NASAA Series 65 — All Questions

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

If an adviser delivers its brochure at the same time the advisory contract is signed rather than at least 48 hours before, the client generally must be given:

• a.A five-business-day period to rescind the contract without penalty✓
• b.A performance-based fee discount
• c.Nothing further; the timing is irrelevant
• d.A guarantee against loss

The brochure delivery rule requires delivery at least 48 hours before entering the contract, or at the time of entering the contract if the client is given the right to rescind within five business days without penalty. This ensures the client has time to review disclosures. Advisers commonly use the five-day rescission option to meet the requirement.Investment Advisers Act of 1940

When an adviser pays a cash fee to a third-party solicitor for referring clients, the arrangement generally requires:

• a.That the client pay the solicitor directly in cash
• b.That the solicitor personally guarantee investment results
• c.A written agreement and disclosure of the solicitor's compensation to the client✓
• d.No disclosure of any kind to the referred client

Cash referral or solicitation arrangements generally require a written agreement between the adviser and solicitor and disclosure to the prospective client of the solicitor's relationship with the adviser and the compensation paid. This transparency lets clients weigh the conflict of interest behind a referral. Undisclosed paid referrals are prohibited.Investment Advisers Act of 1940

Which use of a professional designation or registration status by an adviser would be considered misleading?

• a.Listing genuine professional credentials the adviser holds
• b.Truthfully describing the adviser's years of experience
• c.Implying that registration means the Administrator has approved the adviser's qualifications or endorsed the firm✓
• d.Accurately stating the adviser is registered with the state

It is misleading, and prohibited, for an adviser to imply that being registered means a regulator has approved or endorsed its abilities or the merits of its services. Registration signifies compliance with legal requirements, not government endorsement. Accurately stating registration status and genuine credentials, however, is permissible.Uniform Securities Act

Which professional is most likely excluded from the definition of investment adviser when advice about securities is incidental to their practice and no special compensation is received?

• a.A person holding themselves out as a financial planner
• b.A firm charging a separate fee for portfolio management
• c.An individual publishing paid stock recommendations
• d.A lawyer or accountant whose securities advice is solely incidental to their profession✓

Lawyers, accountants, teachers, and engineers (the 'LATE' exclusions) are generally excluded from the investment adviser definition when their securities advice is solely incidental to their profession and they receive no special compensation for it. Charging a separate fee for advice or holding oneself out as a financial planner removes the exclusion. The exclusion recognizes advice that is truly ancillary.Investment Advisers Act of 1940

An adviser's obligation to protect clients' nonpublic personal information and provide a privacy notice arises principally from which requirement?

• a.Privacy rules (such as Regulation S-P) governing the safeguarding of customer information✓
• b.The custody rule's surprise examination conducted once each year by an independent public accountant
• c.The Marketing Rule's limits on testimonials and endorsements
• d.The Code of Ethics rule's requirement that access persons report their personal securities holdings to the chief compliance officer

Regulation S-P requires covered firms, including SEC-registered investment advisers, to protect customers' nonpublic personal information and to deliver privacy notices describing their information-sharing practices. The custody rule addresses how client assets are held and verified, the Marketing Rule governs advertising, testimonials and endorsements, and the Code of Ethics rule covers employees' personal trading reports. None of these creates the duty to safeguard client information or give a privacy notice.Regulation S-P (17 CFR Part 248, Subpart A)

Under the Uniform Securities Act, a willful violation of the act by an adviser or agent can result in which of the following?

• a.Criminal penalties, including fines and imprisonment, in addition to civil liability✓
• b.Only an administrative reprimand, since the act contains no criminal penalties
• c.Civil liability only, because criminal penalties arise only under federal law
• d.Automatic revocation of registration, but no fine or prison term

A willful violation of the Uniform Securities Act is a crime: on conviction the violator can be fined and imprisoned (the 1956 Act sets up to $5,000 and three years, and the 2002 Act leaves the amounts to each state), in addition to civil liability and administrative sanctions such as revocation of registration. Administrative and civil remedies do not replace the criminal penalty, and state criminal liability exists independently of federal law.Uniform Securities Act, Section 409 (1956 Act) and Section 508 (2002 Act)

Under the Uniform Securities Act, an individual who represents a broker-dealer in effecting securities transactions is defined as which of the following, and must generally register?

