NASAA Series 66 — All Questions

Under the Uniform Securities Act, a person who acts in good-faith conformity with an Administrator's rule or order that is later amended or rescinded:

• a.Is not liable under the Act for that act, even though the rule or order was later amended or rescinded✓
• b.Remains liable if the rule or order is rescinded, because liability turns on the rule in force when suit is filed
• c.Is protected only if the Administrator first approved that specific act in a written opinion letter
• d.Is protected only until the rule or order is amended, after which the act is treated as unlawful from the start

The Act provides that no provision imposing liability applies to an act done or omitted in good-faith conformity with a rule, form or order of the Administrator, even if the rule, form or order is later amended or rescinded. Liability therefore does not turn on the rule in force at the time of suit. The protection does not depend on a written opinion for the specific act, and it does not end retroactively when the rule is amended.Uniform Securities Act (1956) Section 412(e)

Under the 1956 Uniform Securities Act, a party aggrieved by a final order of the Administrator generally may:

• a.Petition the appropriate court, but only within 30 days after entry
• b.Obtain judicial review by filing a petition in the appropriate court within 60 days of the order✓
• c.Petition within 60 days, which automatically stays the order while the court decides
• d.Appeal to the SEC within 30 days, because state orders against registrants are reviewed at the federal level

A person aggrieved by a final order of the Administrator may petition the appropriate court for review within 60 days after the order is entered. The period is 60 days, not 30. Filing does not automatically stay the order, because a stay is available only if the court orders one. Review is in state court, not before the SEC.Uniform Securities Act (1956) Section 411(a)-(b)

Under the Uniform Securities Act, when the Administrator issues a summary order suspending a registration before any hearing is held, the Administrator must:

• a.Obtain a court injunction first, because only a court may suspend a registration without holding a prior hearing
• b.Allow 30 days to pass before the suspension takes effect, so the registrant can file a written response
• c.Hold a full hearing before the order is issued, because a suspension without a prior hearing violates the registrant's due process rights
• d.Promptly notify the registrant of the order and its reasons, and schedule a hearing within 15 days of a request for one✓

A summary order operates immediately, pending the final determination of the proceeding. The Administrator must promptly notify the affected person that the order was entered and why, and must schedule a hearing within 15 days after receiving a request for one (2002 Act s.412(f); 1956 Act s.204(c)). A court injunction is a separate remedy, not a prerequisite; what summary process dispenses with is a hearing before the order, not the hearing itself; and the order does not wait 30 days to take effect.Uniform Securities Act (2002) s.412(f); (1956) s.204(c)

The antifraud provisions of the 1956 Uniform Securities Act (Section 101 for sales and Section 102 for advisory activity) apply to:

• a.Only registered broker-dealers and agents effecting sales in the state, and never issuers or unregistered persons selling securities
• b.Only securities that are actually required to be registered by qualification or coordination in the particular state
• c.Only retail transactions with natural persons, since sales to institutional buyers fall outside the antifraud provisions
• d.Any offer, sale, or advice concerning a security, including transactions and securities that are otherwise exempt from registration✓

The antifraud provisions apply to any person in connection with the offer, sale or purchase of any security, and to anyone paid to advise others about securities. The comment to the sales provision states that there are no exemptions from it, so exempt securities and exempt transactions are covered. The provisions are not limited to registered agents and broker-dealers, to securities that must be registered, or to retail buyers.Uniform Securities Act (1956) Sections 101, 102

A person acting as an investment adviser makes a materially false statement to a client to induce advisory business. Under the 1956 Uniform Securities Act this conduct is addressed by:

• a.Section 101, which prohibits fraud and misleading statements in the offer, sale, or purchase of a security
• b.Section 201, which requires broker-dealers, agents, and investment advisers to register before doing business
• c.Section 102, prohibiting fraud and deceit in connection with rendering investment advice✓
• d.Section 402, which lists the exempt securities and the exempt transactions recognized under the Act

Section 102 of the 1956 Act (Advisory Activities) makes it unlawful for a person who is paid for advising others about securities to employ a device, scheme, or artifice to defraud them or to engage in any act that operates as a fraud on them; the 2002 Act's counterpart is s.502. Section 101 is the general antifraud provision for the offer, sale, or purchase of securities, s.201 is the registration requirement, and s.402 lists exemptions, so none of those addresses a false statement made to win advisory business.Uniform Securities Act (1956) s.102(a)

Under Advisers Act section 203(m) and SEC Rule 203(m)-1, which adviser is generally EXEMPT from SEC registration under the 'private fund adviser' exemption?

• a.An adviser solely to private funds whose private-fund assets total $150 million or more
• b.An adviser solely to private funds with less than $150 million in private-fund assets under management in the United States✓
• c.An adviser to one private fund and to several retail separately managed accounts, with under $150 million in total assets
• d.An adviser solely to private funds with $400 million of private-fund assets, because every investor in each fund is accredited

Rule 203(m)-1 exempts a U.S. adviser from SEC registration only if it acts solely as an adviser to qualifying private funds and manages private-fund assets of less than $150 million. At $150 million or more the exemption is lost, an adviser that also manages retail separate accounts does not act solely for private funds, and having only accredited investors does not substitute for the asset limit.Advisers Act s.203(m); 17 CFR 275.203(m)-1(a)

Under the NASAA brochure rule for state-registered advisers (Model Rule USA 2002 411(g)), the Form ADV Part 2A brochure must be delivered to a prospective client:

