NASAA Series 65 — All Questions

In a firm-commitment underwriting, an issuer sells newly issued non-exempt shares to its underwriters. How is the sale from the issuer to the underwriters treated under the Uniform Securities Act (1956)?

• a.It is exempt only if each underwriter is registered as a broker-dealer in every state in which it will sell
• b.It is exempt, and so are the underwriters' resales to the public, because the first sale carries the exemption forward
• c.It is an exempt transaction, although the underwriters' sales to the public must be registered or exempt on their own✓
• d.It is not exempt, because any issuer sale of non-exempt shares, including one to an underwriter, must be registered first

Section 402(b)(4) exempts a transaction between the issuer or its controlling person and an underwriter, or among underwriters. The exemption attaches to that transaction alone, so the later offering to investors still needs registration or its own exemption. Registration of the underwriters in every state is not a condition.Uniform Securities Act (1956) section 402(b)(4)

A lender holding shares as collateral forecloses on a defaulted loan and sells the pledged shares to a buyer. Under the Uniform Securities Act (1956), how is the sale treated?

• a.It is exempt only if the lender is a registered broker-dealer or sells through a registered broker-dealer
• b.It is exempt only if the borrower consents in writing to the sale and the buyer is purchasing for investment
• c.It is exempt as a transaction by a bona fide pledgee, as long as it is made without any purpose of evading the Act✓
• d.It is not exempt, because that group of exemptions covers only executors, receivers, trustees and guardians acting as fiduciaries

Section 402(b)(7) exempts a transaction executed by a bona fide pledgee without any purpose of evading the Act. Pledgees are listed beside executors, administrators, receivers, trustees in bankruptcy, guardians and conservators, so the list is not limited to those fiduciaries, and the exemption has no borrower consent or registered-dealer condition.Uniform Securities Act (1956) section 402(b)(7)

Under the nonissuer distribution exemption for securities in a recognized securities manual, what must the manual contain about the issuer?

• a.Its registration number with the SEC and a list of its ten largest shareholders
• b.A statement that it has operated continuously for five years and has paid dividends in each of them
• c.The names of its officers and directors, a balance sheet dated within 18 months, and a profit and loss statement for the preceding fiscal year or most recent year of operations✓
• d.A balance sheet dated within 90 days and audited statements covering three fiscal years

The manual exemption in section 402(b)(2) covers a nonissuer distribution of a security if a recognized securities manual contains the names of the issuer's officers and directors, a balance sheet as of a date within eighteen months, and a profit and loss statement for the fiscal year preceding that date or the most recent year of operations. The five-year record belongs to registration by notification, and the other items are not part of the test.Uniform Securities Act (1956) section 402(b)(2)

An issuer will offer new shares only to its existing shareholders, and it plans to pay a finder a commission for soliciting them. How can it use the existing-holder exemption in section 402(b)(11)?

• a.By filing a notice and then waiting 30 days for the Administrator's affirmative written approval of the offer before selling any shares
• b.It cannot, because a commission paid for soliciting shareholders destroys the existing-holder exemption entirely under the statute
• c.By first filing a notice of the offer's terms and receiving no order disallowing the exemption within the next five full business days✓
• d.By having the finder register as an agent, after which no notice of the offer needs to be filed with the Administrator at all

Section 402(b)(11) exempts an offer to existing security holders if either no commission is paid for soliciting them, apart from a standby commission, or the issuer first files a notice of the terms and the Administrator does not disallow the exemption by order within five full business days. A commission therefore does not end the exemption if the notice route is used, and approval is not required.Uniform Securities Act (1956) section 402(b)(11)

In an enforcement action alleging an unregistered sale, the seller claims the sale fell within a transactional exemption. Who bears the burden of proving the exemption?