• a.An agent✓
• b.An issuer
• c.An investment adviser representative acting for a bank
• d.A federal covered adviser

An individual who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities is an agent under the Uniform Securities Act and generally must register in the states where they conduct business. Certain representatives of issuers in exempt transactions may be excluded. Agents are distinct from investment adviser representatives, who give advice rather than execute trades.Uniform Securities Act

State rules addressing an adviser that maintains custody or discretion over client accounts commonly require the adviser to do which of the following?

• a.Guarantee client accounts against loss
• b.Ignore any minimum financial requirements
• c.Avoid providing account statements to clients
• d.Meet minimum net worth or bonding requirements set by the Administrator, or provide required notice✓

State rules often impose minimum net worth or surety bond requirements on advisers that have custody of or discretion over client assets, scaled to the level of authority they hold. These financial safeguards help protect clients if the adviser fails or misuses assets. Advisers must also meet applicable notice, disclosure, and statement-delivery obligations.Uniform Securities Act

An adviser is granted authority to decide only the price and time at which to execute a client-specified purchase of a particular security. This is best described as:

• a.Custody of client assets
• b.Full discretionary authority requiring a written trading authorization
• c.Limited time and price discretion, which is not treated as full discretion✓
• d.A prohibited practice under all circumstances

Deciding only the price and time to execute an order that the client has already specified as to security and amount is considered limited time and price discretion, and it is generally not treated as full discretionary authority. Full discretion, choosing the security or quantity without prior client direction, requires written discretionary authorization. This distinction affects the documentation an adviser must obtain.Investment Advisers Act of 1940

Under the NASAA model rules on unethical business practices, which of the following is prohibited for an adviser or agent?

• a.Recommending securities after reasonable inquiry shows they match the client's stated objectives
• b.Guaranteeing a client against loss or churning the account to generate fees✓
• c.Charging a reasonable advisory fee that was fully disclosed to the client in advance
• d.Explaining the risks of a recommended strategy before the client decides to proceed

NASAA's model rule on unethical business practices prohibits, among other things, guaranteeing a client that a specific result (a gain or no loss) will be achieved and inducing trading that is excessive in size or frequency for the account (churning). Making suitable recommendations, charging a reasonable disclosed fee, and explaining risks are proper conduct, not violations.NASAA Model Rule 102(a)(4)-1

Under the Uniform Securities Act, which of the following is an exempt security (exempt from state registration)?

• a.A newly issued corporate stock offered broadly to state residents
• b.A U.S. government or municipal bond✓
• c.A limited partnership interest sold through general solicitation
• d.A private start-up's common stock sold to the general public

Exempt securities under the Uniform Securities Act include U.S. government and municipal bonds, bank securities, and certain others; they need not be registered with the state, though the antifraud provisions still apply. The trap is confusing an exempt security, based on what the instrument is, with an exempt transaction, based on how it is sold.Uniform Securities Act

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

• a.An unsolicited order from a customer to buy a specific security✓
• b.A solicited sale of an unregistered security to a retail customer
• c.A public advertising campaign for a new issue
• d.A cold-call solicitation of the general public

An unsolicited customer order is the classic exempt transaction because the customer initiated it. Other exempt transactions include private placements, isolated non-issuer transactions, and sales to institutional or accredited buyers. An exempt transaction turns on how the sale occurs, not on the security itself, so the solicited public sales are the traps.Uniform Securities Act

Registration by coordination under the Uniform Securities Act is available to an issuer that is:

• a.A state-chartered bank not otherwise required to register
• b.Simultaneously registering the same offering with the SEC under the Securities Act of 1933✓
• c.Registering an offering solely within one state with no federal filing
• d.Exempt from all federal registration and selling only intrastate

Registration by coordination is used when a security is registered federally under the Securities Act of 1933 at the same time as at the state level; the state registration becomes effective concurrently with the federal one. Registration by qualification is for offerings with no federal registration, the trap in the last option, and notification is for certain established issuers.Uniform Securities Act

When filing an initial registration application, a broker-dealer, agent, or investment adviser must include a consent to service of process, which:

• a.Waives the applicant's right to a hearing before the Administrator and to judicial review of any order denying, suspending, or revoking the registration
• b.Must be re-filed with the Administrator each time the registration is renewed, because the consent expires whenever the registration lapses or is withdrawn
• c.Appoints the Administrator as agent for service only in criminal prosecutions brought against the applicant, and only if the applicant is located outside the state
• d.Appoints the Administrator as the applicant's attorney to receive legal papers in actions under the act, with the same effect as personal service✓

