NASAA Series 65 — All Questions

A publisher of a financial newsletter of general and regular circulation, offering only impersonal commentary not tailored to any specific client, is:

• a.An investment adviser representative who must register with the state
• b.An investment adviser that must register with the SEC, since a fee is charged for the commentary
• c.Excluded from the definition of investment adviser under the publisher's exclusion✓
• d.A federal covered adviser that need only file a notice in each state where subscribers live

The Investment Advisers Act of 1940 excludes from the definition of investment adviser the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation (Section 202(a)(11)(D)); the Supreme Court's Lowe v. SEC decision applied this to impersonal, non-tailored advice. Because the publisher is not an investment adviser at all, it is neither a representative, nor a registrant, nor a notice filer. Personalized advice for a fee removes the exclusion.15 U.S.C. 80b-2(a)(11)(D) (Investment Advisers Act of 1940, Section 202(a)(11)(D))

Under the Uniform Securities Act, if no denial order or proceeding is pending, an application for registration as an agent or investment adviser generally becomes effective:

• a.At noon on the 30th day after a complete application is filed✓
• b.Only after a mandatory one-year waiting period imposed by the Administrator on all first-time applicants for registration
• c.Immediately upon filing
• d.Five business days after filing

Under the USA, absent a pending proceeding, registration becomes effective at noon on the 30th day after the application is filed, though the Administrator may set an earlier effective date. Reference: Uniform Securities Act.

Under NASAA model rules, a state-registered investment adviser that maintains custody of client funds or securities must generally maintain a minimum net worth of:

• a.$10,000
• b.$5,000
• c.$100,000
• d.$35,000✓

NASAA's model financial-requirement rule sets minimum net worth at $35,000 for advisers with custody and $10,000 for advisers with discretion but no custody. An adviser that only accepts substantial prepaid fees faces separate requirements.

Under the Uniform Securities Act, an investment adviser whose net worth falls below the required minimum may generally cure the shortfall by:

• a.Guaranteeing client accounts against any loss
• b.Ignoring the requirement if clients consent in writing
• c.Charging a performance-based fee to make up the difference out of client accounts until the required net worth has been restored
• d.Posting a surety bond in the amount required by the Administrator✓

When an adviser's net worth falls below the required minimum, the Administrator may allow or require a surety bond to cover the deficiency, protecting clients. Guaranteeing accounts against loss is separately prohibited, so it is the trap.

Registrations of broker-dealers, agents, and investment advisers under the Uniform Securities Act:

• a.Expire on December 31 each year and must be renewed with payment of fees✓
• b.Are effective permanently once granted and never lapse, so no annual filing or fee is due to the Administrator
• c.Must be renewed every 90 days
• d.Never require any renewal fee

Under the USA, state securities registrations expire on December 31 annually and must be renewed with the appropriate fee. Registration is not permanent and must be kept current to remain in effect.

When a registered person files to withdraw its registration under the Uniform Securities Act, the withdrawal generally becomes effective 30 days after filing, and the Administrator retains jurisdiction to bring proceedings for:

• a.One year after the withdrawal becomes effective✓
• b.An indefinite period with no limit
• c.No period; jurisdiction ends immediately upon withdrawal
• d.10 years after the withdrawal

Under the USA, a withdrawal takes effect 30 days after filing absent a pending proceeding, and the Administrator keeps jurisdiction to institute a revocation or suspension proceeding for one year afterward.

Under the Uniform Securities Act, which of the following is considered an offer or sale of a security?

• a.A gift of assessable stock, and a bonus of stock given as an inducement to buy another security✓
• b.A judicially ordered transfer of securities by an executor
• c.A bona fide gift of securities with nothing given in return
• d.A stock dividend paid on shares already owned, given free of charge to every holder of record on the declaration date set by the board

The USA treats a gift of assessable stock as a sale and a security given as a bonus or inducement to a purchase as part of the offer and sale. A bona fide gift, a stock dividend, and certain judicial transfers are not offers or sales.