• a.The buyer, who must show that the sale was not exempt
• b.The seller, as the person claiming the exemption✓
• c.The Administrator, who must disprove every exemption the seller raises
• d.Neither side, because the court presumes an exemption applies unless fraud is shown

Section 402(d) places the burden of proving an exemption or an exception from a definition on the person claiming it. Exemptions are a defense to the registration requirement, and facts about the offering are in the seller's hands. The burden does not fall on the Administrator or the buyer, and no presumption in favor of the exemption exists.Uniform Securities Act (1956) section 402(d)

An issuer's first investor becomes irrevocably contractually committed to invest in its Rule 506 offering on Tuesday, May 4, 2027. By what date must the issuer file Form D?

• a.Tuesday, May 11, 2027, which is only one week from the commitment
• b.Thursday, June 3, 2027, which is a full 30 days from that date of commitment
• c.Wednesday, May 19, 2027, which is 15 calendar days after the first sale✓
• d.Monday, May 31, 2027, which is the last day of the month in which the first investor committed

Form D is due no later than 15 calendar days after the first sale, which for a Rule 506 offering is the date the first investor is irrevocably contractually committed to invest. May 4 plus 15 days is May 19. The month-end, 30-day and 7-day dates are not deadlines under Regulation D.Regulation D Rule 503; Securities Act Rule 506

Shares of a company listed on the New York Stock Exchange are covered securities. A state investigates a local agent who lied to a client about the company's earnings to sell the shares. May the state act?

• a.No, because covered securities are subject only to SEC antifraud enforcement
• b.Yes, but only by requiring the shares to be registered in the state
• c.No, unless the company is headquartered in that state
• d.Yes, because federal law preserves state authority to investigate and bring enforcement actions for fraud or deceit involving covered securities✓

Section 18 of the Securities Act bars states from requiring registration of covered securities, but section 18(c) preserves their authority to investigate and act against fraud or deceit, and to require notice filings, fees and consents to service. Being covered is no protection for the agent who lied, and the state's power does not depend on where the issuer is based.Securities Act section 18(c)

Which of the following is NOT a covered security under section 18 of the Securities Act?

• a.Common stock listed on the New York Stock Exchange
• b.Securities sold in an offering that complies with Rule 506 of Regulation D
• c.Shares of an open-end investment company registered with the SEC
• d.Shares sold in an intrastate offering exempt under section 3(a)(11)✓

Section 18(b)(4) covers certain exempt securities and transactions, but it does not include securities exempt under section 3(a)(4), 3(a)(10) or 3(a)(11). The intrastate exemption in section 3(a)(11) therefore leaves the offering subject to state registration. Exchange-listed securities, registered investment company shares and Rule 506 offerings are all covered.Securities Act sections 3(a)(11) and 18(b)

In this state, an unregistered consultant receives 5% of all money raised for soliciting residents to buy a private company's shares. The offering is not covered by any exemption. Is the consultant an agent?

• a.Yes, because an individual who represents an issuer in effecting non-exempt sales is an agent, and his transaction-based pay does not change that✓
• b.Yes, but only if he contacts more than ten prospects
• c.No, because a person paid by the issuer rather than by investors is an independent finder outside the Act
• d.No, because an agent must represent a broker-dealer, and he represents only the issuer

An agent includes an individual who represents an issuer in effecting or attempting to effect sales, and section 401(b) lists the narrow exclusions. A paid solicitor of residents for a non-exempt offering fits none of them, and a commission based on the money raised is the typical mark of an agent. The ten-offeree number belongs to the transactional exemption that this commission would defeat.Uniform Securities Act (1956) section 401(b)

An issuer solicits the public through a website under Rule 506(c). One interested purchaser is a friend of the founder who is not an accredited investor. May the issuer sell to her in that offering?