A consent to service of process, filed with an initial application, is an irrevocable appointment of the Administrator to receive process in noncriminal suits and proceedings under the act, with the same force and validity as personal service. It is filed once: under the 2002 Act a consent already filed with a previous application need not be filed again. It does not waive hearing or review rights, it is not limited to criminal cases or to out-of-state applicants, and it does not promise approval.Uniform Securities Act, Section 414(g) (1956 Act) and Section 611(a) (2002 Act)

Under the Uniform Securities Act, a purchaser's right to bring a civil suit for a violation is generally subject to a statute of limitations of:

• a.No time limit on such suits
• b.Thirty days after the transaction
• c.Ten years from the transaction in every case
• d.The earlier of two years after discovery or three years after the sale✓

Under the Uniform Securities Act, a purchaser generally must bring a civil suit within the earlier of two years after discovering the violation or three years after the sale or contract of sale. This uniform two-and-three-year figure is the level the exam tests, even though some federal fraud claims carry longer periods; there is a definite limit, so the first and third options are wrong.Uniform Securities Act

A broker-dealer with no place of business in a state deals only with an existing client who is on vacation in that state for two weeks. Under the Uniform Securities Act, the firm:

• a.May be exempt from registration in that state under the provision for a firm with no place of business there dealing with an existing, temporarily present client✓
• b.Must open a branch office in the vacation state
• c.Must fully register as a broker-dealer in the vacation state immediately and open a supervised branch office there before it may contact the client even once about existing holdings
• d.Automatically commits securities fraud

The Uniform Securities Act does not require a broker-dealer with no place of business in a state to register there when it deals only with an existing client who is not a resident but is merely temporarily present, the so-called snowbird or vacation rule. Establishing an office or soliciting new state residents would, by contrast, trigger registration.Uniform Securities Act

Under the soft-dollar safe harbor, an investment adviser may use client brokerage commissions to pay for which of the following without breaching its duty?

• a.Brokerage and qualifying research services that benefit clients✓
• b.Office rent, equipment, and salaries for the adviser's administrative staff
• c.Travel and entertainment expenses for the adviser's portfolio managers
• d.Marketing materials used to attract new advisory clients

The Section 28(e) soft-dollar safe harbor lets an adviser with investment discretion pay a broker more than the lowest available commission if it determines in good faith that the commission is reasonable in relation to the value of the brokerage and research services provided. Overhead such as rent, equipment, and staff salaries, travel and entertainment, and marketing materials fall outside the safe harbor and create an undisclosed conflict of interest.Securities Exchange Act of 1934 Section 28(e)

An agent proposes to share in the profits and losses of a customer's account. Under NASAA rules this is generally permitted only if:

• a.The agent and customer agree to it verbally
• b.It is never permitted under any circumstances
• c.The agent obtains written approval from both the customer and the broker-dealer and shares only in proportion to the agent's own capital contribution✓
• d.The agent personally guarantees the customer against any loss and promises to reimburse the customer for any decline in the account's value below its agreed starting balance

An agent may share in the profits and losses of a customer's account only with the written approval of both the customer and the employing broker-dealer, and only in proportion to the agent's own financial contribution. A verbal agreement is insufficient, and guaranteeing a customer against loss is separately prohibited; those are the traps. Investment advisers face stricter limits still.Uniform Securities Act

Which of the following is a prohibited market manipulation practice?

• a.Entering matched orders or wash trades to create a false appearance of active trading✓
• b.Recommending a suitable, diversified portfolio
• c.Disclosing a material conflict of interest to a client
• d.Executing a client's order at the best available price

Creating a false or misleading appearance of active trading through wash trades, matched orders, or 'painting the tape' is market manipulation, prohibited under the antifraud provisions; front-running client block orders is likewise banned. Best execution, conflict disclosure, and suitable recommendations are proper conduct, so they are the traps.Uniform Securities Act

Under the NASAA model act addressing suspected financial exploitation of vulnerable adults, a qualified firm that reasonably suspects exploitation is generally permitted to:

• a.Notify a state regulator or adult protective services and place a temporary hold on a suspicious disbursement, with the required notices✓
• b.Freeze the whole account for as long as the firm considers necessary, with no time limit, and without telling the account owner or anyone else authorized on the account
• c.Delay a suspicious disbursement for up to 60 business days on its own authority, and extend that delay whenever its own compliance officer sees fit
• d.Disclose the suspicion to the account owner's relatives and local police, but not to the state securities regulator or adult protective services, which become involved only after a court order