• a.Before or at the time of entering into the advisory contract, with no minimum lead time and no cancellation right required for the client
• b.At least 48 hours before entering into the advisory contract, OR at the time of entering the contract if the client is given a right to rescind within five business days without penalty✓
• c.Within 120 days after the end of the adviser's fiscal year, accompanied by a summary of the material changes made to it during the year
• d.At least 72 hours before entering into the advisory contract, with no alternative timing available even where the client can terminate without penalty

The NASAA model brochure rule requires initial delivery at least 48 hours before the advisory contract is signed, or at signing if the client may terminate without penalty within five business days. The SEC's own rule for federally registered advisers is different: it requires delivery before or at the time of entering into the contract, with no 48-hour option, so that is not the state rule. The 120-day delivery is the annual update, which comes after the relationship begins. A flat 72-hour wait with no cancellation alternative is not in the model rule.NASAA Model Rule USA 2002 411(g)(b)(1)

Under Section 205 of the Investment Advisers Act of 1940, the advisory contract of an SEC-registered adviser may NOT:

• a.Allow the adviser to assign the contract to another adviser without the client's consent
• b.Provide for an asset-based fee, such as a stated percentage of the assets under management each year✓
• c.Let the client terminate on written notice, with a prorated refund of any advisory fee paid in advance
• d.Charge a flat fixed fee for a written financial plan that does not depend on how the client's account performs

Section 205(a)(2) requires every advisory contract of an SEC-registered adviser to provide that it cannot be assigned without the client's consent, so a contract that lets the adviser assign it freely is barred. A partnership adviser must also promise to tell clients of a change in its membership within a reasonable time. Asset-based fees, termination rights with a prorated refund, and flat planning fees are all permitted; what Section 205(a)(1) restricts is the performance-based fee.Investment Advisers Act of 1940 §205(a)(2)-(3)

Under the Investment Advisers Act, an adviser that pays a third party a cash fee to refer advisory clients (a promoter under the SEC marketing rule) generally must:

• a.Comply with the marketing/solicitation rule, including a written agreement and clear disclosure to the client of the solicitor's compensation and any conflict✓
• b.Disclose the arrangement to the SEC in an annual Form ADV amendment only, because telling the referred client is no longer required once the marketing rule replaced the old solicitation rule
• c.Follow the former cash-solicitation rule, Rule 206(4)-3, which still governs every paid referral and requires the client to receive a separate solicitor's disclosure document
• d.Pay referral fees only to a registered broker-dealer or investment adviser, because paying any unregistered person for client referrals is prohibited outright under the rule

The marketing rule, Rule 206(4)-1, treats a paid referral as a compensated endorsement. The adviser must make clear disclosures to the prospective client at the time of the endorsement, including that the promoter is paid and any conflicts, and must have a written agreement with the promoter (de minimis compensation of $1,000 or less in 12 months is excepted). Telling only the SEC on Form ADV is not enough. The old cash-solicitation Rule 206(4)-3 was rescinded when the marketing rule was adopted. Promoters need not be registered, but the adviser must check that they are not subject to disqualifying events.17 CFR 275.206(4)-1(b)

Under the Investment Advisers Act, the SEC marketing rule (Rule 206(4)-1) governs advertisements. A testimonial or endorsement in an adviser's advertisement is generally:

• a.Permitted without any disclosure, as long as the statement is truthful and the person giving it actually holds the opinion expressed
• b.Permitted only for promoters who are registered representatives of a broker-dealer, since unregistered persons may not give endorsements for pay
• c.Prohibited in every case, as under the former Rule 206(4)-1(a)(1) ban on client testimonials, which the 2020 amendments left in place
• d.Permitted only with required disclosures, including whether the promoter is a client and whether they were compensated, plus oversight and, where compensated, a written agreement✓

The amended marketing rule permits testimonials and endorsements if the adviser discloses clearly whether the person is a client and whether the person is compensated, along with the material conflicts and terms, oversees compliance, and has a written agreement with a compensated promoter. Exceptions apply, for example for de minimis compensation of $1,000 or less in 12 months. Truthfulness alone is not enough, the person need not be a registered representative, and the former blanket ban on testimonials was removed by the amendments, not kept.17 CFR 275.206(4)-1(b)

Under the Investment Advisers Act, the recordkeeping rule (Rule 204-2) generally requires an SEC-registered adviser to preserve its required books and records for a minimum of:

• a.Three years from the end of the fiscal year of the last entry, with the first year kept in an appropriate office of the adviser and the rest anywhere
• b.Six years from the end of the fiscal year of the last entry, all of it kept in the adviser's principal office or a branch office
• c.Five years from the end of the fiscal year of the last entry, the first two years in an appropriate office of the adviser✓
• d.Five years from the date each record is created, kept wherever the adviser finds it convenient

Rule 204-2(e)(1) requires the records to be kept for not less than five years from the end of the fiscal year in which the last entry was made, the first two years in an appropriate office of the adviser. Three years with one year on site, and six years in the principal office, are not what the rule says. Counting five years from the date a record is created, instead of from the end of the fiscal year of the last entry, misstates the start date, and the first two years must be in an appropriate office of the adviser.17 CFR 275.204-2(e)(1)

An agent of a broker-dealer lends money to a retail customer to help the customer meet a margin call. Under the NASAA model rule on dishonest or unethical practices, an agent's lending money to a customer is:

• a.Permitted when the loan is short-term and is repaid by the date on which the margin call must be met
• b.Permitted whenever the customer signs a written acknowledgment that memorializes the terms of the loan and the agent's firm approves it
• c.Permitted only where the agent earns no interest or fee on the money advanced
• d.A dishonest or unethical practice that can be grounds for denial, suspension, or revocation of the agent's registration✓

NASAA's model rule lists 'engaging in the practice of lending or borrowing money or securities from a customer' among the dishonest or unethical practices of agents, and it states no exception for short-term, documented, or interest-free loans. Such conduct can be grounds for denial, suspension, or revocation of registration, so a loan to cover a margin call is not excused by a brief repayment period, a signed acknowledgment, or the absence of interest.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents, s.2.a

An investment adviser representative decides only the price at which, or the time when, a client's order for a definite amount of a specified security is executed. Under NASAA Model Rule 102(a)(4)-1, this limited discretion:

• a.Requires written discretionary authority from the client before the first such trade, exactly as full discretion does, with no exception for price or time
• b.Requires written discretionary authority within ten business days after the first such trade, the same as it does for full discretion exercised under oral authority
• c.Does not require written discretionary authority, because the rule excepts discretion limited to price or time for a definite amount of a specified security✓
• d.Is allowed without written authority only for purchases of mutual fund shares, because the exception covers no other kind of security

NASAA Model Rule 102(a)(4)-1(b) makes it unethical to exercise discretion without written discretionary authority, but excepts discretion that relates solely to the price at which, or the time when, an order for a definite amount of a specified security is executed. So price-or-time discretion needs no written authority. The ten-business-day window is for full discretion that began under oral authority. Written authority before the first trade is the broker-dealer standard for full discretion. The exception is not limited to mutual funds.NASAA Model Rule 102(a)(4)-1(b)

A client gives an investment adviser oral authority to exercise full discretion over the account. Under NASAA Model Rule 102(a)(4)-1, the adviser must obtain the client's written discretionary authority:

• a.Before the first discretionary transaction is placed, because oral authority is never enough for an investment adviser, as it is not for a broker-dealer
• b.Within thirty calendar days after the account is opened, whether or not a discretionary transaction has yet been placed
• c.Within ten business days after the date of the first transaction placed under the oral discretionary authority✓
• d.Within ten business days after the account is opened, whether or not any discretionary transaction has yet been placed under oral authority

NASAA Model Rule 102(a)(4)-1(b) lets an investment adviser act on oral discretionary authority, but written authority must be in hand within ten business days after the first transaction placed under it. Requiring it before the first trade is the broker-dealer rule. A thirty-day deadline is not in the rule, and the ten days run from the first transaction, not from the date the account is opened.NASAA Model Rule 102(a)(4)-1(b)

An investment adviser directs client brokerage to a firm that charges higher commissions in exchange for soft-dollar benefits that do not qualify for the Section 28(e) research safe harbor. Under fiduciary principles this is:

• a.Acceptable if the adviser discloses the arrangement on Form ADV, since disclosure alone brings any soft-dollar benefit within the Section 28(e) safe harbor
• b.Acceptable if the higher commission is still within the range other broker-dealers charge, because best execution looks only at the commission rate and not the total cost
• c.Permitted if the benefits are used only for the adviser's overhead, such as rent and salaries, because overhead indirectly benefits the clients who pay the commissions
• d.A potential breach of the duty of best execution and loyalty, because paying up for benefits outside the Section 28(e) safe harbor is not protected✓

Section 28(e) of the Exchange Act protects an adviser from claims of breach for paying more than the lowest commission only when the brokerage and research services qualify and the adviser determines in good faith that the commission is reasonable. Benefits outside the safe harbor lose that protection, so paying higher commissions for them can breach the duties of best execution and loyalty. Disclosure does not bring a non-qualifying benefit within the safe harbor. Best execution looks at the total cost and quality of execution, not only the commission rate. Overhead such as rent and salaries is not research or brokerage that qualifies.Securities Exchange Act of 1934 §28(e) (15 U.S.C. 78bb(e))

An adviser deducts advisory fees directly from client accounts held at a qualified custodian. Under the NASAA model custody rule, to avoid the independent verification (surprise examination) requirement the adviser typically must:

• a.Hold the client's written authorization to deduct fees, concurrently send the custodian and the client itemized fee statements, and notify the Administrator on Form ADV✓
• b.Send the client an itemized fee statement once a year, with no invoice to the custodian and no notice to the Administrator
• c.Post a surety bond equal to the fees it deducts and file the bond with the Administrator in place of sending invoices
• d.Deduct each fee only after the client signs the invoice, then send the custodian a copy within 30 days

The fee-deduction relief in the NASAA model custody rule applies when the adviser has custody solely because it can deduct its fee. The adviser must hold the client's written authorization to deduct fees. Each time it deducts a fee, it must at the same time send the custodian a statement of the fee and send the client a statement itemizing the formula, the assets under management and the period. The adviser must also notify the Administrator on Form ADV that it uses these safeguards. An annual statement, a surety bond, or a client signature on each invoice is not the test.