• a.No, because every purchaser in a Rule 506(c) offering must be an accredited investor whom the issuer has taken reasonable steps to verify✓
• b.Yes, if she hires a purchaser representative
• c.Yes, because Rule 506 allows up to 35 non-accredited purchasers in any offering
• d.Yes, if her investment is less than $10,000

Rule 506(c) permits general solicitation only if all purchasers are accredited investors and the issuer takes reasonable steps to verify that status. The allowance for up to 35 non-accredited purchasers belongs to Rule 506(b), which prohibits general solicitation. A small check or a purchaser representative does not change the rule in 506(c).Securities Act Rule 506(c)

Under the Uniform Securities Act (1956), what may the Administrator require regarding sales and advertising literature?

• a.Filing only of literature addressed to customers who are not institutions
• b.Filing of prospectuses, circulars, advertisements and other sales literature intended for prospective investors, unless the security or transaction is exempt under section 402✓
• c.Prior approval of all advertising by every registered broker-dealer, whatever the security
• d.Filing only of literature for securities registered by qualification

Section 403 lets the Administrator by rule or order require filing of any prospectus, pamphlet, circular, form letter, advertisement or other sales literature addressed to prospective investors, including advisory clients, unless the security or transaction is exempted by section 402. It is not limited to a registration method or to retail recipients, and it authorizes filing, with approval only where a rule says so.Uniform Securities Act (1956) section 403

In a state investigation under the Uniform Securities Act (1956), a subpoenaed witness claims the privilege against self-incrimination, and the Administrator compels his testimony. What protection does he receive?

• a.None, because a witness in a securities investigation has no privilege and can be prosecuted on his testimony
• b.Only his own testimony is barred from use, and he may still be prosecuted on independent evidence
• c.He may not be prosecuted or penalized for the transaction about which he was compelled to testify, except for perjury or contempt committed in testifying✓
• d.Immunity from federal as well as state prosecution

Section 407(d) removes the privilege as a ground for refusing to testify and in exchange gives the broader form of immunity, which bars prosecution for the transaction concerned, not just use of the testimony. Perjury and contempt in testifying are excepted. Because the compulsion is under state process, it does not grant immunity from federal prosecution.Uniform Securities Act (1956) section 407(d)

A buyer paid $40,000 exactly one year ago for securities sold through a material misstatement, and the seller cannot prove it lacked knowledge. The buyer received $1,500 of income on the securities and now tenders them. Excluding costs and attorneys' fees, what may the buyer recover?

• a.$43,900, the price plus interest and the income received
• b.$42,400, the price plus a year of interest at 6%
• c.$40,900✓
• d.$38,500, the price less the income received

On tender the buyer recovers the consideration paid, interest at 6% per year from the date of payment, costs and reasonable attorneys' fees, less the income received on the security. That is $40,000 plus $2,400 of interest, less $1,500 of income, or $40,900. Omitting the interest, omitting the income credit, or adding the income all give wrong totals.Uniform Securities Act (1956) section 410(a)

A buyer sues a corporate seller and its president under section 410 of the Uniform Securities Act (1956) for a sale made by means of a material misstatement. What must the president show to avoid joint and several liability?

• a.That he personally received no part of the proceeds of the sale and held no more than a minor stake in the company
• b.Nothing, because under the Act the buyer must prove that the president knew of the misstatement at the time it was made
• c.That he did not know, and in the exercise of reasonable care could not have known, of the facts that give rise to the liability✓
• d.That he signed none of the documents used in the sale and took no part in drafting or reviewing any of them

Section 410(b) makes a seller's controlling persons, partners, officers and directors jointly and severally liable with the seller, unless the non-seller carries the burden of proving that he did not know and in the exercise of reasonable care could not have known of the facts. The burden is on the defendant, and receipt of proceeds or signatures are not the test. Contribution among those liable is allowed.Uniform Securities Act (1956) section 410(b)

A broker-dealer wants to appeal an Administrator's order revoking its registration. Under the Uniform Securities Act (1956), what is the rule on judicial review?