Under the NASAA model act on financial exploitation of vulnerable adults, a qualified individual who reasonably believes exploitation has occurred must notify adult protective services and the state securities regulator, and the firm may delay a disbursement it reasonably believes would result in exploitation for up to 15 business days, notifying the people authorized on the account (unless they are suspected) and reviewing the matter internally. The regulator or adult protective services can request a further 10 business days, and anything longer needs a court order. The model act does not allow an open-ended freeze, a self-extended delay, or leaving out the regulator and adult protective services.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation

A broker-dealer that offers a wrap-fee program, charging a single asset-based fee that covers advice, execution, and custody, generally must:

• a.Register as an investment adviser only if the wrap program holds more than $110 million, since smaller programs fall within the broker-dealer exclusion
• b.Register as (or place the account with) an investment adviser, because a bundled asset-based fee for advice is not 'solely incidental' compensation✓
• c.Deliver Form CRS to wrap clients in place of registering, because the relationship summary meets all of the conditions of the broker-dealer exclusion
• d.Avoid investment adviser registration entirely, because bundling the advisory fee with brokerage commissions keeps the advice solely incidental to brokerage

The broker-dealer exclusion from the investment adviser definition applies only when advice is solely incidental to the conduct of the brokerage business and the firm receives no special compensation for it. A wrap fee is a single asset-based charge covering advice, execution and custody, which is special compensation, so the activity calls for investment adviser registration or placing the account with an adviser. Program size does not create or remove the exclusion, delivering Form CRS is a disclosure duty rather than a substitute for registration, and bundling the fee with commissions does not make the advice incidental.Investment Advisers Act of 1940, Section 202(a)(11)(C) (15 U.S.C. 80b-2(a)(11)(C))

Under the Uniform Securities Act, the term person includes all of the following EXCEPT:

• a.A deceased individual, a minor, or a person legally declared incompetent✓
• b.A corporation
• c.A government or a political subdivision, together with any agency or instrumentality of such a government
• d.A partnership or a trust

The USA defines person broadly to include individuals, corporations, partnerships, associations, trusts, and governments, but it specifically excludes a deceased person, a minor, and an incompetent, none of whom can lawfully contract. Reference: Uniform Securities Act.

An investment adviser with $60 million under management, located in a state that requires registration and examination, generally must register with:

• a.The SEC, because advisers with more than $25 million may choose federal registration instead of the state
• b.Both the SEC and the state, because advisers above $25 million in assets must dual register
• c.FINRA, because advisers at this size must be member firms
• d.The state securities Administrator, as a mid-size adviser between $25 million and $100 million✓

Under the Investment Advisers Act of 1940, Section 203A, as amended by the Dodd-Frank Act, a mid-sized adviser ($25 million to $100 million in assets under management) that is required to register, and would be examined, in its home state registers with the state and not the SEC. It may register with the SEC only if the state does not require registration and examination, or if it would otherwise have to register in 15 or more states. The $25 million figure alone is not a reason to register with the SEC, advisers do not dual register on that basis, and FINRA does not register investment advisers.15 U.S.C. 80b-3a(a)(2) (Investment Advisers Act of 1940, Section 203A(a)(2))

An investment adviser that manages a registered investment company (a mutual fund) must register with:

• a.No regulator, because funds are self-regulated
• b.FINRA as a member firm
• c.The state securities Administrator only
• d.The SEC, regardless of its assets under management✓

Under the Investment Advisers Act of 1940, an adviser to a registered investment company must register with the SEC as a federal covered adviser regardless of assets under management, an exception to the usual dollar threshold.

A pension consultant advising employee benefit plans becomes eligible to register with the SEC once the plan assets on which it advises reach at least:

• a.$25 million
• b.$200 million✓
• c.$500 million
• d.$110 million

Under SEC rules implementing the Investment Advisers Act of 1940, a pension consultant may register federally once it advises on at least $200 million in plan assets. Below that level it registers with the states.

An investment adviser that provides advice to clients exclusively through an interactive website (an internet adviser) generally:

• a.Registers with the SEC as a federal covered adviser under the internet adviser exemption✓
• b.Registers with the state where its principal office is located, regardless of its size
• c.Is excluded from the definition of an investment adviser because its advice is delivered by software
• d.Registers with each state in which it has more than five clients, under the de minimis exemption

SEC Rule 203A-2(e), the internet adviser exemption, lets an adviser that gives advice to all of its clients exclusively through an operational interactive website register with the SEC as a federal covered adviser regardless of its assets under management, instead of registering in each state. Delivering advice by software does not remove an adviser from the definition of investment adviser, and the five-client state de minimis rule is a separate provision for advisers with no place of business in the state.17 CFR 275.203A-2(e) (internet investment advisers)