An adviser's client dies. The adviser, aware of the death, continues to place discretionary trades in the account for two weeks under the existing discretionary authority. This is:

• a.Acceptable, because the client's discretionary authority passes automatically to the client's heirs at death
• b.Proper, because a written grant of discretionary authority is a permanent delegation that continues in force until the client expressly revokes it in writing
• c.Permitted until the executor or estate formally notifies the adviser of the death in writing
• d.Improper — discretionary authority and the advisory relationship generally terminate on the client's death, and continued trading is unauthorized✓

Discretionary authority is delegated by the client personally, and under general agency principles it generally ends when the client dies, as does the advisory relationship. Trades placed afterward are placed without authority, which NASAA Model Rule 102(a)(4)-1(d) lists as an unethical practice. The authority does not pass to the heirs, it is not permanent, and an adviser that already knows of the death cannot wait for formal written notice; it should stop trading and await instructions from the estate's legal representative.NASAA Model Rule 102(a)(4)-1(d)

Under FINRA Rule 3210, a person associated with a member firm who wants to open a securities account at another broker-dealer must generally:

• a.Obtain the state securities Administrator's advance written consent before opening the account, and file a copy of that consent with the employing member
• b.Notify the employing member within 30 days after opening the account, and tell the executing firm of the association only if the executing firm asks
• c.Notify the employing member in writing within five business days after the account is opened, with no consent needed
• d.Obtain the employing member's prior written consent, and notify the executing firm in writing of the association before opening the account✓

FINRA Rule 3210 requires an associated person to get the employing member's prior written consent before opening an account in which securities transactions can be effected and in which he or she has a beneficial interest, and to notify the executing firm in writing of the association before opening it. The executing firm must send duplicate confirmations and statements to the employer on written request. State Administrators play no consent role. A 30-day notice window applies only to accounts that already existed when the person joined the firm. After-the-fact notice with no consent does not satisfy the rule.FINRA Rule 3210(a)-(c)

An adviser accepts a gift of significant value from a client and does not disclose it, later favoring that client's interests over others in allocation decisions. Under the Investment Advisers Act, the failure here most directly implicates:

• a.The custody rule's requirement that a qualified custodian hold client assets and send account statements directly to each client at least quarterly
• b.The fiduciary duty to treat clients fairly and to disclose conflicts, since undisclosed benefits can bias allocation and breach loyalty✓
• c.The anti-assignment requirement in Section 205, under which the client must consent before an advisory contract is transferred
• d.The performance-fee prohibition in Section 205(a)(1), under which only qualified clients may be charged a share of capital gains

An adviser's fiduciary duty under Section 206 requires loyalty and fair treatment of clients, and an undisclosed gift that leads the adviser to favor one client in allocations is an undisclosed conflict that breaches that duty. The custody rule is about holding client assets with a qualified custodian. The anti-assignment provision concerns who may take over an advisory contract. The performance-fee prohibition concerns how an adviser may charge. None of those addresses biased allocation.

Under the Uniform Securities Act and NASAA rules, an agent who effects transactions in an account based on inside information provided by a client who is a corporate director:

• a.Had a complete defense, because the agent did not originate the information and only acted on a tip from a corporate insider
• b.Committed only a suitability violation and not any kind of fraud or insider-trading violation
• c.Violated insider-trading prohibitions — trading on material nonpublic information is unlawful regardless of its source✓
• d.Acted lawfully, because the information came directly from the client rather than from the firm itself

Trading on material nonpublic information is prohibited no matter how the information was obtained, so the agent had no defense for acting on a tip and did not merely commit a suitability violation. The conduct is fraud under the Act's general antifraud provision (1956 Act s.101; 2002 Act s.501), and broker-dealers must maintain written policies to prevent misuse of material nonpublic information (Exchange Act s.15(g)). The client being the source rather than the firm creates no exception.Exchange Act s.15(g) (15 U.S.C. 78o(g)); Uniform Securities Act (1956) s.101 / (2002) s.501

An investment adviser wants to register a client's securities in the adviser's own name as the owner, 'for convenience.' Under the SEC custody rule, holding client securities this way is:

• a.Acceptable, provided the adviser sends the client an annual statement listing the securities held in its name
• b.A custody problem raising misappropriation risk: client securities must be held by a qualified custodian, in the client's name or in the adviser's name only as agent or trustee for its clients✓
• c.Permitted for an SEC-registered adviser but not for a state-registered adviser
• d.Acceptable if the client gives written consent, because the client may waive the qualified-custodian requirement

Rule 206(4)-2(a)(1) requires a qualified custodian to maintain client securities either in a separate account for each client under that client's name, or in accounts holding only clients' assets under the adviser's name as agent or trustee. Registering the securities in the adviser's own name as owner fits neither, and it exposes the clients to misappropriation and to the adviser's creditors. An annual statement does not fix that, the rule does not turn on how the adviser is registered, and the client cannot waive the requirement.17 CFR 275.206(4)-2(a)(1)

An adviser's employee overhears material nonpublic information in an elevator and the firm has no written policies to prevent its misuse. Under the Investment Advisers Act, the firm's failure most directly violates:

• a.The custody rule, Rule 206(4)-2, which requires client assets to be held by a qualified custodian and verified by an independent accountant's surprise examination
• b.The performance-fee prohibition in Section 205(a)(1), which bars fees based on a share of capital gains unless the client is a qualified client
• c.The civil-liability and rescission provisions found in the Uniform Securities Act, which let a buyer recover the purchase price whenever a security was sold in violation of the Act
• d.Section 204A of the Investment Advisers Act, requiring written policies reasonably designed to prevent the misuse of material nonpublic information by the firm✓