• a.It may petition at any time within one year of the order, with an automatic stay of the order while the petition is pending
• b.It has no right of judicial review, because the Administrator's findings of fact and conclusions are final and binding on it
• c.It may petition within 30 days, and the filing of the petition automatically stays the order until the court rules on it
• d.It may petition the court within 60 days after the order, and the order stays in effect unless the court orders otherwise✓

Section 411 allows any person aggrieved by a final order of the Administrator to obtain review by petition within sixty days after entry of the order. The filing of a petition does not stay the order unless the court so orders. Thirty days and one year are not the period, and the Act provides review rather than making the findings final.Uniform Securities Act (1956) section 411

A state Administrator finds that a registered investment adviser representative willfully violated the state's securities act. Besides establishing that ground, what must the Administrator find before revoking the representative's registration?

• a.That at least one client lost money because of the violation
• b.That revocation is in the public interest✓
• c.That a court has already convicted the representative of the violation
• d.That the SEC has begun a parallel action against the representative

The act allows the Administrator to deny, suspend or revoke a registration only if the action is in the public interest and one of the listed grounds, such as a willful violation, exists. Client loss is not a required finding, because the violation itself is the ground. A conviction is a separate ground in its own right, not a precondition to administrative action. A parallel SEC proceeding is not required either, since the state acts under its own statute.Uniform Securities Act s.204 (grounds and public-interest finding)

Under the original Uniform Securities Act (1956), an adviser's registration became effective while the Administrator already knew of a prior order against the adviser by another state. The Administrator may revoke on the strength of that known fact only if a proceeding is instituted within

• a.30 days✓
• b.six months
• c.one year
• d.two years

Under Section 204(a) of the 1956 Act, the Administrator may not begin a suspension or revocation proceeding based on a fact or transaction known when the registration became effective unless the proceeding starts within the next thirty days. Six months, one year and two years are all longer than the Act allows, and would let the Administrator hold a known fact in reserve and revoke long after clearing the adviser.Uniform Securities Act (1956) s.204(a) (last paragraph)

A state Administrator issues a summary order suspending an adviser's registration and promptly notifies the adviser of the reasons. The adviser never asks for a hearing. What happens to the order?

• a.It is void because no hearing was held before it was issued
• b.It remains in effect until the Administrator modifies or vacates it✓
• c.It expires automatically after 15 days unless the Administrator holds a hearing
• d.It stays in effect only until a court of the state confirms or sets it aside

A summary order may be issued before any hearing. If the adviser requests a hearing in writing, the Administrator must set one within 15 days, but when no request is made the order simply stays in place until the Administrator changes or vacates it. Nothing in the act makes it expire automatically, and a missing pre-order hearing does not void it. Court confirmation is not part of the process.Uniform Securities Act s.204(c) (summary orders)

During an Administrator's investigation of an adviser, a witness refuses to answer questions and invokes the privilege against self-incrimination. Under the Uniform Securities Act, the Administrator may

• a.compel the testimony, which may then be used to prosecute the witness criminally for what the witness discloses
• b.compel the testimony only if the witness is a registered agent or adviser
• c.excuse the witness, because the privilege against self-incrimination applies in every administrative investigation and cannot be overridden
• d.seek a court order to compel the testimony; the witness is then immune except for perjury or contempt✓

The act does not let a witness refuse on self-incrimination grounds. Instead the compelled testimony comes with protection: the witness cannot be prosecuted for the transactions covered, except for perjury or contempt. Excusing the witness would defeat the Administrator's subpoena power. Using the testimony in a criminal case would be inconsistent with that protection. The power to compel is not limited to registrants.Uniform Securities Act s.407 (investigations and privilege)

An Administrator learns that an unregistered adviser is taking in client money in violation of the act and sues in court to stop it. Which statement is correct?

