NASAA Series 66 — All Questions

An open-end fund holds itself out as diversified and has $200 million in total assets. To meet the 75-5-10 test, what is the most the fund may hold in the securities of one non-government issuer and still count that holding toward the 75% portion?

• a.$10 million, which is 5% of the fund's total assets✓
• b.$20 million, which is 10% of the fund's total assets
• c.$7.5 million, which is 5% of the 75% portion of assets
• d.$150 million, which is the full 75% portion of assets

A diversified company must have at least 75% of its total assets in cash, government securities, other investment companies and other securities, and the last group counts only to the extent it does not exceed 5% of the fund's total assets in any one issuer and 10% of that issuer's voting securities. The 5% is measured on total assets of $200 million, which gives $10 million. The 10% limit applies to the issuer's voting securities, not to fund assets. Taking 5% of the $150 million portion understates the limit, and the full 75% is the size of the qualifying pool, not the cap for one issuer.Investment Company Act of 1940 §5(b)(1)

A manufacturing company has total assets of $90 million, including $2 million in cash and $8 million in U.S. Government securities. It also holds $34 million in minority stock positions that are investment securities. Under the 40% test of Section 3(a)(1)(C), is it an investment company?

• a.Yes, because investment securities are 42.5% of the $80 million left after excluding cash and government securities✓
• b.No, because investment securities are about 37.8% of its total assets of $90 million, under 40%
• c.No, because the test applies only to issuers that hold themselves out as being in the business of investing
• d.No, because the test counts only securities in which the company has a controlling interest in the issuer

Section 3(a)(1)(C) defines an investment company as an issuer with investment securities exceeding 40% of the value of its total assets, exclusive of Government securities and cash items, on an unconsolidated basis. Removing $2 million of cash and $8 million of government securities leaves $80 million, and $34 million is 42.5% of that. Dividing by the full $90 million gives 37.8% and wrongly reaches the opposite answer. The 40% test is objective and applies whether or not the issuer holds itself out as investing, and minority positions are the kind of holding it counts.Investment Company Act of 1940 §3(a)(1)(C)

A private fund wants to rely on the Section 3(c)(7) exclusion from the definition of investment company. Which investor can it sell to?

• a.An individual who owns $4 million in investments
• b.An individual with a net worth of $1.2 million
• c.An individual who owns $5.5 million in investments✓
• d.An individual who earned $500,000 in each of three years

Section 3(c)(7) excludes a fund whose securities are owned only by qualified purchasers. Under Section 2(a)(51), a natural person is a qualified purchaser if he or she owns at least $5 million in investments, so the investor with $5.5 million qualifies. Net worth of $1.2 million and income of $500,000 are accredited-investor measures and say nothing about the amount of investments owned, and $4 million in investments is below the $5 million line.Investment Company Act of 1940 §3(c)(7); §2(a)(51)

A mutual fund's investment adviser sells its advisory business to another firm in a transaction that is an assignment of the advisory contract. What is the effect on the fund's advisory contract?

• a.It terminates automatically, so the fund needs a new contract approved as the Act requires✓
• b.It continues until the fund's board next reviews it at the annual approval
• c.It continues unless the fund's shareholders vote to cancel it within 60 days
• d.It continues, because only the fund may end it on 60 days' notice without penalty

Section 15(a) requires an advisory contract to provide that it terminates automatically on its assignment. The fund may also end it without penalty on no more than 60 days' notice, but that is the fund's right and is not the only way the contract ends. The sale triggers the termination itself, so no board review or shareholder vote is needed to bring it about, and a replacement contract must be approved before the new adviser can serve.Investment Company Act of 1940 §15(a)

A securities agent is subpoenaed to testify in an Administrator's investigation of an unregistered offering. After he claims his privilege against self-incrimination, the Administrator compels his testimony. May the state later prosecute him for the offering he testified about?

• a.Yes, but the state may not use his compelled testimony as evidence against him
• b.No, but he remains open to prosecution for perjury or contempt in the testimony✓
• c.No, and the protection also extends to any perjury he commits while testifying
• d.Yes, because compelled testimony gives no protection from later state prosecution of him

Section 407(d) provides that no one is excused from testifying on the ground of self-incrimination, but that an individual compelled to testify after claiming the privilege may not be prosecuted or penalized for the transaction concerning which he testified. The protection covers the transaction itself and not merely the use of the testimony, which is broader than use immunity. Perjury and contempt committed in the testimony are expressly excepted, so a witness cannot gain immunity by lying or refusing to answer.Uniform Securities Act (1956) §407(d)

A broker-dealer refuses to produce records demanded by the Administrator's subpoena in an investigation. What may the Administrator do under the Act?

• a.Hold the firm in contempt directly and order its principal jailed without going to court first
• b.Apply to the court for an order to produce the records; disobeying it may be punished as contempt✓
• c.Impose a fine on the firm itself equal to the statutory maximum for willful violations
• d.Nothing further, because a subpoena under the Act is advisory unless the SEC also joins the state inquiry

Under Section 407(c), when a person refuses to obey a subpoena, the Administrator applies to the appropriate court, which may order the person to appear and produce evidence. Failure to obey the court's order may be punished as contempt of court. The Administrator cannot punish for contempt on his own authority, and the criminal fine in Section 409 applies to willful violations and is imposed on conviction. A subpoena under the Act is enforceable by the state and does not depend on any federal action.Uniform Securities Act (1956) §407(c)

The securities administrator of State B asks the Administrator of State A to subpoena records held by a firm in State A. The activity under investigation in State B would also violate State A's Act if it had occurred in State A. What may State A's Administrator do?