Section 204A requires an adviser to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, so a firm without such policies violates it even if no one has traded. The custody rule and the performance-fee rule address other subjects entirely. The civil-liability provisions of the Uniform Securities Act are a state remedy for buyers of securities sold in violation of that Act; they are not the federal policy requirement and are not triggered by an overheard remark.Investment Advisers Act of 1940 §204A

A state-registered investment adviser with $40 million in assets under management permanently moves its principal office and place of business to a different state. Under the Advisers Act's federal/state division, the adviser generally must:

• a.Register with the securities regulator of the new state, because that is now the state of its principal office and place of business✓
• b.Remain registered only with the original state, because its registration stays with the state where it first registered
• c.Automatically become a federal covered adviser the moment it relocates across the state line
• d.Keep its original state registration and file only a notice filing in the new state, as federal covered advisers do

Under Advisers Act s.203A(a)(1), a small adviser is regulated by the state in which it maintains its principal office and place of business, so after the move it must register in the new state. Its old registration does not follow it, a notice filing is for federal covered advisers rather than state-registered ones, and relocating across a state line does not by itself make an adviser a federal covered adviser.Advisers Act s.203A(a)(1) (15 U.S.C. 80b-3a)

An investment adviser representative leaves a state-registered adviser. Under the Uniform Securities Act of 2002, the duty to file the notice of termination with the Administrator falls first on:

• a.The state securities Administrator, who must withdraw the registration on learning of the departure, with no filing by anyone else
• b.The departing representative alone, who must file within 30 days, with no filing required of the firm
• c.The employing investment adviser, which must promptly file the notice, and the representative may file it if the firm fails to✓
• d.The representative's new employer alone, which files once the representative begins the next job

Section 408(a) of the Uniform Securities Act of 2002 requires the employing investment adviser to promptly file a notice of termination when a registered investment adviser representative leaves, and lets the representative file it if the firm has not. The Administrator does not act without a filing. The departing representative is a back-up filer, not the primary one, so the duty cannot rest on that person alone. A new employer's later filing concerns the transfer of registration, not the termination notice from the old firm.Uniform Securities Act (2002) §408(a); NASAA Model Rule USA 2002 408(a)-1

A customer places a genuine order to buy a security and, later the same day, a genuine order to sell it, and the broker-dealer executes both at prevailing market prices. Compared with 'painting the tape,' the broker-dealer's activity is:

• a.Unlawful, because opposite orders in the same security on the same day are treated as matched orders under the antifraud provisions
• b.Lawful only if the Administrator has approved the pairing of the orders in advance
• c.Lawful, because each order reflects a bona fide transaction, unlike matched orders entered to create a false appearance of active trading✓
• d.Lawful only for large institutional customers, because retail round-trip trades are presumed to be manipulative

What the antifraud provisions prohibit is sham activity: wash trades with no change in beneficial ownership, or matched orders entered to create a false or misleading appearance of active trading (NASAA BD rule s.1.p). A customer's genuine purchase and sale, executed at market prices for the customer's own purposes, is a bona fide transaction. Opposite orders on the same day are not presumed to be matched, no advance approval is required, and the lawfulness does not depend on whether the customer is institutional or retail.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents, s.1.p(1)-(3)

Under the Uniform Securities Act, an agent recommends a security that is suitable for the client but fails to disclose a substantial, known risk specific to that issuer. The failure to disclose the material issuer-specific risk is:

• a.Permissible, because the agent's duty ends once the recommendation is suitable, and describing risks is the issuer's job alone
• b.A material omission — suitability does not excuse omitting a material fact needed to keep statements from being misleading✓
• c.Excused if the client has signed an account agreement acknowledging that securities can lose value
• d.Acceptable if the customer is an experienced investor, since sophisticated customers are presumed to know every issuer-specific risk

Section 101(2) of the Uniform Securities Act makes it unlawful to omit to state a material fact necessary to make the statements made not misleading. A suitable recommendation is a separate requirement, so it does not cure an omission of a known material risk. The issuer's duty to describe risks does not remove the agent's own duty. A general acknowledgment that securities can lose value is not disclosure of the specific risk. Experience does not make a customer aware of a risk the agent knows and has not mentioned.Uniform Securities Act (1956) §101(2)

Under the Investment Advisers Act custody rule (Rule 206(4)-2), when an adviser has custody of client funds or securities, the core safeguard against misappropriation is:

• a.Using a qualified custodian and delivering independent account statements to the client, so client assets are segregated and independently verifiable✓
• b.Posting a fidelity bond for the full value of the assets in place of using a custodian
• c.Holding client assets in an omnibus account in the adviser's name and sending its own statements
• d.Filing a Form ADV Part 2A brochure that describes the adviser's custody practices

Rule 206(4)-2 makes it a fraudulent practice to have custody of client funds or securities unless a qualified custodian holds them in the client's own account or in an account for the adviser's clients only, the custodian sends account statements at least quarterly, and an independent accountant verifies the assets by surprise examination (with limited exceptions). A fidelity bond does not substitute for a custodian. An omnibus account in the adviser's own name with self-issued statements removes the independent check. A brochure describing custody practices informs clients but does not protect the assets.17 CFR 275.206(4)-2

An SEC-registered adviser has a new disciplinary event in March but waits to report it until its next annual Form ADV update. Under the Investment Advisers Act, the adviser:

• a.Complied, because the annual updating amendment is the only filing that Form ADV requires
• b.Violated its duty: Form ADV must be amended promptly when disciplinary information becomes inaccurate, not just once a year✓
• c.Complied, as long as it told affected clients about the event orally, because only client notice is required between annual updates
• d.Missed a quarterly deadline: Form ADV must be amended within 30 days after the end of each quarter in which any change occurs

Rule 204-1 requires an annual updating amendment within 90 days after fiscal year end, and more frequent amendments when the Form ADV instructions require them. Those instructions require a prompt other-than-annual amendment when the disciplinary answers in Part 1A (Item 11) become inaccurate in any way, so waiting for the annual update is a violation. The annual update is not the only filing, telling clients orally does not replace amending the form, and there is no quarterly amendment deadline.17 CFR 275.204-1

An investor contributes $5,000 at the end of each year for 30 years. Assuming a positive annual return, compared with contributing the same total ($150,000) all at once at the end of year 30, the annual-contribution plan will:

• a.Accumulate more, because earlier contributions compound for longer✓
• b.Accumulate the same amount, since the total dollars contributed are identical
• c.Accumulate less, because spreading contributions out reduces total interest
• d.Accumulate more only if the return exceeds the rate of inflation

With any positive return, earlier contributions compound for longer, so a stream of annual contributions accumulates more than the same total deposited as a lump sum at the end of the period, which earns nothing in that time. The totals contributed are identical but the interest earned is not, spreading contributions out adds interest rather than reducing it, and the advantage does not depend on beating inflation.

For a bond trading at a premium above par, the correct ordering of its three yields from lowest to highest is:

• a.Current yield, yield to maturity, nominal (coupon) yield
• b.All three yields are equal to one another, whatever price the bond trades at
• c.Yield to maturity, current yield, nominal (coupon) yield✓
• d.Nominal (coupon) yield, current yield, yield to maturity

For a bond bought at a premium, the coupon is paid on par but the investor pays more than par, so current yield (annual interest divided by price) falls below the coupon rate. Yield to maturity falls lower still because the premium is lost gradually as the bond is pulled back to par at maturity. The order from lowest to highest is yield to maturity, current yield, then coupon rate. The reverse order applies to a discount bond, and the three yields equal each other only when the bond trades at par.

A traditional IRA owner was born in 1955. Under SECURE 2.0, required minimum distributions from the IRA generally must begin:

• a.At age 73, the SECURE 2.0 age for owners born in 1951-1959✓
• b.At age 75, the SECURE 2.0 age for owners born in 1960 or later
• c.At age 72, the age set by the original SECURE Act of 2019
• d.At age 59½, when the 10% early-withdrawal penalty ends

Under SECURE 2.0 the required minimum distribution age is 73 for owners who reach age 72 after 2022 and age 73 before 2033, which covers those born from 1951 through 1959. An owner born in 1960 or later waits until 75, and age 72 was the age under the original SECURE Act before it was raised. Age 59½ is when the 10% early-withdrawal penalty stops applying, which has no connection to required distributions. A Roth IRA has no required distributions during the original owner's lifetime.IRC Sec. 401(a)(9)(C)(v) (SECURE 2.0 Act Sec. 107)

Under FINRA rules, the maximum aggregate sales charge on shares of an open-end fund that has no asset-based sales charge is:

• a.8.5% of the public offering price✓
• b.8.5% of the net asset value per share at the time of purchase
• c.6.25% of the amount invested, the cap on a single transaction for a fund that has an asset-based sales charge
• d.10.0% of the public offering price on purchases of any size

FINRA Rule 2341(d)(1)(A) limits aggregate front-end and deferred sales charges of a fund without an asset-based sales charge to 8.5% of the offering price, and the cap is lower if the fund does not offer rights of accumulation and quantity discounts on prescribed terms (for example 8.0% without rights of accumulation). The base is the public offering price, not the net asset value. The 6.25% figure applies to a different type of fund, one with an asset-based sales charge, and no fund may exceed the rule's limits by setting its own load.FINRA Rule 2341(d)(1)(A)

In theory, if the Federal Reserve lowers the reserve requirement ratio, the MOST likely effect is that:

• a.Inflation pressure eases, because banks keep more idle cash on hand
• b.Banks will have less to lend, slowing economic growth
• c.Banks can lend more, expanding the money supply✓
• d.The federal budget deficit will shrink as tax receipts rise

Lowering the reserve requirement ratio frees a larger share of deposits for lending, which expands banks' lending capacity and the money supply, an easing action. Raising the ratio does the reverse and would slow lending. Reserve requirements affect bank lending, not federal tax revenue or the budget deficit, and more lending adds to inflation pressure rather than easing it. In practice the Federal Reserve set the ratio to zero percent on March 26, 2020, so the tool is dormant today.Federal Reserve Regulation D, 12 CFR Part 204 (reserve requirements)

The Federal Reserve's trading desk sells a large block of Treasury securities to primary dealers. What is the most likely immediate effect on the banking system?

• a.Bank reserves fall, which tends to push the federal funds rate down
• b.Bank reserves rise, which tends to push the federal funds rate down
• c.Bank reserves stay unchanged, because only a discount-rate change moves reserves
• d.Bank reserves fall, which tends to push the federal funds rate higher✓

Dealers pay for the securities with reserves, so the sale drains reserves from the banking system, and scarcer reserves cost more to borrow overnight. Rising reserves with a lower rate describes a Fed purchase, not a sale. Open-market operations are the Fed's main day-to-day tool precisely because they change reserves directly, so unchanged reserves is wrong. Falling reserves cannot lower the rate, since less supply of a good raises its price.