A nonissuer transaction under the Uniform Securities Act is one in which:

• a.The issuer sells newly authorized shares directly to the public and keeps the entire proceeds for its business
• b.The security is exempt from registration, so no state antifraud provisions apply
• c.The proceeds go to a selling securityholder rather than to the issuer, as in ordinary secondary-market trading✓
• d.The issuer sells treasury shares it previously repurchased, with the proceeds going to the company

A nonissuer transaction is a transaction not directly or indirectly for the benefit of the issuer, so the proceeds go to a selling securityholder, as in ordinary secondary-market trading. When the company itself sells new shares, treasury shares or stock to its employees and receives the money, it is an issuer transaction. A nonissuer transaction can involve an exempt security, but exemption status does not turn off antifraud provisions.Uniform Securities Act (2002) Section 102(18); (1956) Section 401(h)

Under the Uniform Securities Act, which of the following is a federal covered security exempt from state registration?

• a.A local limited partnership interest sold by general solicitation to retail investors throughout the state by broad advertising
• b.A stock listed on the New York Stock Exchange or Nasdaq, and securities senior to it✓
• c.A promissory note issued to the general public
• d.A private start-up's stock sold door to door

Under NSMIA, securities listed on national exchanges such as the NYSE, NYSE American, or Nasdaq, along with securities equal or senior to them and registered investment company shares, are federal covered securities that preempt state registration, though notice filings and antifraud rules can still apply.

The private placement exemption from state registration under the Uniform Securities Act generally applies to an offer directed to no more than:

• a.100 persons of any type
• b.35 institutional buyers only, provided each of them signs an investment-representation letter and the offering is not advertised to the public in any medium during the preceding twelve months
• c.10 non-institutional persons in the state during any 12 consecutive months, with no commissions on non-institutional sales and buyers purchasing for investment✓
• d.50 accredited investors

The USA private-placement (limited-offering) exemption covers offers to 10 or fewer non-institutional persons in 12 months, provided the seller reasonably believes buyers are purchasing for investment rather than resale and pays no commission for non-institutional solicitations. Offers to institutions are not counted.

Which of the following is an exempt transaction under the Uniform Securities Act?

• a.An issuer's registered agent making a solicited sale of unregistered shares to state residents in a continuous public offering
• b.A sale of securities by an executor, administrator, sheriff, trustee in bankruptcy, or guardian✓
• c.A cold-call sale of an unregistered security to a retail customer by a registered agent
• d.A public offering by a local issuer, exempt because all of the buyers live in the same state

Sales by executors, administrators, sheriffs, receivers, trustees in bankruptcy, guardians and conservators are exempt transactions because the fiduciary sells under a legal duty rather than conducting a distribution. Registration of the agent does not make an unregistered public offering exempt, and a cold call is just another solicitation of retail buyers. Selling only to residents of one state is a federal Securities Act idea; state law still requires registration or a specific exemption for the offering.Uniform Securities Act (1956) s.402(b)(6)

A sale of a security to which of the following buyers is most likely an exempt transaction under the Uniform Securities Act?

• a.A high-net-worth individual who answers a newspaper advertisement for a new, unregistered offering
• b.A retiree who attends an issuer-sponsored seminar and buys the new shares
• c.A group of fifty friends and relatives of the founders, solicited for a start-up
• d.An insurance company, bank, or registered investment company (an institutional investor)✓

Offers and sales to banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts and other financial institutions or institutional buyers are exempt transactions because such buyers can protect themselves. A wealthy individual who responds to an advertisement is still a retail buyer, a seminar attendee is a member of the public, and a solicitation of fifty friends and relatives exceeds the small-group private-offering limit.Uniform Securities Act (1956) s.402(b)(8)

Registration by qualification under the Uniform Securities Act is:

• a.Available only when the security is simultaneously registered with the SEC, becoming effective automatically at the same moment the federal registration statement clears
• b.Automatic upon any federal filing
• c.The most detailed state registration method, used for securities not registered federally, effective when the Administrator so orders✓
• d.The method used exclusively by federal covered securities

Registration by qualification is the most comprehensive state method, used for intrastate offerings or securities not registered federally, and it becomes effective when the Administrator determines. Coordination is used when registering federally at the same time.

Under the Uniform Securities Act, which action is beyond the Administrator's own authority and instead requires a court?

