so it provides no estate or income tax shelter. It also guarantees no investment return. Its main advantages are probate avoidance and continuity of management.

When measuring investment performance, time-weighted return is preferred over dollar-weighted return when the goal is to:

• a.Account for the size of external cash flows
• b.Evaluate the performance of the portfolio manager independent of client cash flows✓
• c.Show the client's personal gain after taxes and fees, including the effect of when the client added or withdrew money
• d.Calculate the growth rate that equates the account's beginning value and all cash flows to its ending value

Time-weighted return removes the distorting effect of client deposits and withdrawals, isolating the manager's investment performance for fair comparison. Dollar-weighted return, or internal rate of return, equates the beginning value and all cash flows to the ending value and so reflects the timing of cash flows, which makes it better for measuring the investor's actual experience. Accounting for the size of external cash flows or the client's personal after-tax result therefore points to the dollar-weighted measure.

A client nearing retirement expresses a low risk tolerance but wants growth to keep pace with inflation. The most balanced recommendation is:

• a.Place 100% of assets in aggressive growth stocks to maximize the chance of outpacing inflation over the next 30 years
• b.Hold long-term Treasury bonds exclusively, because their guaranteed coupons remove any need for growth in the portfolio
• c.Move everything to cash and money market funds, accepting that purchasing power will erode but principal stays stable
• d.Blend high-quality bonds and dividend equities to balance stability with modest growth✓

A near-retiree with low risk tolerance but a need to outpace inflation is best served by a balanced mix of high-quality bonds for stability and dividend-paying equities for modest growth and inflation protection. All-equity exceeds the stated risk tolerance, all long-term bonds carry heavy interest rate risk and fixed coupons that lose purchasing power, and all-cash erodes purchasing power. Balancing competing objectives is central to suitable advice.

A portfolio's expected return is calculated as which of the following?

• a.The simple average of the holdings' expected returns, giving every holding the same weight regardless of its size
• b.The return of the benchmark index minus fees
• c.The highest expected return among its holdings, reduced by the portfolio's standard deviation
• d.The weighted average of the expected returns of its individual holdings✓

A portfolio's expected return is the weighted average of the expected returns of its component assets, with weights equal to each asset's proportion of the portfolio. A simple average ignores position sizes, and neither the best single holding nor a benchmark return less fees is the portfolio's own expected return. Unlike return, portfolio risk depends on correlations and is not simply a weighted average of individual risks.

Under the Investment Advisers Act of 1940, an investment adviser owes clients which standard of care?

• a.A mere suitability standard with no loyalty obligation
• b.A fiduciary duty to act in the client's best interest✓
• c.A duty of care only, with no duty of loyalty
• d.A disclosure-only duty, with its own interests first

Under federal law an investment adviser is a fiduciary, and the fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty: the adviser must act in the client's best interest and not place its own interests ahead of the client's. The duty cannot be waived, although its application may be shaped by agreement. A suitability-only standard has no loyalty obligation, a care-only duty omits loyalty, and disclosing a conflict does not by itself let the adviser put its own interests first.Investment Advisers Act of 1940 s.206; SEC Release IA-5248 (2019)

Which of the following best distinguishes the fiduciary standard from a suitability standard?

• a.Suitability requires putting the client's interest first at all times
• b.The fiduciary standard applies only to broker-dealers
• c.Suitability requires eliminating all conflicts of interest
• d.A fiduciary must act in the client's best interest and disclose or avoid conflicts, not merely recommend an acceptable product✓

A fiduciary must place the client's interests first, manage or disclose conflicts of interest, and provide advice in the client's best interest. A suitability standard only requires that a recommendation be appropriate given the client's profile, without the same loyalty and conflict-management duties. This distinction is heavily tested for investment advisers.Investment Advisers Act of 1940

Under the Investment Advisers Act of 1940, which three elements define a person as an investment adviser (the 'three-prong test')?

• a.Providing advice about securities, as a business, for compensation✓
• b.Managing over $100 million, having employees, and using a custodian
• c.Custody, discretion, and compensation
• d.Registration, bonding, and examination

The three-prong test defines an investment adviser as a person who (1) provides advice or analysis about securities, (2) does so as part of a business, and (3) receives compensation for it. Meeting all three prongs generally triggers the definition. Certain professionals may qualify for exclusions if their advice is incidental.Investment Advisers Act of 1940

Generally, an investment adviser managing $110 million or more in assets registers with which regulator?