• a.Issue the subpoena only if the firm is registered as a broker-dealer in both states
• b.Issue and enforce the subpoena in State A on behalf of State B at its request✓
• c.Share only records that are already public, since subpoenas serve State A's inquiries
• d.Issue the subpoena only if the SEC also joins in the request that State B makes

Section 407(e) allows an Administrator to issue and apply to enforce subpoenas in his own state at the request of another state's securities agency or administrator, provided the alleged activity would be a violation of his own Act if it had occurred there. The power is not limited to State A's own inquiries, and it does not depend on SEC involvement or on the firm's registration in both states.Uniform Securities Act §407(e) (NASAA-updated text)

The Administrator sues in court to stop an issuer's fraudulent offering and asks for a temporary restraining order and restitution to purchasers. Which statement about the court's authority is correct?

• a.The court must require the Administrator to post a bond equal to the dollar size of the entire offering
• b.The court may grant only a permanent injunction and may not issue a temporary order
• c.The court may order restitution only if purchasers have also filed their own private suits
• d.The court may grant the relief on a proper showing and may not require a bond from the Administrator✓

Section 408(b) lets the Administrator sue to enjoin acts that violate the Act. On a proper showing, the court may grant a permanent or temporary injunction or restraining order, appoint a receiver, and order rescission, restitution or disgorgement. The section states that the court may not require the Administrator to post a bond. Neither a bond nor parallel private suits are conditions of relief, and a temporary order is expressly available.Uniform Securities Act (1956) §408(b)

Before any hearing or court judgment, the Administrator completes an investigation of an unregistered promoter and wants to issue a public notice describing the violation. Does the Uniform Securities Act (1956) permit it?

• a.Yes, because the Administrator may publish information about any violation of the Act✓
• b.No, because publication is permitted only after a criminal conviction is entered
• c.No, because publication is permitted only after a final order is issued following a hearing
• d.Yes, but only in a private notice sent to registered broker-dealers and agents

Section 407(a)(3) of the 1956 Act lets the Administrator, in his discretion, publish information concerning any violation of the Act or of a rule or order under it. The power is not conditioned on a conviction, on a hearing and order, or on a court judgment, and it is not limited to a private audience. Publication is an investigative-stage tool, so the Administrator may use it before any proceeding is decided.Uniform Securities Act (1956) Sec. 407(a)(3)

An Administrator uncovers evidence that an agent committed a willful securities fraud. Who decides whether criminal charges are brought?

• a.The attorney general or district attorney, who may proceed with or without a referral✓
• b.The SEC, which must approve any state criminal charge before it may be filed in court
• c.The Administrator, who prosecutes the criminal charges directly in state court if he chooses
• d.The state securities board, once a court has issued a final injunction against the agent

Section 409(b) says the Administrator may refer available evidence to the attorney general or the proper district attorney, who may institute the criminal proceedings with or without a referral. The Administrator's own tools are administrative and civil, such as orders and injunctions. State criminal charges do not require SEC approval or a prior injunction.Uniform Securities Act (1956) §409(b)

A buyer paid $40,000 for a security sold in violation of the Act's registration requirement. A full year has passed, interest under the Act is 6% a year, the buyer received $1,800 in income, and the buyer has costs of $500 and attorney's fees of $5,000. The buyer tenders the security. What may the buyer recover?

• a.$46,100: the price plus interest, costs and fees, less the income received✓
• b.$43,700: the price plus costs and fees, less income, but without interest
• c.$40,600: the price plus interest, less income, but without costs and fees
• d.$47,900: the same total, but without subtracting the income received from the security

Section 410(a) allows a buyer who tenders the security to recover the consideration paid, interest, costs and reasonable attorney's fees, less income received on the security. Working: $40,000 + $2,400 interest + $500 costs + $5,000 fees = $47,900, and $47,900 - $1,800 income = $46,100. Leaving out the income deduction gives $47,900, leaving out costs and fees gives $40,600, and leaving out interest gives $43,700, so none of those matches the statutory measure.Uniform Securities Act (1956) §410(a)

Under the Uniform Securities Act of 1956 as updated by NASAA (Section 410(f)), a buyer bought a security on March 1, 2023, in a sale that violated the Act, and discovered the facts on January 10, 2024. What is the last day to sue?

• a.March 1, 2026, three years after the sale itself
• b.January 10, 2027, three years after the discovery
• c.January 10, 2026, the earlier of the two statutory dates✓
• d.March 1, 2025, two years after the original purchase date

Section 410(f) of the NASAA-updated 1956 Act bars a suit brought more than three years after the contract of sale or after two years from discovery of the facts, whichever first occurs. Three years from March 1, 2023 is March 1, 2026, and two years from January 10, 2024 is January 10, 2026. The earlier date controls, so the last day to sue is January 10, 2026. The two-year period runs from discovery rather than from the sale, and the three-year period runs from the contract rather than from discovery. The original 1956 wording allowed only two years from the contract of sale, which would give March 1, 2025, but that is not the updated text named in the question.Uniform Securities Act §410(f) (NASAA-updated text; the original 1956 text is §410(e))

A seller who sold securities in violation of the Act dies before any buyer sues. What is the effect on the buyers' claims under Section 410?