• a.Denying, suspending, or revoking a registration
• b.Conducting investigations and issuing subpoenas
• c.Issuing an injunction to stop a violation✓
• d.Issuing a cease-and-desist order

The Administrator may investigate, subpoena, issue cease-and-desist orders, and deny, suspend, or revoke registrations, but only a court can grant an injunction on the Administrator's application. Confusing a cease-and-desist order with an injunction is a common trap.

Under the Uniform Securities Act, a person convicted of a willful (criminal) violation is subject to a maximum penalty of:

• a.A $50,000 fine and 10 years' imprisonment
• b.A fine of up to $5,000 and/or imprisonment of up to 3 years✓
• c.A lifetime industry bar only, with no fine
• d.A $1,000 fine only

The USA sets criminal penalties for willful violations at up to a $5,000 fine and/or up to 3 years in prison, and the statute of limitations for criminal prosecution is 5 years. Some states adopt higher figures, but these are the standard exam numbers.

Under the Uniform Securities Act's civil liability provisions, a buyer who prevails in a rescission suit against a seller may generally recover:

• a.The price paid, plus interest and attorney's fees and costs, minus any income already received on the security✓
• b.The price paid plus interest, but not attorney's fees, since each side bears its own legal costs
• c.Treble the price paid, as a statutory penalty for a willful violation
• d.The price paid plus the profit the buyer would have earned had the security performed as promised

Civil liability under the Uniform Securities Act lets the buyer recover the consideration paid plus interest (six percent a year in the 1956 Act), costs and reasonable attorney's fees, less any income such as interest or dividends already received, upon tender of the security. Fees are recoverable, so the American rule that each side pays its own does not apply. The remedy is rescission, not a punitive multiple and not an expectation-of-profit award.Uniform Securities Act (1956) s.410(a)

When a seller who made a nonwillful violation offers a buyer a right of rescission (a rescission offer), the buyer generally:

• a.Has 10 years to decide whether to accept
• b.Need not respond and keeps all legal remedies
• c.Automatically receives triple damages
• d.Must accept or reject the offer within 30 days, and loses the right to sue if a reasonable offer is rejected or ignored✓

A seller may cure a nonwillful violation by offering to repurchase the security for the price plus interest, less income received. The buyer typically must accept within 30 days; failing to accept a proper rescission offer generally bars a later civil suit on that violation.

Under the antifraud provisions of the Uniform Securities Act, fraud in connection with a securities transaction includes:

• a.Only affirmative false statements of fact, because omissions are policed solely by federal securities law
• b.An untrue statement of a material fact or the omission of a material fact needed to make statements not misleading✓
• c.Only conduct in connection with the sale of securities, never conduct in connection with a purchase
• d.Only conduct involving securities that are not exempt from registration under the Act

The antifraud provision covers untrue statements of material fact and omissions of material fact that make the statements made misleading, in connection with the offer, sale, or purchase of any security, and applies to any person, registered or not. Omissions are covered, purchases are covered as well as sales, and there are no exemptions from the antifraud provision for exempt securities.Uniform Securities Act (1956) Section 101(2)

Under the Investment Advisers Act of 1940, an investment adviser is generally deemed to have custody of client funds when it:

• a.Receives a client's check made payable to a third party and promptly forwards it
• b.Recommends securities, and the client places orders with a broker-dealer the client chooses
• c.Holds client funds or securities, or has authority to withdraw them from the account, including authority to deduct its advisory fees✓
• d.Has written discretionary authority to select securities and amounts but cannot withdraw any assets

Custody means holding client funds or securities, or having any authority to obtain possession of them, including an arrangement under which the adviser may withdraw assets, such as authority to deduct its advisory fees. Discretion over which securities to buy, without authority to withdraw assets, is not custody, and neither is receiving a client's check payable to a third party. Custody triggers safeguards such as a qualified custodian and account statements; an adviser whose only custody is fee deduction is excused from the independent verification (surprise examination) requirement.17 CFR 275.206(4)-2(d)(2)

When an investment adviser has authority to vote proxies for securities held in client accounts, it must:

• a.Vote all proxies for management's recommendations, since management knows the company best
• b.Vote proxies in the best interest of clients and keep records of how votes were cast✓
• c.Obtain separate written client consent before each individual vote is cast, however routine
• d.Return unvoted proxies to the issuer whenever the adviser has a conflict of interest

An adviser that exercises proxy-voting authority must adopt written policies reasonably designed to ensure it votes in clients' best interest, including how it handles material conflicts, tell clients how to obtain its voting record, describe its policies, and keep a record of each vote cast. Voting with management by rule ignores the client's interest, a separate consent for every routine vote is not required, and handing proxies back unvoted does not resolve a conflict.17 CFR 275.206(4)-6; 17 CFR 275.204-2(c)(2)

An agent who chooses the security and amount for a client's trade without the client's prior instruction and without written discretionary authority has:

• a.Exercised acceptable time and price discretion on a customer's order
• b.Committed no violation because the firm approved the trade after it was placed
• c.Exercised discretion without authorization, a prohibited practice✓
• d.Acted properly because the client later benefited from the trade

Full discretion, meaning choosing the security or quantity, requires the client's written discretionary authority. Acting without it, even profitably or with later approval from the firm, is unauthorized discretionary trading and is prohibited. Only limited discretion over the time and price of a client-specified order may proceed without written authority.

Failing to disclose whether a firm is acting as a principal (trading from its own account) or as an agent (broker) for the client in a transaction is:

• a.Permissible, since the capacity is irrelevant to clients
• b.A concern only for federal covered advisers
• c.A prohibited practice, because clients must know the capacity in which the firm acts✓
• d.Required to be disclosed only for exempt securities

Firms must disclose the capacity in which they act, because acting as principal versus agent carries different conflicts and forms of compensation. Nondisclosure of capacity is an unethical, prohibited practice under the USA.

Before completing a principal transaction with an advisory client (selling the client a security from the adviser's own account), an investment adviser generally must:

• a.Obtain the client's consent after the trade settles, as long as it discloses its profit
• b.Describe principal trading in its Form ADV brochure, with no consent needed for each trade
• c.Obtain the written approval of the state Administrator before completing the trade
• d.Disclose its capacity and obtain the client's consent before completion of that transaction✓

Section 206(3) of the Investment Advisers Act of 1940 makes it unlawful for an adviser acting as principal to sell a security to, or buy one from, a client unless it discloses in writing before the completion of the transaction the capacity in which it acts and obtains the client's consent to that transaction. Consent after settlement comes too late, a general brochure statement does not give trade-by-trade consent, and regulators do not pre-approve the trade.Investment Advisers Act of 1940 s.206(3) (15 U.S.C. 80b-6(3))

Under the Investment Advisers Act of 1940, an adviser with discretionary authority, custody, or a requirement of substantial prepaid fees whose financial condition is reasonably likely to impair its ability to meet commitments to clients must:

• a.Promptly disclose that financial condition to affected clients✓
• b.Guarantee client accounts against any loss
• c.Keep the information confidential from clients
• d.Immediately deregister with no notice to clients

An adviser with discretion, custody, or substantial prepaid fees must disclose any financial condition reasonably likely to impair its ability to meet contractual commitments, part of the financial and disciplinary disclosure duty. Concealing a material adverse condition is a prohibited practice.

An adviser's advertisement stating that a strategy is guaranteed to earn at least 10% per year is:

• a.Allowed as long as the adviser is SEC-registered
• b.Permitted for accredited investors only
• c.A prohibited, misleading practice, because advisers may not guarantee investment results✓
• d.Acceptable if placed in small print

Guaranteeing a specific return or against loss is a prohibited, fraudulent practice in advertising and communications under the Investment Advisers Act of 1940. Advisers must present information in a fair and balanced way and must not promise results.

Performance-based advisory fees are generally permitted only for a qualified client, which currently includes a natural person with at least:

• a.$1.1 million in assets under management with the adviser, or a net worth exceeding $2.2 million✓
• b.$100,000 of annual income
• c.$500,000 of net worth
• d.$25 million in assets under management

Performance fees are allowed only for qualified clients, generally those with at least $1.1 million under management with the adviser or more than $2.2 million net worth, and these thresholds are periodically inflation-adjusted. The rule shields less-sophisticated retail investors from the added risk incentive.