• a.An injunction is available only after a criminal conviction has been obtained
• b.The court may appoint a receiver, and the Administrator posts no bond✓
• c.The Administrator must first win an administrative hearing before going to court
• d.The Administrator must post a bond that covers the clients' funds

The act lets the Administrator go straight to court for an injunction and for ancillary relief such as a receiver or conservator, and the Administrator is not required to post a bond. An administrative hearing is not a prerequisite to court action. A bond requirement would hamper a public agency acting for investors. A conviction is not needed, since an injunction is a civil remedy.Uniform Securities Act s.408 (injunction and receivers)

Except for a summary order, an Administrator may not issue an order denying, suspending or revoking an adviser's registration without

• a.the written consent of a majority of the adviser's clients, obtained after notice of the pending order
• b.a prior court judgment finding that the adviser violated the act, entered in the Administrator's own state
• c.approval of the SEC, which must review every order against a state-registered adviser
• d.prior notice, an opportunity for a hearing, and written findings and conclusions✓

Due process in the act means notice, a chance to be heard, and a written explanation of the findings and conclusions behind the order. A court judgment is not required before administrative action. Clients have no veto over a regulator's order. The SEC does not approve state orders against state-registered advisers.Uniform Securities Act s.204(f) (notice and hearing)

An adviser and its two principals are respondents in an administrative hearing, and the adviser wants the hearing closed to the public. Under the Uniform Securities Act, a private hearing is allowed only if

• a.the adviser alone requests it as the registrant
• b.a majority of the respondents agree to the request
• c.the Administrator decides that clients' identities might be revealed
• d.all respondents join in the request✓

Hearings under the act are public unless every respondent joins in asking that it be private. One respondent, even the registered firm, cannot close it. A majority is not enough because the act requires unanimity among respondents. The Administrator's own view about client privacy does not create the exception.Uniform Securities Act s.412 (public hearings)

An investment adviser representative breaks an Administrator's rule that she did not know existed and, when prosecuted, proves she had no knowledge of it. Under the criminal provision of the act, she

• a.cannot be sentenced to prison for violating that rule✓
• b.is immune from every sanction, including administrative action and civil liability
• c.faces the same prison term as a willful violator, since ignorance of a rule is never a defense
• d.can be sentenced to prison, but only if a client actually lost money

A willful violation of the act is punishable by a fine, imprisonment, or both. For a violation of a rule or order, however, a person who proves she had no knowledge of it cannot be imprisoned. That protection concerns imprisonment only, so administrative and civil consequences remain possible. Client loss is not what decides the question.Uniform Securities Act s.409 (criminal penalties)

A buyer paid $40,000 for a security sold by means of a misleading statement and has received $2,500 of income on it. If the buyer tenders the security back, the base amount recoverable under the Uniform Securities Act, before interest, costs and attorneys' fees, is

• a.$2,500
• b.$37,500✓
• c.$40,000
• d.$42,500

A buyer who tenders the security recovers the consideration paid, plus interest, costs and fees, less any income received on the security: $40,000 - $2,500 = $37,500. Ignoring the income would give $40,000. Adding the income to the price gives $42,500, which turns a deduction into a bonus. The income alone, $2,500, is only one input and not the recovery.Uniform Securities Act s.410 (rescission amount)

A securities firm sells a security using a material misrepresentation, and the buyer sues. A partner in the firm who took no part in the sale is named as a defendant. Under the Uniform Securities Act, the partner is liable

• a.not at all, because only the person who personally made the sale to the buyer can be held liable under the act
• b.jointly and severally, unless he proves he did not know and could not have known with reasonable care✓
• c.only up to the amount of his capital contribution to the firm
• d.only if the plaintiff proves the partner knew of the misrepresentation before the sale was made and approved it

The act extends civil liability to those who control the seller, including partners, officers and directors. They are liable jointly and severally with the seller unless they prove lack of knowledge that reasonable care could not have uncovered. Limiting liability to the individual seller ignores this extension. Receiving commissions is not an element. The act contains no cap tied to capital contributions.Uniform Securities Act s.410 (joint and several liability)

After notice and a hearing, the SEC finds that an SEC-registered adviser willfully violated the Advisers Act and that a sanction is in the public interest. If the SEC chooses to suspend the adviser's registration rather than revoke it, the longest suspension it may order is