• a.The claims survive, and a buyer may pursue them against the seller's estate✓
• b.The claims pass to the Administrator, who alone may sue on behalf of the buyers
• c.The claims end at death, because liability under the Act is personal to the seller
• d.The claims survive only if a buyer had already made a written demand on the seller

Section 410(e) provides that every cause of action under the section survives the death of any person who might have been a plaintiff or a defendant. A buyer's civil claim therefore continues against the seller's estate without a prior demand. The Administrator's own enforcement powers are separate, and the buyer's private right of action does not transfer to the Administrator.Uniform Securities Act (1956) §410(e)

A client paid an investment adviser $12,000 in fees. The adviser defrauded the client through a scheme, and the client lost $30,000 on the recommended investments. Ignoring interest, costs and attorney's fees, what may the client recover under Section 410(b)?

• a.$12,000: only the fees the client paid for the advice
• b.$18,000: the loss less the fees paid for the advice
• c.$42,000: the fees paid plus the loss caused by the advice✓
• d.$30,000: only the loss on the recommended investments

Section 410(b) gives a client defrauded by a paid adviser the right to recover the consideration paid for the advice and any loss due to the advice, with interest, costs and fees, less any income received from the advice. Here, $12,000 + $30,000 = $42,000. Recovering only the loss ignores the fee, recovering only the fee ignores the loss, and subtracting the fee from the loss misreads the measure, which adds the two.Uniform Securities Act (1956) §410(b)

An investor signs a subscription agreement stating that she waives all rights under the state securities act and will not sue. She later learns that she was misled about the offering. What is the effect of the waiver?

• a.It is valid, but only if she was an accredited investor when she signed
• b.It is valid, because she signed the agreement knowingly and in writing
• c.It is valid for civil claims but void for any criminal proceeding
• d.It is void, and she may still sue under the Act for her losses✓

Section 410(i) makes void any condition, stipulation or provision that binds a person acquiring a security to waive compliance with the Act or any rule or order under it. A knowing signature does not cure it, and accredited status is irrelevant to it. The provision protects the buyer's civil remedies in the same way whether or not any criminal proceeding is brought.Uniform Securities Act (1956) §410(i)

A state-registered adviser's draft client agreement states the services, the term, the fee formula, a no-assignment clause and the adviser's discretionary authority. Which missing item would make the agreement noncompliant with NASAA's model rule on the contents of an advisory contract?

• a.A list of the soft-dollar research and services the adviser receives from the brokers it uses
• b.The client's written investment policy statement attached to the agreement as an exhibit
• c.How much of any prepaid fee would be returned if the contract ends before the period is over✓
• d.A copy of the adviser's latest balance sheet showing its net worth at the last fiscal year-end

The model rule requires the written contract itself to state the services, the term, the fee, the formula for computing it, the amount of prepaid fee returned on termination or non-performance, any grant of discretion, and the no-assignment-without-consent clause. An adviser's financial statements are filed with the regulator or delivered when the adviser holds client prepayments, but they are not a contract term. Soft-dollar practices are disclosed in Form ADV Part 2A, not in the agreement. An investment policy statement is good practice, but no contract rule requires attaching one.NASAA Model Rule USA 2002 502(c)(a)(1)

A client pays a state-registered adviser $1,500 in advance on January 1 for the calendar quarter. The client ends the relationship effective at the close of February, so two of the three months were used, and the contract follows NASAA's model rule on prepaid fees. How much should be returned to the client?

• a.$1,500
• b.$500✓
• c.$1,000
• d.$750

The fee covers three months at $500 a month. Two months of service were delivered, so $1,000 is earned and the unearned $500 for March goes back to the client. Returning $1,000 refunds the earned portion instead of the unearned portion. Returning $750 splits the fee in half without regard to the time actually served. Returning the full $1,500 ignores that the adviser did earn the fee for the two months of service.NASAA Model Rule USA 2002 502(c)(a)(1); Rule 102(a)(4)-1(p)

On Monday, March 2, 2026, a client orally authorizes an IAR to exercise discretion in her account. The IAR places the first discretionary trade on Tuesday, March 3, and no holidays fall in the period. By what date must the IAR have the client's written discretionary authority?

• a.Tuesday, March 17, 2026✓
• b.Thursday, April 2, 2026
• c.Monday, March 16, 2026
• d.Friday, March 13, 2026

NASAA's unethical-practices rule allows discretion on oral authority only if written authority is obtained within ten business days after the date of the first transaction placed under it. Counting business days from March 3, the tenth falls on March 17. March 13 counts ten calendar days, not business days. March 16 treats the trade date itself as day one. April 2 counts thirty calendar days, which is a different period from the one in the rule.NASAA Model Rule 102(a)(4)-1(b)

An adviser wants to charge a qualified client a fee equal to 20% of capital gains. If the information is not already in Form ADV Part 2, which written disclosure must the adviser give under NASAA's contract rule before entering the agreement?

• a.That the fee may give the adviser an incentive to make riskier or more speculative investments✓
• b.That the fee is capped at the same percentage as the adviser's asset-based fee on similar accounts
• c.That the fee will be charged only on gains that have been realized and never on unrealized appreciation
• d.That the adviser's performance results have been reviewed and approved by the state Administrator

A performance-fee arrangement requires the adviser to disclose the incentive toward riskier investments, that compensation may rise with unrealized as well as realized gains, the measurement periods, any comparison index, and how hard-to-price securities are valued. Telling clients the Administrator approved performance results is itself prohibited. The unrealized-appreciation disclosure runs the opposite way, because the fee may be earned on unrealized gains. No rule caps a performance fee at the asset-based rate.NASAA Model Rule USA 2002 502(c)(c)(2)(B)

A state-registered adviser's agreement says the client 'waives any right to claim a violation of the Investment Advisers Act or the state securities act.' What is the effect of this clause?