An investment adviser placing client trades has a duty of best execution, which means it must:

• a.Route every order to the broker-dealer charging the lowest commission, regardless of execution quality
• b.Use an affiliated broker-dealer for all client trades, provided it discloses its commissions in Form ADV
• c.Seek the most favorable overall terms reasonably available for the client's transactions✓
• d.Obtain the single best price on each trade, without regard to commissions, speed, or likelihood of execution

Best execution is part of an adviser's duty of care. Where the adviser selects broker-dealers, it must seek the execution under which the client's total cost or proceeds are the most favorable under the circumstances, weighing price, speed, certainty of execution and total cost together. The lowest commission is not automatically the best execution, using an affiliate is acceptable only if the terms are still the most favorable available, and chasing the best headline price while ignoring cost and certainty misses the point of weighing every factor.SEC Release IA-5248 (2019), Part II.B.2 (duty to seek best execution)

When an investment adviser representative or agent leaves a firm, the firm generally reports the termination to regulators using:

• a.Form U4 (Uniform Application for Securities Industry Registration)
• b.Form ADV-W (Notice of Withdrawal from Investment Adviser Registration)
• c.Form ADV Part 2B (the brochure supplement for supervised persons)
• d.Form U5 (the Uniform Termination Notice)✓

A representative's registration is filed on Form U4 and the termination is reported on Form U5, both through CRD/IARD. Form ADV-W withdraws the advisory firm's own registration, and Form ADV Part 2B is the brochure supplement given to clients about a supervised person. Neither reports a representative's departure.

Under the SEC's brochure rule, an investment adviser must annually deliver to each client either an updated brochure or a summary of material changes within:

• a.120 days of the end of the adviser's fiscal year✓
• b.30 days of the calendar year-end
• c.5 years, matching the recordkeeping rule
• d.10 business days of any client request only

The brochure rule under the Investment Advisers Act of 1940 requires advisers to deliver, within 120 days of their fiscal year-end, a free updated brochure or a summary of material changes with an offer of the full brochure. Initial delivery must occur before or at the time of contracting.

An investment adviser that has custody of client assets is generally required to arrange for:

• a.An annual audit of the adviser's own financial statements in place of any verification of client assets
• b.A surprise annual examination of client assets by an independent public accountant, and use of a qualified custodian✓
• c.A surprise examination of client assets every quarter by the state Administrator
• d.Client assets held in the adviser's own name at its office, with account statements sent once a year

Under the custody rule an adviser with custody must keep client funds and securities with a qualified custodian, notify clients where the assets are held, have a reasonable basis to believe the custodian sends account statements at least quarterly, and, unless an exception such as fee-deduction-only custody applies, have an independent public accountant verify the assets by a surprise examination at least once each calendar year. An audit of the adviser's own books does not verify client assets, the examiner is an accountant rather than a state Administrator, and holding assets in the adviser's own office with yearly statements fails the qualified-custodian and quarterly-statement requirements.17 CFR 275.206(4)-2(a)

Under the Uniform Securities Act, which of the following would be considered an institutional investor?

• a.An agent of a broker-dealer buying securities for his own personal account
• b.An individual accredited investor with a net worth of over $1 million
• c.A bank, insurance company, or registered investment company✓
• d.A UTMA custodial account for a minor, managed by a parent as custodian

The Uniform Securities Act exempts offers and sales to banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts and other financial institutions or institutional buyers. An individual, even a wealthy accredited one, is treated as a retail buyer, a broker-dealer's agent buying for his own account is an individual rather than an institution, and a parent managing a custodial account for a child is acting for a person, not an institutional buyer.Uniform Securities Act (1956) s.402(b)(8)

SEC Release IA-1092 clarified that which of the following is generally acting as an investment adviser?