• a.3 months
• b.24 months
• c.12 months✓
• d.6 months

Section 203(e) allows the SEC to censure, limit activities, suspend for a period not exceeding twelve months, or revoke. Three and six months are within the cap but are not the maximum. Twenty-four months exceeds the statutory limit, so a longer period would have to be a revocation.Investment Advisers Act s.203(e) (SEC sanctions)

A portfolio manager employed by an SEC-registered adviser willfully violates the Advisers Act. After notice and a hearing, and a finding that it is in the public interest, the SEC may

• a.suspend the manager for up to 12 months, but only after a criminal conviction
• b.bar the manager from associating with an adviser or suspend the manager for up to 12 months✓
• c.sanction only the firm, because the Act reaches individuals only if they are registered themselves
• d.censure the manager, but not bar or suspend, since those sanctions are reserved for registrants

Section 203(f) lets the SEC censure, limit, suspend for up to 12 months, or bar a person associated with an adviser, and it does not depend on that person being separately registered. Treating the firm as the only target ignores this section. Reserving suspension and bars for registrants reverses its effect. A conviction is not a precondition for an administrative sanction.Investment Advisers Act s.203(f) (associated persons)

An SEC-registered adviser's fiscal year ends December 31, 2026. With no earlier trigger, what is the latest date by which it must deliver to each client its current brochure or a summary of material changes for the year?

• a.March 31, 2027
• b.April 30, 2027✓
• c.January 30, 2027
• d.June 29, 2027

Delivery is due within 120 days after the fiscal year-end. Counting from December 31, 2026: 31 days in January, 28 in February, 31 in March, and 30 in April reach 120 days on April 30, 2027. March 31 is only 90 days, January 30 is 30 days, and June 29 is 180 days.Advisers Act rule 204-3 (annual brochure delivery)

A registered adviser hires a new portfolio manager who will give advice to an existing client. The manager's brochure supplement must be delivered to that client

• a.within 30 days after the manager's first transaction
• b.only if the client asks for the supplement in writing
• c.before or when the manager begins advising✓
• d.within 120 days after the adviser's fiscal year-end

A supplement describes the supervised person who actually gives the advice, so it must reach the client no later than the time that person starts providing advisory services. The 120-day deadline applies to the annual brochure update. Waiting until after the first transaction defeats the purpose. Delivery does not depend on a client request.Advisers Act rule 204-3 (brochure supplement)

An SEC-registered adviser delivered Form CRS to a retail client when the relationship began years ago. Which event requires the adviser to deliver Form CRS to that client again?

• a.A change in the client's mailing address
• b.The annual update of the adviser's Form ADV Part 2A brochure, filed within 90 days of fiscal year-end
• c.Recommending a rollover of the client's workplace plan account into an IRA the adviser manages✓
• d.Delivery of the client's quarterly performance report

Existing retail clients must receive Form CRS when they open a new and different account, when the adviser recommends a rollover of retirement assets into an account it offers, or when it recommends a new service or investment that does not fit the existing account. The annual brochure update, an address change and a routine report are not triggers.Advisers Act rule 204-5 (Form CRS triggers)

A retail investor asks an SEC-registered adviser for its current Form CRS. The adviser must provide it within

• a.30 days✓
• b.5 business days
• c.90 days
• d.60 days

A request for the current relationship summary must be answered within 30 days. Five business days is shorter than the rule requires. Sixty days is the window for communicating changes to existing clients, which is a different obligation. Ninety days has no basis in the rule.Advisers Act rule 204-5 (Form CRS on request)

At a first meeting, an adviser tells a prospect, "Our state registration means the Administrator has reviewed and approved our recommendations." Under the Uniform Securities Act, this statement is

• a.acceptable if the adviser also gives the prospect its brochure at the first meeting
• b.unlawful only if the prospect relies on it and loses money
• c.unlawful, because registration is not an approval or finding by the Administrator✓
• d.acceptable, because registration requires the Administrator to examine the adviser's track record