• a.It is void, and including it is an unethical business practice under NASAA's rule✓
• b.It is enforceable only if the client separately initials it and receives Form ADV Part 2
• c.It is valid, since a sophisticated client may waive any statutory right by signing a contract
• d.It is enforceable against private damage claims but not against actions by the Administrator

Section 215 of the Advisers Act makes void any provision binding a person to waive compliance with the Act, and NASAA's rule treats putting such a clause in an advisory contract as an unethical practice. Initialing the clause or receiving a brochure does not cure it. Splitting the waiver between private claims and regulatory actions is not recognized, because the whole provision is void. Client sophistication does not create a right to waive the statute.Investment Advisers Act Section 215(a); NASAA Model Rule 102(a)(4)-1(s)

A state-registered adviser organized as a partnership admits a new partner. The change does not shift who controls the firm. How do the Advisers Act and NASAA's contract rule treat the clients' advisory contracts?

• a.The contract must require the partnership to tell clients about the change in membership within a reasonable time✓
• b.The firm must file an amended copy of each contract with the Administrator within thirty days of the change
• c.Each client must consent in writing before the new partner joins, because admitting a partner assigns the contract
• d.No notice is owed unless the new partner will personally manage client accounts or have discretion

An adviser that is a partnership must agree in its contracts to notify clients of any change in the membership of the partnership within a reasonable time. A change that does not alter actual control is not an assignment, so client consent is not required. The notice duty does not depend on whether the new partner manages accounts. Advisory contracts are not filed with the Administrator when membership changes.Investment Advisers Act Section 205(a)(3); NASAA Model Rule USA 2002 502(c)(a)(4)

In the past 12 months an adviser has paid a total of $900 to a client who posted a testimonial for the firm. Under the SEC Marketing Rule, which requirement does NOT apply to this arrangement?

• a.Disclosure that the client received compensation in exchange for giving the testimonial
• b.Clear and prominent disclosure that the speaker is a current client of the adviser
• c.A written agreement describing the scope of the activities and the compensation terms✓
• d.A reasonable basis for the adviser's belief that the testimonial complies with the rule

Compensation of $1,000 or less in the preceding 12 months is de minimis, and the written-agreement and ineligible-person provisions do not apply to it. The disclosures that the speaker is a client and that compensation was paid still must be made clearly and prominently. The adviser's duty to have a reasonable basis for believing the testimonial complies also continues to apply.17 CFR 275.206(4)-1(b)(4)

Over the past 12 months an adviser paid a promoter $400 in cash and later gave the same promoter a $700 gift card for recommending the firm in a video. Treating the video as an endorsement, how does the SEC Marketing Rule classify this compensation?

• a.Not de minimis, because any cash payment to an endorser removes the exception altogether
• b.De minimis, because the gift card is non-cash and does not count toward the dollar limit
• c.Not de minimis, because the $1,100 total exceeds $1,000, so the written agreement and screen apply✓
• d.De minimis, because each payment is below the $1,000 threshold when tested on its own, not in total

De minimis compensation is a total of $1,000 or less in the preceding 12 months, and non-cash compensation counts at its equivalent value. Cash of $400 plus a $700 gift card is $1,100, which exceeds the limit, so the written agreement and disqualification screen are required. The test is applied to the total, not to each payment. Non-cash compensation is included in the total. A small cash payment alone does not remove the exception.17 CFR 275.206(4)-1(e)(2)

A podcast host who has never been a client tells listeners the adviser 'is the best planner in the state' and is paid $5,000 for the segment. Under the SEC Marketing Rule this statement is best classified as:

• a.a third-party rating, because the host is ranking the adviser against other local planners
• b.an endorsement, so the adviser must disclose the host is not a client and was paid✓
• c.a testimonial, because the term covers any paid statement of approval by whoever makes it
• d.outside the rule, because a spoken statement is not part of the adviser's own materials

An endorsement is a statement of approval by a person other than a current client, and a compensated endorsement is treated as an advertisement. The adviser must disclose clearly that the speaker is not a client, that compensation was provided, and any material conflicts. A testimonial can only come from a current client. A rating requires a rating or ranking produced in the third party's ordinary business, which a paid opinion is not. The live, extemporaneous oral exclusion does not reach a compensated podcast segment.17 CFR 275.206(4)-1(b), (e)(6)

An adviser wants its advertisement to say that a magazine's reader survey named it a 'Top Fee-Only Planner.' Which condition must be met before the rating can appear in the advertisement?

• a.The rating must have been issued within the past twelve months, and anything older may never be used
• b.The magazine that produced the survey must itself be registered with the SEC as an investment adviser or broker-dealer
• c.The advertisement must disclose the date and period of the rating, who produced it, and any compensation paid✓
• d.The Administrator must pre-approve the rating in writing before the advertisement is first used

A third-party rating may be used only if the adviser has a reasonable basis to believe the survey was not designed to produce a predetermined result, and the advertisement clearly and prominently discloses the date and period of the rating, the identity of the party that created and tabulated it, and any compensation the adviser paid. The rating provider need not be a registrant. The rule requires disclosing the date but sets no twelve-month age cut-off. The Marketing Rule does not require regulator pre-approval of advertisements.17 CFR 275.206(4)-1(c)

An adviser's brochure shows a composite's gross return of 12% in large bold type, while the net return of 9.1% appears in small footnote type. Which requirement of the SEC Marketing Rule does this presentation violate?