• a.A financial planner, pension consultant, or sports and entertainment representative who advises clients about securities for compensation✓
• b.A publisher of a bona fide newspaper of general, regular, and paid circulation that prints impersonal market commentary and general financial news
• c.A lawyer whose securities advice is solely incidental to the practice of law and uncompensated
• d.A bank acting only as a custodian of client assets

Release IA-1092 explained that financial planners, pension consultants, and sports and entertainment representatives who give securities advice as part of a business, for compensation, are generally investment advisers. Bona fide publishers of impersonal commentary, professionals whose advice is solely incidental to their practice, and banks acting only as custodians fall outside the definition.SEC Release IA-1092 (1987)

An investment adviser representative of a federal covered (SEC-registered) adviser must register with a state securities Administrator:

• a.In each state where the representative has a place of business✓
• b.Only in the adviser firm's home state, and that registration covers every other state
• c.In each state where any of the representative's clients lives, even without a place of business there
• d.Never, since the firm's federal registration preempts states

The National Securities Markets Improvement Act preempts state registration of the SEC-registered firm and its supervised persons, but a state may still license, register or otherwise qualify an investment adviser representative who has a place of business in that state. The test is the representative's place of business, not where clients live, one state's registration does not cover the others, and federal registration of the firm does not exempt its representatives from state registration.Investment Advisers Act s.203A(b)(1)(A) (15 U.S.C. 80b-3a(b)(1)(A))

Under NASAA rules, an investment adviser that requires prepayment of more than $500 in fees, six or more months in advance, generally must:

• a.Register with the SEC regardless of its size
• b.Do nothing special beyond ordinary disclosure
• c.Include a balance sheet reflecting its financial condition in its brochure disclosures✓
• d.Guarantee the prepaid fees against loss

An adviser that charges substantial prepaid fees, more than $500 and six or more months in advance, must provide a balance sheet reflecting its financial condition so clients can assess the risk of prepayment. This ties to the custody and financial-disclosure framework.

Under the Uniform Securities Act, an individual who represents an issuer only in effecting certain exempt transactions, such as those in U.S. government or municipal securities, is:

• a.Required to register as an agent in each state where the issuer sells
• b.Required to register as an agent only if paid commissions on those sales
• c.Excluded from the definition of agent and need not register for those transactions✓
• d.Excluded only when employed by a broker-dealer, not by the issuer

Under the Uniform Securities Act an agent is an individual who represents a broker-dealer or an issuer in effecting securities sales, but the definition excludes an individual who represents an issuer in effecting transactions in exempt securities, such as U.S. government and municipal securities, or in exempt transactions. Such an individual need not register for those transactions. Commissions do not change this, and the exclusion applies to those representing an issuer, not to those employed by a broker-dealer. Representing an issuer in nonexempt public sales can require registration.Uniform Securities Act (1956) s.401(b)

Under the Uniform Securities Act, the Administrator has jurisdiction over an offer to sell a security when the offer:

• a.Reaches the state solely through a television broadcast that originates outside the U.S. and is not directed into the state
• b.Originates in the state, is directed into the state, or is accepted in the state✓
• c.Is never subject to state jurisdiction if the issuer is located out of state
• d.Is made only in a foreign country with no U.S. contact

The Administrator has jurisdiction if an offer or sale originates in, is directed into, or is accepted in the state. This origination-or-acceptance test defines the reach of state blue-sky law over a transaction.

Under the Uniform Securities Act, an isolated nonissuer transaction is:

• a.A solicited sale to the general public
• b.An exempt transaction involving infrequent, isolated trades not made by the issuer✓
• c.A public offering by an issuer raising new capital
• d.Always a prohibited practice

Isolated nonissuer transactions, meaning infrequent secondary trades that do not benefit the issuer, are exempt transactions under the USA because they are not part of a public distribution. Exempt-transaction status depends on how and how often the sale occurs.

Under NASAA rules, an investment adviser that deposits client funds into the adviser's own business operating account is engaged in:

• a.Acceptable bookkeeping if a ledger shows each client's share of the account
• b.Permitted practice as long as it notified the Administrator that it has custody
• c.Commingling client and firm assets, a prohibited practice✓
• d.A custody arrangement permitted once the adviser meets its minimum net worth

Client funds and securities must be held by a qualified custodian, either in a separate account for each client or in accounts containing only clients' assets, so depositing them in the adviser's own operating account commingles them with firm assets and is prohibited. A ledger of each client's share, notice of custody to the Administrator, and satisfying the net worth minimum do not replace the qualified custodian requirement.NASAA Model Rule 102(e)(1)-1(a)