• a.The Securities and Exchange Commission (SEC)✓
• b.Only the state securities administrator where its office is located
• c.The Federal Reserve
• d.FINRA as a member firm

Advisers with assets under management of $110 million or more are generally required to register with the SEC as federal covered advisers, while smaller advisers typically register with the states. The $100 million to $110 million range creates a buffer to reduce frequent switching. FINRA regulates broker-dealers, not investment advisers.Investment Advisers Act of 1940

Under the Uniform Securities Act, the state official who administers securities law is known as the:

• a.Administrator✓
• b.Registrar of Deeds
• c.Trustee
• d.Comptroller

The Uniform Securities Act refers to the state securities regulator as the Administrator, who enforces the act, registers securities and professionals, and pursues violations. The Administrator has broad authority to make rules, conduct investigations, and issue orders. This term is used consistently throughout state blue-sky law.Uniform Securities Act

Under the Uniform Securities Act, an 'investment adviser representative' (IAR) is best described as:

• a.A broker-dealer that sells mutual funds
• b.Any clerical employee of an advisory firm
• c.An individual associated with an investment adviser who provides advice or solicits advisory clients✓
• d.A bank that holds client assets in custody

An investment adviser representative is an individual, associated with an investment adviser, who makes recommendations, manages accounts, or solicits advisory services for the firm. Purely clerical or administrative personnel are generally excluded. IARs typically must register in the states where they have clients or a place of business.Uniform Securities Act

An investment adviser that has custody of client funds or securities is generally required to do which of the following?

• a.Take permanent title to client securities
• b.Follow the custody rule's safeguards, such as using a qualified custodian and providing account statements✓
• c.Commingle client assets with firm assets for efficiency
• d.Avoid any independent verification of holdings

Under the custody rule, an adviser with custody must safeguard client assets by using a qualified custodian, ensuring clients receive account statements, and, in many cases, undergoing a surprise independent verification. Commingling client and firm assets is prohibited. These safeguards protect clients against misappropriation.Investment Advisers Act of 1940

Under the Uniform Securities Act, which of the following is generally considered a prohibited practice for an investment adviser?

• a.Maintaining accurate books and records
• b.Borrowing money from a client who is not a lending institution✓
• c.Delivering the brochure to clients before or at the time of entering an advisory contract
• d.Disclosing all material conflicts of interest to clients

Borrowing money or securities from a client who is not a bank, broker-dealer, or other financial institution in the business of lending is a prohibited practice because it creates a serious conflict of interest. Disclosing conflicts, keeping accurate records, and delivering the brochure are all required, proper conduct. Prohibited practices are heavily tested on the exam.Uniform Securities Act

An investment adviser's Form ADV Part 2 (the 'brochure') primarily serves which purpose?

• a.Registering the adviser's individual representatives with each state
• b.Registering the securities that the adviser recommends for sale
• c.Disclosing the adviser's services, fees, conflicts of interest, and disciplinary history to clients✓
• d.Showing clients that the SEC has approved the adviser's methods

Form ADV Part 2, the brochure, is a plain-English disclosure document that describes the adviser's business, services, fee schedule, conflicts of interest and disciplinary history for clients and prospective clients. It must be delivered before or at the time the adviser enters into an advisory contract. Registration of individual representatives is done on Form U4, securities are registered under the Securities Act of 1933, and SEC registration or review of the form is not an approval or endorsement of the adviser.Advisers Act Rule 204-3 (17 CFR 275.204-3)

Regarding advisory fees, which arrangement is generally prohibited for most retail advisory clients?

• a.A fee based on a percentage of assets under management
• b.A flat annual fee for financial planning
• c.An hourly fee for consultations
• d.A performance-based fee charged to a non-qualified retail client✓

Performance-based fees, which compensate the adviser based on gains in the account, are generally prohibited except for qualified clients meeting income or net worth thresholds, because they can encourage excessive risk-taking. Flat, hourly, and asset-based fees are commonly permitted. This restriction protects less sophisticated retail investors.Investment Advisers Act of 1940

Under the Uniform Securities Act, which of the following is excluded from the definition of a 'security'?

• a.An investment contract
• b.A corporate bond
• c.A share of common stock
• d.A fixed insurance policy or fixed annuity✓

Fixed insurance policies and fixed annuities are generally excluded from the definition of a security because they do not involve investment risk to the purchaser in the same way. Stocks, bonds, and investment contracts are securities subject to registration and antifraud provisions. Variable annuities, by contrast, are securities.Uniform Securities Act

An agent (broker-dealer representative) who engages in 'selling away' is doing which of the following?