• a.Any advertisement with performance must carry a statement that the Administrator has reviewed and approved the figures
• b.Net performance must appear with at least equal prominence to gross performance, in a format that eases comparison✓
• c.Gross returns must be examined by an independent accountant before they may be used in any advertisement
• d.Only net returns may be shown to retail investors, and a gross figure is never allowed beside them

Gross performance may appear only if net performance is also presented with at least equal prominence, calculated over the same period with the same methodology, and formatted to facilitate comparison. No accountant examination of gross returns is required. Claiming that a regulator reviewed or approved performance figures is itself prohibited. Gross figures are permitted for retail audiences as long as net figures accompany them on equal footing.17 CFR 275.206(4)-1(d)(1)

An adviser launched an equity composite seven years ago and advertises its results (it is not a private fund). Which time periods must the advertisement show, each ending no earlier than the most recent calendar year-end?

• a.One-year, five-year and since-inception figures, each shown with equal prominence✓
• b.One-year and five-year figures only, because a ten-year figure is barred for a younger composite
• c.The since-inception figure only, because it already covers every shorter period inside it
• d.One-year, five-year and ten-year figures, with the ten-year figure projected from actual results

Performance advertised for a portfolio or composite must show one-, five- and ten-year results with equal prominence, ending no earlier than the latest calendar year-end. If the portfolio is younger than a period, the life of the portfolio is substituted for that period, so here the seven-year since-inception figure replaces the ten-year one. Projecting a ten-year figure would be hypothetical performance. Dropping the long period or showing only inception results omits required periods.17 CFR 275.206(4)-1(d)(2)

An adviser plans to mail 3,000 prospects a flyer showing the backtested returns of a model portfolio. Which condition does the SEC Marketing Rule place on advertising this hypothetical performance?

• a.The adviser must get the Administrator's written approval of the backtesting method before any use
• b.The returns may go only to investors who meet the definition of a qualified client and sign an acknowledgment
• c.The adviser must adopt policies to ensure the results are relevant to the audience's financial situation and goals✓
• d.Backtested returns may be shown only if every fee and expense has been left out of the calculation

Hypothetical performance, which includes model portfolios, backtests and projections, may be advertised only if the adviser has policies to ensure relevance to the intended audience, gives enough information on the criteria and assumptions, and gives enough information on the risks and limitations of relying on it. The rule does not limit it to qualified clients. It does not call for fees to be excluded, and no regulator pre-approval is required.17 CFR 275.206(4)-1(d)(6)

An adviser's website highlights the 31% return of the three best-performing stocks pulled out of a client portfolio. What does the SEC Marketing Rule require for this extracted performance?

• a.The advertisement must state in a footnote that the figures are 'selected holdings', not typical results
• b.The picks must be shown beside the one-year return of every other account the firm manages
• c.The advertisement must give, or offer to give promptly, the results of the whole portfolio they came from✓
• d.The picks may be shown only if they were held for at least five years before the ad ran

Extracted performance may be advertised only if the advertisement provides, or offers to provide promptly, the results of the total portfolio from which it was extracted, so the audience can see the full picture. A footnote label alone does not meet that requirement. The rule has no minimum holding period for extracted results. It also does not require showing every other client's account, only the source portfolio.17 CFR 275.206(4)-1(d)(5)

Which communication is excluded from the definition of 'advertisement' under the SEC Marketing Rule?

• a.A web page describing the firm's advisory services, viewed by many prospects
• b.An adviser's extemporaneous, live, oral remarks to prospective clients at a seminar✓
• c.A scripted advertisement for the firm's services read aloud on a radio program
• d.A one-to-one letter to a prospect that includes hypothetical performance

Extemporaneous, live, oral communications are carved out of the definition. A scripted radio spot is a communication to more than one person offering advisory services, so it is an advertisement. A communication to a single person is an advertisement when it includes hypothetical performance, unless it responds to an unsolicited request. A public web page offering services is a communication to more than one person.17 CFR 275.206(4)-1(e)(1)

An advertisement tells readers that the adviser's recommendation of one biotech stock doubled in a year, but it does not mention other recommendations from the same period that lost money. Which general prohibition is most directly implicated?

• a.Referring to specific investment advice that is not presented in a fair and balanced manner✓
• b.Presenting hypothetical performance without policies tied to the intended audience
• c.Presenting gross performance without showing net performance alongside it
• d.Including a testimonial without a written agreement with the person giving it

The Marketing Rule's general prohibitions bar a reference to specific investment advice unless it is presented in a fair and balanced way, and showing only the winner while omitting losing recommendations is the classic failure. The gross and net rule concerns performance results, not a single recommendation. The testimonial and hypothetical-performance conditions do not apply because no testimonial or hypothetical figures are used.17 CFR 275.206(4)-1(a)(5)

An adviser that receives revenue-sharing payments from a fund family wants its Form ADV disclosure to support informed client consent. Which statement would be sufficient under the SEC's fiduciary interpretation?