Assume a 10% reserve requirement and no cash leakage. A bank receives a new $5,000 deposit. What is the maximum total deposits the banking system can support from it, counting the original deposit?

• a.$50,000, found by dividing the deposit by the 10% requirement✓
• b.$45,000, the loans the system creates beyond the original deposit
• c.$4,500, the most that the first bank itself can lend out initially
• d.$5,000, because deposits cannot grow beyond what was first deposited

The simple deposit multiplier is 1 / reserve requirement = 1 / 0.10 = 10, so $5,000 x 10 = $50,000 of total deposits, counting the original. The $45,000 figure is the new loans and deposits created beyond the original, not the total including it. $4,500 is only what the first bank can lend before the proceeds are redeposited. Treating the deposit as fixed ignores that loans are redeposited and re-lent. (The 10% requirement is a textbook assumption; the Fed has set reserve requirements to zero since March 2020.)

The money supply is $2 trillion and nominal GDP is $12 trillion. Using the equation of exchange (MV = PQ), what is the velocity of money?

• a.10, because nominal GDP less the money supply equals $10 trillion
• b.14, because the money supply plus nominal GDP equals $14 trillion
• c.6, because nominal GDP of $12 trillion divided by $2 trillion equals 6✓
• d.0.17, because the money supply divided by nominal GDP equals about 0.17

In MV = PQ, PQ is nominal GDP, so V = PQ / M = $12 trillion / $2 trillion = 6: each dollar changes hands six times a year on average. Inverting the fraction gives 0.17, which is the money supply as a share of GDP. Subtracting or adding the two figures mixes dollar amounts into a ratio and has no meaning as a turnover rate.

Nominal GDP grew 5.5% last year and the GDP price deflator rose 3.0%. Approximately how much did real GDP grow?

• a.About 2.5%, because real growth is nominal growth less inflation✓
• b.About 1.8%, because nominal growth is divided by inflation
• c.About 5.5%, because the deflator does not affect the growth rate
• d.About 8.5%, because inflation is added to nominal growth

Real GDP is nominal GDP stripped of price changes, so real growth is roughly 5.5% - 3.0% = 2.5%. Adding inflation would double count price increases. The deflator is exactly the adjustment that separates price changes from output changes, so it cannot be ignored. Dividing 5.5 by 3.0 yields about 1.8, but growth rates are subtracted, not divided.

The Producer Price Index (PPI) is most useful to an analyst as an early signal of what?

• a.Coming changes in unemployment, since producers adjust payrolls first
• b.Coming changes in real GDP, since producers' sales equal total output
• c.Coming changes in the federal funds rate, since the FOMC targets the PPI
• d.Coming changes in consumer prices, since producers often pass on input costs✓

The PPI measures prices received by domestic producers at the wholesale level, and rising producer costs often flow through to the CPI. Hiring decisions are tracked by payroll and jobless-claims data rather than by prices. Output is measured by GDP, not by an index of prices. The FOMC weighs many inputs, and no rule sets the policy rate mechanically from the PPI.

Inflation falls from 6% in one year to 3% the next, while prices continue to rise. This situation is best described as:

• a.Deflation, because the inflation rate declined during the year
• b.Stagflation, because prices rose while the inflation rate was still above 2%
• c.Disinflation, because the rate of price increase slowed but prices still rose✓
• d.Hyperinflation, because the earlier 6% rate was far above the long-run average

Disinflation is a decline in the inflation rate while the price level still increases. Deflation requires the price level itself to fall, which did not happen here. Stagflation pairs high inflation with stagnant output and high unemployment, and the facts say nothing about growth. Hyperinflation involves extremely rapid price increases, and 6% is nowhere near that.

Oil prices spike and manufacturers raise prices on finished goods to cover higher input costs, even though consumer demand has not increased. This is best described as:

• a.Cyclical disinflation
• b.Cost-push inflation✓
• c.Demand-pull inflation
• d.Structural deflation

Cost-push inflation arises when higher production costs, such as energy or wages, push up prices without a rise in demand. Demand-pull inflation requires spending to outrun supply, which the facts exclude. Deflation means falling prices, the opposite of what is happening. Disinflation is a slowing of inflation, not a supply-cost shock raising it.

According to the Phillips curve, what short-run relationship exists between unemployment and inflation?

• a.No link: inflation is determined only by the growth of the money supply
• b.An inverse trade-off: lower unemployment is associated with higher inflation✓
• c.A fixed link: each 1% fall in unemployment adds exactly 1% to inflation
• d.A direct link: higher unemployment is associated with higher inflation

The Phillips curve describes an inverse short-run relationship: tight labor markets raise wages and prices. A direct link describes stagflation, which the curve was criticized for failing to explain, not the curve itself. Monetarists emphasize money growth, but that is a rival view, not the Phillips relationship. The trade-off is not fixed at one-for-one and shifts with expectations.

An investor says long-term Treasury yields usually exceed short-term yields because investors demand extra compensation for tying up money and bearing more price risk. Which theory of the term structure is this?

• a.Pure expectations theory
• b.Liquidity preference theory✓
• c.Market segmentation theory
• d.Purchasing power parity

Liquidity preference theory says longer maturities carry a term premium, which tends to make the curve upward sloping. Pure expectations theory says long rates equal the average of expected future short rates, with no premium. Market segmentation says each maturity range has its own supply and demand and investors do not move between them. Purchasing power parity concerns exchange rates, not yields.