The act says that filing or registration does not mean the Administrator has approved or passed on the merits of the adviser or its advice, and it is unlawful to represent otherwise. Registration is not a track-record review. Handing over a brochure does not cure a false statement. Unlawfulness does not wait for the prospect to rely on it or suffer loss.Uniform Securities Act s.405 (no approval implied by registration)

An adviser's website says all six of its representatives hold the CFP certification, but only two actually do. Under NASAA's model rule on unethical business practices, this is

• a.misrepresenting employees' qualifications, which is an unethical practice✓
• b.acceptable marketing language, because the states do not regulate certifications
• c.improper only if the unqualified representatives give investment advice
• d.a violation only if a client files a written complaint

The model rule lists misrepresenting the qualifications of the adviser or any employee as an unethical business practice. States do not give advisers a pass on claims about credentials. The rule is not limited to representatives who advise, and it does not wait for a complaint.NASAA Model Rule 102(a)(4)-1(h) (misrepresenting qualifications)

An adviser gives a client a retirement-planning report written by an outside consulting firm, presenting it as the adviser's own work without saying who prepared it. Under NASAA's model rule, the adviser has

• a.violated the rule only if the client suffers a loss as a result of relying on it
• b.engaged in no violation, because the adviser paid for the report and therefore owns the work
• c.violated the rule only if the report proves inaccurate or misleading to the client
• d.engaged in an unethical practice by not disclosing who prepared it✓

Giving a client a report or recommendation prepared by someone else without disclosing that fact is on the model rule's list of unethical practices. The exception covers published research or reports ordered in the normal course of providing service, which is not this case. Payment does not excuse nondisclosure. The violation is the omission, so accuracy or loss does not matter.NASAA Model Rule 102(a)(4)-1(i) (reports by others)

A retail advisory agreement says the adviser "shall not be liable for any loss to the account except for willful misconduct." Under the SEC's 2019 fiduciary interpretation, such a hedge clause in a retail agreement is

• a.valid for retail clients but void when used with institutional clients
• b.valid if the client signs the agreement and separately initials the clause to confirm understanding
• c.likely misleading, because it suggests the client has given up non-waivable rights✓
• d.valid if the adviser also describes the clause in its brochure and Form CRS, since that is full disclosure

The SEC said there are few, if any, circumstances in which a hedge clause in a retail agreement is consistent with the antifraud provisions, because retail clients may read it as waiving remedies they cannot waive. A signature or initials do not change that. The analysis is not a simple retail-valid, institutional-void split. Mentioning the clause in the brochure does not cure it.SEC fiduciary interpretation IA-5248 (hedge clauses)

An advisory contract includes the sentence, "Client waives any right to enforce the adviser's compliance with the Investment Advisers Act." Under section 215(a), that sentence is

• a.valid if the client signs a separate acknowledgment that the waiver was explained
• b.valid for clients whose accounts exceed $1 million and who are represented by counsel
• c.void, because a provision waiving compliance with the Act has no effect✓
• d.valid between the parties, though it cannot bind the SEC in an enforcement action

Section 215(a) voids any condition, stipulation or provision that binds a person to waive compliance with the Act or its rules. A separate acknowledgment does not rescue it. Calling it valid between the parties contradicts the word void. The statute draws no exception by account size.Advisers Act s.215(a) (waiver of compliance)

The two owners of an SEC-registered adviser reorganize the firm from a corporation into an LLC that they own in the same proportions, with the same managers and no change in who controls it. For the clients' advisory contracts, this reorganization is

• a.an assignment, because the legal form of the adviser changed
• b.not an assignment, because actual control did not change✓
• c.an assignment, unless each client is notified within 30 days
• d.an assignment, because the adviser must refile its registration