• a.'We receive 0.25% a year from Fund X on assets you hold in it, which gives us an incentive to recommend it'✓
• b.'Our firm may have conflicts of interest in connection with some of the recommendations it makes'
• c.'Conflicts exist, and by signing this agreement the client agrees to waive all claims arising from them'
• d.'We follow practices common in our industry, and clients may ask us for details at any time'

The SEC's interpretation requires disclosure specific enough that a client can understand the conflict and give informed consent, and a statement that identifies the payment, the amount and the resulting incentive meets that standard. Saying the firm 'may' have conflicts is too general to permit informed consent. A blanket waiver does not satisfy the duty and cannot waive it. Pointing to industry practice and inviting questions shifts the burden onto the client.SEC Release IA-5248 (2019 fiduciary interpretation)

An adviser accepts a client's account under an ongoing relationship but does not review the holdings for three years. Which part of the adviser's federal fiduciary duty is most directly breached?

• a.The duty of care, which includes monitoring the client's account over the course of the relationship✓
• b.The duty of loyalty, met once Form ADV Part 2 has been delivered to the client
• c.The duty of best execution, which applies only when the adviser selects the broker for client trades
• d.The duty of loyalty, which requires the adviser to refrain from placing its own interest ahead of the client's

The SEC describes the duty of care as having three parts: advice in the client's best interest, seeking best execution where the adviser selects the broker, and advice and monitoring over the course of the relationship at a frequency consistent with the agreed scope. Failing to review an ongoing account for years is a monitoring failure under the duty of care. The facts show no conflict that would implicate loyalty, and disclosure of conflicts is part of loyalty rather than a one-time delivery that ends the adviser's obligations. Best execution concerns trading, not monitoring.SEC Release IA-5248 (2019 fiduciary interpretation)

A retail client's agreement with an adviser states: 'The adviser is not a fiduciary and owes the client no duty beyond the terms of this contract.' How does the SEC's fiduciary interpretation treat this language?

• a.It is effective as long as the client acknowledges the statement in a separately signed notice
• b.It removes the duty of loyalty but leaves the duty of care in place under the agreement's scope
• c.The duty applies regardless; the agreement can shape the scope of services but cannot waive the duty✓
• d.It is effective because the Advisers Act imposes a fiduciary duty only when the contract says so

The fiduciary duty is imposed by the Advisers Act and cannot be waived. The relationship's scope may be shaped by agreement with informed consent, but a clause disclaiming fiduciary status does not remove the duty and may itself be misleading to a retail client. A separate acknowledgment does not change that. The duty arises from the statute, not the contract. Splitting the duty into a waivable part and a surviving part has no basis in the interpretation.SEC Release IA-5248 (2019 fiduciary interpretation)

Over twelve months a broker-dealer representative recommends 40 trades in a retiree's account. Each trade would be suitable on its own, but the account's turnover is very high and the representative earns a commission on each trade. Which Regulation Best Interest obligation is most directly implicated?

• a.The care obligation, which requires a reasonable basis to believe a series of trades is not excessive overall✓
• b.The disclosure obligation, which is met once each trade confirmation shows the commission charged
• c.The compliance obligation, which concerns only the firm's supervisory procedures, not account activity
• d.The conflict obligation, which governs written policies but does not reach any single recommendation

The care obligation requires a reasonable basis to believe that a series of recommended transactions, even if in the customer's best interest in isolation, is not excessive and serves the customer's best interest taken together. That is the Regulation Best Interest rule against churning. Showing commissions on confirmations does not make excessive trading acceptable. The conflict obligation requires policies to address incentives, but the trading itself is a care issue. The compliance obligation requires policies, not trade-level review by itself.17 CFR 240.15l-1(a)(2)(ii)(C)

A broker-dealer announces a one-quarter bonus for representatives who sell the most shares of its proprietary fund to retail customers. What does the conflict of interest obligation of Regulation Best Interest require?

• a.The firm may run it if each retail customer receives written disclosure before the recommendation
• b.The firm must identify and eliminate the contest, because disclosure alone does not cure it✓
• c.The firm may run it if the bonus is paid in cash, since the ban reaches only non-cash awards
• d.The firm may run it if the bonus is capped at a small share of the representative's pay

Regulation Best Interest requires broker-dealers to identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on the sales of specific securities or types of securities within a limited period. Other conflicts may be disclosed or mitigated, but these must be eliminated. No cap on the size of the bonus makes it allowable. The prohibition covers bonuses of any kind, so paying in cash does not avoid it.17 CFR 240.15l-1(a)(2)(iii)(D)

A broker-dealer representative recommends to a retail customer a fund whose expense ratio is 0.30% higher than a comparable fund's because it offers better service features. Under Regulation Best Interest, this recommendation is:

• a.permissible if the higher cost is disclosed in writing, because disclosure satisfies the care obligation
• b.permissible if, after weighing cost with other factors, it reasonably serves the customer's best interest✓
• c.permissible if the customer later affirms the choice, whatever the representative's basis
• d.prohibited, because the care obligation requires recommending the lowest-cost security among those available

The care obligation requires a reasonable basis to believe the recommendation is in the particular customer's best interest based on the customer's investment profile and the risks, rewards and costs of the recommendation. Cost is an important factor but is weighed alongside others, so a higher-cost product can be recommended when the basis for it is reasonable. The rule does not mandate the cheapest option. Disclosure belongs to the separate disclosure obligation and does not replace the care analysis. A later written affirmation does not supply the required basis at the time of the recommendation.17 CFR 240.15l-1(a)(2)(ii)(B)

A dual registrant prepares one relationship summary that covers both its brokerage services and its advisory services. What is the maximum length of that summary in paper format?