An agent who, knowing of an impending large client buy order that will move the price, first buys the same security for their own account is engaged in:

• a.Scalping, a practice that is allowed once reported to the firm
• b.Front-running, a prohibited practice✓
• c.Cross-trading between the client's account and the agent's own account
• d.Permissible personal trading, since the agent's own order was entered first

Front-running means trading for one's own account ahead of a client's known order to profit from the expected price move. It is a dishonest and unethical practice that can support denial, suspension or revocation of an agent's registration. Scalping is a different abuse (recommending a security while planning to sell one's own holding), reporting does not make it acceptable, the facts do not describe a cross-trade, and entering the personal order first is exactly what front-running is, not a defense.Uniform Securities Act (1956) s.204(a)(2)(G)

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of investment adviser?

• a.A pension consultant who advises plans on choosing money managers
• b.A bank or bank holding company that is not itself an investment company✓
• c.A financial planner who charges an hourly fee for advice on securities
• d.A sports agent who advises athletes on selecting specific mutual funds

Section 202(a)(11) of the Advisers Act lists specific exclusions, and banks and bank holding companies that are not investment companies are among them, because banking regulators already supervise them. Anyone else who gives securities advice as a business for compensation meets the three-prong test, and neither an unusual job title nor an institutional clientele defeats it.Investment Advisers Act of 1940

A broker-dealer loses its exclusion from the definition of investment adviser under the Investment Advisers Act of 1940 when it:

• a.Publishes research reports distributed free to all of its brokerage clients
• b.Executes unsolicited orders for customers in listed equity securities
• c.Receives special compensation for advice beyond ordinary brokerage charges✓
• d.Employs registered agents who are compensated solely through commissions

A broker-dealer is excluded only when its advice is solely incidental to its brokerage business AND it receives no special compensation for that advice. Charging a separate advisory or wrap fee is special compensation, so the firm must register as an investment adviser for that activity. Commission-only compensation for executing trades keeps the exclusion intact.Investment Advisers Act of 1940

The brochure supplement, Form ADV Part 2B, must be delivered to a client and describes the:

• a.Custodian's procedures for safeguarding client funds and securities
• b.Performance record of every model portfolio the firm currently manages
• c.Background of the individuals who actually provide advice to that client✓
• d.Firm's fee schedule, advisory services, and disciplinary history

Part 2A is the firm brochure covering services, fees, conflicts, and disciplinary history. Part 2B is the supplement, and it covers the specific supervised persons who formulate advice for or have discretion over that client: their education, business experience, disciplinary events, other business activities, and who supervises them. Clients receive the supplement for their own adviser, not for the entire staff.Investment Advisers Act of 1940

Form CRS, which is Part 3 of Form ADV, is a relationship summary that a registered adviser must:

• a.Give to every advisory client, retail or institutional, once each year
• b.File with the SEC and deliver only if a retail investor asks for it
• c.Provide to retail investors in place of the Part 2A firm brochure
• d.Deliver to retail investors in plain English at the start of the relationship✓

Form CRS is a short, plain-English relationship summary for retail investors covering the relationships and services offered, fees and costs, standard of conduct, conflicts, disciplinary history and questions to ask. An adviser must deliver it to each retail investor before or at the time the investor enters into the advisory contract, post it on its website, and redeliver it at certain triggers such as opening a different type of account or recommending a rollover. It is not an annual mailing, it is not limited to requests, and it supplements rather than replaces the Part 2A brochure.17 CFR 275.204-5 (Form CRS delivery); Form ADV Part 3

A registered investment adviser must file an annual updating amendment to Form ADV within:

• a.12 months of the date of its last filing
• b.90 days of the end of its fiscal year✓
• c.120 days of the end of its fiscal year
• d.30 days of the end of its fiscal year

The annual updating amendment is due within 90 days after the adviser's fiscal year end and confirms or corrects the information in Form ADV, including assets under management and the number of clients. This is separate from the brochure delivery obligation, under which an updated brochure or a summary of material changes must reach clients within 120 days of the fiscal year end.Investment Advisers Act of 1940