• a.Disclosing all transactions to the employing firm
• b.Executing trades exactly as the firm directs
• c.Selling securities transactions outside the scope of employment without the firm's knowledge or approval✓
• d.Recommending only securities on an approved list

Selling away occurs when an agent effects private securities transactions outside the employing broker-dealer's supervision and without its knowledge or approval, a prohibited practice. It deprives the firm of oversight and exposes clients to unvetted risks. Agents must conduct approved business through their firm.Uniform Securities Act

An adviser wishing to enter into an agency cross transaction (acting as broker for both sides) must generally do which of the following?

• a.Obtain the client's oral consent after the trade is completed and describe it in the next annual report
• b.Obtain prior written client consent and disclose the conflict✓
• c.Recommend the trade to both the buyer and the seller
• d.Obtain a one-time consent that cannot be revoked and requires no confirmation of individual trades

Rule 206(3)-2 lets an adviser act as broker for both sides of a trade only if the client has given written consent in advance, after full written disclosure that the adviser will receive commissions from both parties and has a potentially conflicting division of loyalties. The adviser must also send a confirmation of each trade and, at least annually, a statement of the number of cross trades and commissions received, and the consent must be revocable at any time. Oral or after-the-fact consent does not satisfy the rule, an irrevocable consent with no trade confirmations is not allowed, and the adviser may not recommend the transaction to both the buyer and the seller.Investment Advisers Act of 1940, Rule 206(3)-2 (17 CFR 275.206(3)-2)

Under the Uniform Securities Act, the antifraud provisions apply to which persons?

• a.Only broker-dealers, agents, and investment advisers that are registered with the state Administrator
• b.Only persons dealing in securities that are not exempt from registration
• c.Anyone who offers or sells securities or provides investment advice, whether registered or not✓
• d.Only issuers and underwriters of securities being offered to the public

The antifraud provisions reach any person in connection with the offer, sale, or purchase of any security, and any person paid primarily to advise others about securities, whether registered or not. Section 101 has no exemptions, so exempt securities and exempt transactions are still covered. The provisions are not limited to registered professionals, to non-exempt securities, or to issuers and underwriters.Uniform Securities Act (1956) Sections 101 and 102

Which activity constitutes a prohibited misuse of material nonpublic information?

• a.Trading on confidential inside information before it is released to the public✓
• b.Building a recommendation from public filings, industry reports and interviews with a company's customers, even though no single fact is material
• c.Recommending a stock after reading a research report that the brokerage firm published to all of its clients that same morning
• d.Trading on an earnings figure after the company has announced it in a press release and filed it with the SEC

Section 204A requires advisers to maintain written policies to prevent misuse of material nonpublic information. Trading on, or tipping others with, material information the market does not yet have is insider trading. Assembling a conclusion from public filings, industry data and customer interviews (the mosaic approach) is permitted because no single input is both material and nonpublic. Acting on a research report already published to all clients, or on an earnings figure after it has been announced and filed, is permitted because the information is public.Investment Advisers Act of 1940, Section 204A (15 U.S.C. 80b-4a)

An adviser who wishes to use client testimonials or advertisements must comply with rules that primarily require which of the following?

• a.Hiding any compensation paid for endorsements
• b.Guaranteeing the results shown in the advertisement
• c.Fair and balanced presentation with required disclosures, avoiding misleading claims✓
• d.Presenting only the best-performing accounts

Advertising and testimonial rules require advisers to present information in a fair and balanced manner, disclose material facts such as compensation paid for endorsements, and avoid false or misleading statements. Cherry-picking only top accounts or hiding paid endorsements would be misleading. Guaranteeing results is prohibited.Investment Advisers Act of 1940

Under the Uniform Securities Act, how long must an investment adviser generally retain required books and records?

• a.No retention is required if records are electronic
• b.For a specified minimum period, commonly five years, with recent years readily accessible✓
• c.Permanently, with no exceptions or format requirements
• d.For only 30 days after account closing

State recordkeeping rules under the Uniform Securities Act generally require advisers to preserve required books and records for a set minimum period, commonly five years, with the most recent years kept easily accessible. Records may be maintained electronically if properly preserved. Adequate recordkeeping supports examinations and enforcement.Uniform Securities Act

An investment adviser representative who moves to a new advisory firm must generally do which of the following?