• a.Three pages, which is one page more than a stand-alone relationship summary
• b.Two pages, the same limit that applies to a stand-alone broker-dealer or adviser
• c.Four pages, if both businesses are described in the one combined summary✓
• d.No page limit, because the summary covers two separate lines of business

Form CRS is limited to two pages for a stand-alone broker-dealer or investment adviser. A dual registrant that combines both businesses in one summary is allowed four pages, while a dual registrant that prepares two separate summaries is limited to two pages for each. Three pages is not a limit in the instructions, and the instructions do set a limit for combined summaries, so there is no unlimited length.Form CRS General Instruction 1.C

On June 1, a firm's relationship summary becomes materially inaccurate because the firm adds a new fee. Which timeline applies under the Form CRS instructions?

• a.File the summary within 60 days, then tell existing retail clients of the changes within 30 days after that
• b.File within 30 days, and deliver the new summary to an existing client only if the client asks for it
• c.Wait for the next annual updating amendment to Form ADV, then deliver the revised summary to every client
• d.Update and file within 30 days; tell existing retail clients within 60 days after the update is due✓

A relationship summary must be updated and filed within 30 days whenever information becomes materially inaccurate, with an exhibit highlighting the changes. Changes must be communicated to existing retail clients within 60 days after the update is required, either by delivering the amended summary or through another disclosure. The 30- and 60-day periods are not interchangeable. Waiting for the annual amendment ignores the interim update duty, and delivery to existing clients is not left to client request.Form CRS General Instruction 8; Advisers Act Rule 204-5

An agent tells a prospect that because an issuer's securities qualify for an exemption under the Act, 'the Administrator has looked at this deal and recommended it.' Under the Uniform Securities Act this statement is:

• a.lawful, because an exemption is granted only after the Administrator reviews the merits of the offering
• b.lawful if the statement appears only in sales literature that has been filed with the Administrator
• c.unlawful, because an available exemption does not mean the Administrator passed on the merits of the deal✓
• d.lawful if the agent hands the prospect a copy of the exemption filing along with the statement

Section 405 states that neither effective registration nor the availability of an exemption means the Administrator has passed in any way on the merits or qualifications of, or recommended or approved, a person, security or transaction, and it is unlawful to tell a prospective purchaser otherwise. Most exemptions are self-executing and involve no merits review. Giving the prospect the filing, or filing the sales literature, does not make an untrue statement of approval permissible.Uniform Securities Act (1956) Section 405(a)

An IAR's email says: 'Our Form ADV is on file with the state, so the Administrator has confirmed that everything in our brochure and performance claims is accurate.' Under Section 405, this representation is:

• a.lawful, because performance claims are outside the documents that the Administrator reviews in a filing
• b.unlawful, because registration is not a finding that a filed document is true and complete✓
• c.unlawful only if the client who heard the statement actually relied on it and then lost money
• d.lawful, because the Administrator reviews every Form ADV for accuracy before the firm can register

Section 405(a) provides that neither the filing of an application for registration nor the fact that a person is registered constitutes a finding by the Administrator that any filed document is true, complete and not misleading, and subsection (b) makes a contrary representation to a prospective purchaser, customer or client unlawful. Registration is not a verification of accuracy. The unlawfulness does not turn on the Administrator's review practices, and no reliance or loss is needed for the representation itself to be unlawful.Uniform Securities Act (1956) Section 405(a)

Which statement by an investment adviser representative in a client presentation is permissible under the Act's rules on representations about registration?

• a.'The state regulator has approved the quality of our advisory work.'
• b.'The Administrator has reviewed our Form ADV and found it truthful.'
• c.'Our registration means the Administrator certified our qualifications.'
• d.'The firm is registered as an investment adviser in this state.'✓

A plain factual statement that the firm is registered is accurate and does not imply approval. The other statements each suggest that the Administrator passed on the adviser's merits, qualifications or filings, which Section 405 forbids because registration is not a finding about quality, qualifications, or the completeness and truth of the documents filed.Uniform Securities Act (1956) Section 405

A brochure states: 'This security is registered with the state, so you can be confident its offering price is fair.' This statement is:

• a.unlawful only if the security was registered by qualification rather than by coordination
• b.unlawful, because registration does not mean the Administrator found the price fair or the merits sound✓
• c.lawful, because the Administrator must find the price fair before registering the security
• d.lawful if the brochure also states the date on which the registration became effective

The registration of a security is not a finding that any document is true or complete and does not mean the Administrator has passed on the merits of the security, and it is unlawful to represent otherwise to a prospective purchaser. A statement of the effective date does not cure the implied approval. The prohibition applies whatever method of registration was used, so the method does not decide the outcome.Uniform Securities Act (1956) Section 405(a)

An adviser's schedule charges 1.20% a year on the first $500,000 of assets and 0.80% a year on assets above that amount. The fee is billed quarterly in arrears on the account value at quarter-end. What is the quarterly fee for a client whose account is worth $900,000 at quarter-end?

• a.$2,300✓
• b.$1,800
• c.$2,700
• d.$9,200

The annual fee is 1.20% of $500,000, which is $6,000, plus 0.80% of the remaining $400,000, which is $3,200, for $9,200. Dividing by four gives $2,300 per quarter. Applying 1.20% to the whole account gives $2,700, which ignores the breakpoint. Applying 0.80% to the whole account gives $1,800, which ignores the higher rate on the first tier. A fee of $9,200 is the annual amount, not the quarterly bill.Investment Advisers Act Section 205; NASAA Model Rule USA 2002 502(c)

A state-registered adviser is drafting an agreement for a client who is not a qualified client. Which fee term would violate the Advisers Act prohibition on performance-based compensation?