When information in Form ADV Part 1 about an adviser's disciplinary history becomes materially inaccurate, the adviser must:

• a.Notify only the clients affected by the specific disciplinary event
• b.Disclose the change orally to clients but make no regulatory filing
• c.File a promptly amended Form ADV rather than wait for the annual update✓
• d.Wait for the annual updating amendment due within 90 days after the fiscal year ends

Form ADV General Instruction 4 requires prompt other-than-annual amendments when answers to certain Part 1A items, including Item 11 (disciplinary information), become inaccurate in any way, instead of waiting for the annual updating amendment due within 90 days after fiscal year-end. Notifying only some clients or telling clients orally does not satisfy the filing obligation. Delay can also be treated as a material omission under the antifraud provisions.Form ADV General Instruction 4; 17 CFR 275.204-1(a)

Under the Investment Advisers Act of 1940, an advisory contract may not be assigned to another adviser without:

• a.The client's consent to the assignment✓
• b.Written notice to clients after the assignment, with a right to cancel within 30 days
• c.The SEC's prior written approval of the assignment, after a review of the new adviser
• d.A new Form ADV filed by each of the new adviser's investment adviser representatives

Section 205(a)(2) requires every advisory contract to provide that it may not be assigned without the client's consent, because the client chose a particular adviser and the advisory relationship is personal. After-the-fact notice with a right to cancel does not satisfy the consent requirement, the SEC does not approve assignments, and representatives' filings are unrelated. A change in control of the firm can count as an assignment.Investment Advisers Act of 1940 Section 205(a)(2)

If an investment adviser organized as a partnership experiences a change in a minority of its partners, the firm must:

• a.File a new initial registration application with the state Administrator
• b.Terminate all existing advisory contracts and negotiate new agreements
• c.Obtain each client's written consent before the change takes effect
• d.Notify its advisory clients of the change within a reasonable time✓

Section 205(a)(3) draws a line at the majority. A change in a MINORITY of the partners requires only that clients be notified within a reasonable period. A change in a MAJORITY of the partners is treated as an assignment of the advisory contracts, which requires client consent. Candidates should keep the notice rule and the consent rule paired but distinct.Investment Advisers Act of 1940

An advisory contract provision stating that the adviser is not liable for any client losses except in cases of gross negligence is generally:

• a.A misleading hedge clause that may violate the antifraud provisions✓
• b.Acceptable whenever the client initials the paragraph at account opening
• c.A provision that NASAA rules require in discretionary contracts
• d.An enforceable limitation permitted for all state-registered advisers

Section 215 of the Advisers Act voids any provision purporting to waive compliance with the Act. Regulators view hedge clauses as misleading because they lead clients to believe they have surrendered nonwaivable rights, including rights under the antifraud provisions and the adviser's fiduciary duty. A client signature does not cure the problem, since the rights are not the client's to waive.Investment Advisers Act of 1940

An investment adviser that inadvertently receives a client's check made payable to a third party can avoid being deemed to have custody by:

• a.Holding the check until the client's next quarterly review meeting
• b.Endorsing the check over to the adviser's affiliated broker-dealer
• c.Forwarding the check to the third party within three business days✓
• d.Depositing the check in the adviser's own operating account promptly

An adviser that holds client funds or securities, or has authority to obtain possession of them, has custody and triggers the qualified custodian, notice, statement, and surprise examination requirements. Inadvertent receipt of a third-party check is not custody if the adviser forwards it to the third party within three business days and keeps a record. Depositing it or holding it defeats the safe harbor.Investment Advisers Act of 1940

An adviser with custody of client assets is generally subject to an annual surprise examination performed by:

• a.An independent public accountant at a time not known in advance✓
• b.The qualified custodian that holds the client funds and securities
• c.The state Administrator's examination staff on a published schedule
• d.The adviser's own chief compliance officer each calendar quarter

The custody rule requires client assets to be held by a qualified custodian, requires account statements to go directly to clients from that custodian, and adds an annual verification of client funds and securities by an independent public accountant on a surprise basis. Surprise is essential: an examination the adviser can anticipate does little to detect misappropriation. Pooled vehicles may substitute an annual audit distributed to investors.Investment Advisers Act of 1940