The one-year Treasury yields 4% and investors expect the one-year rate to be 6% a year from now. Under the pure expectations theory, the two-year yield is approximately:

• a.6%, the higher of the current and the expected one-year rate
• b.10%, the total of the current and the expected one-year rates
• c.4%, because only the current one-year rate is a known figure
• d.5%, the average of the current and the expected one-year rates✓

Pure expectations theory says a two-year rate equals the average of the current one-year rate and the expected one-year rate a year ahead: (4% + 6%) / 2 = 5%. The higher rate alone would ignore the first year. Summing the two rates gives a two-year total return, not an annualized yield. The theory is built on expectations, so the unobservable future rate is exactly what enters.

A country runs a persistent current account deficit. Which statement best describes how the deficit is financed?

• a.By net capital inflows, as foreigners buy its stocks, bonds, and property✓
• b.By central bank reserves that are never replaced, indefinitely
• c.By a matching trade surplus in services, which cancels the deficit
• d.By net capital outflows, as its residents buy assets abroad

The balance of payments must balance: a current account deficit is offset by a capital and financial account surplus, meaning foreigners are buying the country's assets or lending to it. Capital outflows would widen the gap, not fund it. A services surplus is already counted inside the current account figure. Reserves can cover a gap temporarily, but they run out, so they cannot finance a persistent deficit.

A U.S. investor owns Japanese stocks that have not changed in yen terms. If the yen weakens against the dollar, the investor's holding, measured in dollars, will most likely:

• a.Fall in value, because each yen then converts into fewer dollars✓
• b.Rise in value, because dividends are paid in the stronger currency
• c.Rise in value, because a weaker yen makes Japanese exports more competitive
• d.Stay the same, because the shares did not change in yen terms

Foreign holdings are translated back into dollars, so a yen that buys fewer dollars cuts the dollar value even if the yen price is flat. A weaker yen may help Japanese exporters over time, but the question asks about translation of an unchanged yen price. Unchanged yen value does not mean unchanged dollar value; that is currency risk. A yen dividend is also worth less when converted.

Purchasing power parity (PPP) predicts that, over the long run, the exchange rate between two currencies will adjust so that:

• a.The two countries must report identical inflation rates in each year
• b.The country with the larger economy and more exports holds the stronger currency
• c.Interest rates in the two countries converge after adjusting for risk
• d.A basket of goods costs the same in both countries once priced in one currency✓

PPP is the law-of-one-price idea applied to a basket of goods: currencies move until the basket costs the same everywhere. Equal interest rates are a different idea, interest rate parity. Economic size does not determine currency strength under PPP. PPP says currencies adjust to inflation differences; it does not require inflation rates to be equal.

Country X can make either cloth or wine, and gives up fewer units of wine per unit of cloth than Country Y does. Under the principle of comparative advantage, Country X should:

• a.Produce only the good in which it has an absolute cost advantage
• b.Specialize in cloth and trade for wine, even if Y is better at making both✓
• c.Specialize in wine, because it gives up less cloth for each unit of wine
• d.Produce both goods itself, because trade lowers domestic employment

Comparative advantage rests on opportunity cost: X gives up less wine to make cloth, so it should specialize in cloth, and both countries gain from trading even if one is more efficient at both. The wine option reverses the opportunity-cost comparison. Autarky forgoes the gains from trade, and the employment claim is not what the principle says. Absolute advantage is a different test and can point to the wrong specialization.

Economists describe 'crowding out' when government deficit spending financed by borrowing leads to:

• a.A stronger currency that lowers the cost of imports
• b.Higher taxes that raise household disposable income
• c.Higher interest rates that reduce private investment✓
• d.Lower interest rates that increase private investment

When the Treasury borrows heavily it competes for loanable funds, which can push interest rates up and discourage business borrowing and investment. Lower rates would encourage investment, the opposite effect. A stronger currency is a possible side effect through exchange rates, not the definition of crowding out. Higher taxes lower, not raise, disposable income.

If households spend 80% of each additional dollar of income, a sustained $100 billion increase in government spending could raise equilibrium output by up to approximately:

• a.$180 billion, since the multiplier is 1 + 0.80
• b.$125 billion, since the multiplier is 1 / 0.80
• c.$80 billion, since the multiplier is the 0.80 spending rate
• d.$500 billion, since the multiplier is 1 / (1 - 0.80) = 5✓

The simple spending multiplier is 1 / (1 - MPC) = 1 / 0.20 = 5, so $100 billion can raise output by $500 billion as income is re-spent. Adding 1 to the MPC gives 1.8, which has no basis in the model. Dividing by the MPC alone gives 1.25 and ignores the saved fraction that leaks out of each round. Using the MPC itself as the multiplier understates the compounding.

Supply-side economists argue that cutting marginal tax rates will mainly:

• a.Raise aggregate demand through larger government transfer payments
• b.Raise interest rates by increasing the supply of loanable funds
• c.Raise prices because higher after-tax wages are spent immediately
• d.Raise incentives to work, save, and invest, expanding productive capacity✓

Supply-side theory focuses on incentives for producers and workers, so lower marginal rates are argued to raise labor supply and investment and expand capacity. Transfer payments are a demand-side Keynesian tool, not what a tax cut delivers. More saving would increase loanable funds and push rates down rather than up. The inflationary spending channel is a demand-side argument.