• a.Register only if the new firm is in a different state
• b.Nothing; registration follows the individual automatically nationwide
• c.Notify or re-register through the appropriate regulator, as the registration is tied to the association with a specific firm✓
• d.Keep advising clients under the old firm's registration until the next annual renewal date

An investment adviser representative's registration is not effective while the individual is not employed by or associated with a registered adviser, so a move to a new firm requires the transfer or a new filing through the appropriate regulator, and the former firm must promptly file a notice of termination. Registration does not follow the individual automatically, it does not depend on whether the new firm is in another state, and the old firm's registration cannot be used after the association ends, with no waiting period required.Uniform Securities Act of 2002, Sections 404(c) and 408

An investment adviser exercising discretionary authority over a client account must generally obtain what?

• a.Prior written authorization from the client granting discretion✓
• b.A performance-based fee agreement
• c.Approval from FINRA for each transaction
• d.Nothing beyond an oral instruction for each trade

To exercise discretion, choosing securities, amounts, or timing without contacting the client for each trade, an adviser must generally obtain prior written authorization, such as a limited power of attorney or discretionary agreement. Limited time and price discretion may be treated differently, but full discretion requires written client consent. This protects clients from unauthorized trading.Investment Advisers Act of 1940

Under the Uniform Securities Act, the Administrator may deny, suspend, or revoke a registration for which reason?

• a.The applicant earns a high income
• b.The applicant charges asset-based fees
• c.The applicant has been convicted of a securities-related felony or engaged in dishonest practices✓
• d.The applicant refuses to accept discretionary accounts

The Administrator may deny, suspend, or revoke a registration when it is in the public interest and specific statutory grounds exist, such as a securities-related felony conviction, fraudulent or dishonest conduct, or willful violations of the act. Lawful business choices like charging asset-based fees are not grounds. These provisions safeguard investors and market integrity.Uniform Securities Act

Under the Uniform Securities Act, which person is excluded from the definition of a 'broker-dealer' in a given state?

• a.A firm that solicits retail clients throughout the state
• b.A firm that advertises to state residents
• c.A firm with an office in the state dealing with the public
• d.A firm with no place of business in the state that deals only with existing clients temporarily present there✓

A firm with no place of business in a state may be excluded from that state's broker-dealer definition if it deals only with certain exempt clients or existing clients who are merely temporarily present. Establishing an office or soliciting the general public in the state triggers registration. These exclusions limit unnecessary duplicate registration.Uniform Securities Act

The 'de minimis' exemption from state investment adviser registration generally applies when an adviser:

• a.Has no place of business in the state and had no more than fifteen clients there during the preceding year
• b.Manages more than $110 million in assets
• c.Has no place of business in the state and had no more than five clients there, not counting institutional clients, in the prior 12 months✓
• d.Has a place of business in the state but had no more than five clients there during the past year

Under the de minimis standard, an adviser with no place of business in a state need not register there if, during the preceding 12 months, it had no more than five clients in that state, not counting institutional clients and the other clients the act excludes. Fifteen is the offer count in the broker-dealer exclusion, not the adviser figure, and the $110 million figure is a federal dividing line rather than a state exemption. Having a place of business in the state removes the exemption no matter how few clients the adviser has there.Uniform Securities Act of 2002, Section 403(b)(2)

Under the Investment Advisers Act of 1940, an advisory contract must generally provide that:

• a.The contract must be renewed in writing by the client every year to remain in force
• b.The advisory contract cannot be assigned to another party without the client's consent✓
• c.The adviser may assign the contract to an affiliate without consent or notice
• d.The client waives any claim under the Advisers Act arising from the adviser's advice

Section 205(a)(2) bars an adviser from entering into or performing a contract that fails to provide that it cannot be assigned by the adviser without the client's consent, and 205(a)(3) requires a partnership adviser to promise notice of any change in the partnership's membership. Annual renewal is a feature of mutual fund advisory contracts, not a requirement for an adviser's contract with its client. An assignment to an affiliate still needs consent, and clients cannot be made to waive rights under the securities laws.Investment Advisers Act of 1940, Section 205(a)(2) (15 U.S.C. 80b-5)

A federal covered adviser doing business in a state is generally subject to which state requirement?

• a.Full state registration and examination by the Administrator
• b.A notice filing and payment of applicable fees, plus state antifraud jurisdiction✓
• c.No state involvement of any kind
• d.State approval of its advisory contracts before use

A federal covered adviser, registered with the SEC, is not subject to duplicative state registration, but a state may require a notice filing and fees and still enforce its antifraud provisions. This preserves federal-state coordination under the National Securities Markets Improvement Act framework. States cannot impose full registration on federal covered advisers.Uniform Securities Act