• a.A fee of 1% a year of the account's value, which rises when appreciation increases the assets
• b.A fee of 15% of the capital appreciation in the account for the year, realized or unrealized✓
• c.A flat fee of $4,000 a year for ongoing advice, charged whether the account gains or loses
• d.An hourly fee of $250 for financial planning, billed as the work is performed for the client

Section 205(a)(1) bars compensation based on a share of capital gains or capital appreciation of a client's funds unless an exception applies, such as a qualified-client arrangement. A percentage of gains is the prohibited form. An asset-based fee is permitted even though the account's growth raises it, because it is a charge on the value of assets and not a share of the profit. A flat retainer and an hourly fee do not depend on investment results.Investment Advisers Act Section 205(a)(1)

An adviser with investment discretion pays full-service commissions to a broker and receives several items in return. Which item falls within the Section 28(e) safe harbor as eligible research or brokerage?

• a.A subscription to a mass-marketed financial magazine that the analysts read each week at the firm
• b.Computer hardware that the adviser installs on its trading desk to run the broker's trading platform
• c.Rent and utilities for the adviser's office, which the broker agrees to cover out of the commissions
• d.Trade analytics from the broker's order management system, used to structure the adviser's trading✓

The SEC's 2006 interpretation treats research related to the market for securities, including trade analytics available through order management systems, as eligible. Physical items such as computer hardware do not reflect the expression of reasoning or knowledge and are outside the safe harbor, and mass-marketed publications are not eligible research. Overhead such as rent is not advice, analysis or a report, and it is not a brokerage service tied to executing the trade.Exchange Act Section 28(e); SEC Release 34-54165

An adviser with discretion causes client accounts to pay a broker more than another broker would charge, in return for research that helps the adviser manage all of its accounts. The adviser is protected from a claim of breach of fiduciary duty solely for paying more if it:

• a.shows that the research would cost the adviser less than the extra commissions it has paid
• b.limits the extra commission to trades in the one account that is being charged for the research
• c.obtains each client's written consent before any trade on which the higher commission is paid
• d.determines in good faith the commission is reasonable in relation to the value of the services received✓

The safe harbor depends on a good-faith determination that the commission is reasonable in relation to the value of the brokerage and research services, viewed either for the particular transaction or for the adviser's overall responsibilities to the accounts it manages. Client consent to each trade is not the condition. The statute allows the overall-responsibilities test, so the research need not benefit only the paying account. The test compares the commission with the value of the services, not with the adviser's own cost of them.Exchange Act Section 28(e)(1)

A portfolio manager employed by an investment adviser appears in the firm's video advertisement and praises the firm's services. How does the SEC Marketing Rule treat this testimonial or endorsement by the firm's own employee?

• a.A written agreement with the employee is required, because the employee is paid by the adviser as staff
• b.No written agreement is needed, but the affiliation must be apparent or disclosed and the status documented✓
• c.The adviser must disclose the employee's cash compensation in the video, however it is structured
• d.The video is excluded from the rule, because employees are not covered by the testimonial provisions at all

The rule exempts an adviser's partners, officers, directors and employees from the clear-and-prominent disclosure and written-agreement conditions, provided the affiliation is readily apparent or disclosed at the time and the adviser documents the person's status. A written agreement is therefore not required. The video is still an advertisement, so the rule applies and the other conditions continue to apply. An employee's pay does not have to be stated in the video.17 CFR 275.206(4)-1(b)(4)(ii)

A client with a buy-and-hold portfolio that trades about twice a year is choosing between a wrap fee of 1.50% that covers advice and all execution costs and an unbundled arrangement of 1.00% for advice plus commissions averaging 0.10% of the account on each trade. Which statement is most accurate?

• a.The wrap arrangement likely costs the client more, because the single fee pays for trading that seldom occurs✓
• b.The unbundled arrangement is not allowed, because an adviser may not charge commissions on trades
• c.The wrap arrangement costs less, because a bundled fee is always cheaper than separate charges for each service
• d.The two arrangements cost the same, because the advice delivered is identical under either one

A wrap fee bundles advice and execution into one charge, so it favors clients who trade often, since each trade adds nothing to the bill. A client who trades twice a year pays about 1.20% under the unbundled arrangement (1.00% plus roughly 0.20% in commissions) against 1.50% for the wrap, so the wrap costs about 0.30 points more for execution that is used rarely. Bundled pricing is not always cheaper, and the arrangements are not equal in cost just because the advice is the same. An unbundled arrangement is not prohibited; the client simply pays commissions through the executing broker.Advisers Act Form ADV Part 2A (wrap fee programs)

A mutual fund adopts a Rule 12b-1 plan for one of its share classes. Who bears the 12b-1 fee, and what does it pay for?

• a.Only shareholders who redeem within a set period, as a charge for leaving the fund too early
• b.The fund's adviser, out of its own management fee, as a charge for managing the fund's portfolio
• c.All shareholders of that class, through fund assets, to pay distribution and service costs✓
• d.Only new purchasers, as a front-end sales charge deducted from the amount they invest up front

A 12b-1 fee is an ongoing charge deducted from the fund's assets under a plan adopted by the fund, so it is borne indirectly by all shareholders of the class and used to pay for distribution and shareholder services. A charge on early redemption is a contingent deferred sales charge. The management fee compensates the adviser for portfolio management and is a separate expense. A front-end sales charge comes out of a purchase payment and is a load, not a 12b-1 fee.Investment Company Act Rule 12b-1