Under the rule, a transaction that does not result in a change of actual control or management is not an assignment, so client consent is not triggered. A change in legal form alone does not decide it. A notification window has no role when there is no assignment. Refiling registration paperwork does not turn the change into an assignment.Advisers Act rule 202(a)(1)-1 (assignment)

A registered adviser organized as a partnership admits a new general partner. The adviser's advisory contracts must provide that it will notify clients of a change in the partnership's membership

• a.within a reasonable time after the change✓
• b.at least 30 days before the change takes effect
• c.only at the client's next annual review
• d.only if a majority interest in the partnership changes hands

Section 205(a)(3) requires an adviser that is a partnership to promise notice of a change in membership within a reasonable time after it occurs. Advance notice is not demanded. The requirement is not limited to changes of a majority interest. Waiting for an annual review could be an unreasonably long delay.Advisers Act s.205(a)(3) (partnership changes)

The founder of a registered adviser sells a controlling block of the firm's voting stock to an outside investor who will now direct the firm. Under the Advisers Act, this transaction is

• a.not an assignment, because the contracting entity is still the same firm
• b.an assignment only if the founder also leaves the firm
• c.an assignment of the advisory contracts, which requires client consent✓
• d.an assignment only for clients with more than $1 million in assets under management

The Act defines assignment to include a direct or indirect transfer of a controlling block of the adviser's voting securities, and contracts must say they cannot be assigned without client consent. The fact that the firm remains the named party does not matter. Departure of the founder is not required. The definition has no asset threshold.Advisers Act s.202(a)(1) (assignment by sale of control)

An advertisement shows a composite's gross return of 12% in large bold type and its net return of 9% in small footnote text, both over the same period. Under the Marketing Rule, the presentation is

• a.permitted, as long as the footnote is legible and printed in the same typeface
• b.not permitted, because net must be shown with at least equal prominence✓
• c.not permitted, because gross performance may never appear in an advertisement
• d.permitted, because both figures cover the same period

Gross performance may appear only if net performance is also shown with at least equal prominence, over the same period and using the same methodology. Matching periods are necessary but not sufficient. A legible footnote does not give equal prominence. Gross figures are allowed when the net requirement is met, so a flat ban overstates the rule.Marketing Rule 206(4)-1(d) (gross and net performance)

An adviser advertises the performance of a separate-account composite, which is not a private fund, that has existed for three years. To satisfy the Marketing Rule's time-period requirement, the advertisement must show

• a.one-, five- and ten-year performance, using hypothetical returns for the missing years
• b.only the best calendar year since inception
• c.one-year performance and performance since inception, each with equal prominence✓
• d.only since-inception performance, with a note explaining how young the composite is

The rule requires one-, five- and ten-year periods, with equal prominence, but when the portfolio did not exist for a period the life of the portfolio is substituted. For a three-year composite that means one year plus since inception. Showing only inception-to-date drops the one-year figure. Hypothetical filler for missing years is not what the rule allows. Choosing a single best year is cherry-picking.Marketing Rule 206(4)-1(d) (performance time periods)

An adviser plans to show retail prospects backtested returns for a model strategy it has never used with client money. Which condition must the adviser meet under the Marketing Rule?

• a.Show the returns only to prospects who are accredited investors
• b.Adopt policies reasonably designed to ensure the returns are relevant to the likely financial situation and objectives of the audience✓
• c.Obtain the SEC's approval of the backtesting methodology
• d.Present one-, five- and ten-year figures for the strategy

Hypothetical performance may be advertised if the adviser has policies to ensure it is relevant to the intended audience, discloses the criteria and assumptions, and explains the risks and limitations. The SEC does not approve methodologies. Hypothetical performance is not subject to the one-, five- and ten-year requirement. The rule does not restrict the audience to accredited investors.Marketing Rule 206(4)-1(d)(6) (hypothetical performance)

An advertisement says an adviser was named a "Top Advisory Firm" by a business magazine. Which disclosure must the advertisement include?

• a.A statement that the rating was reviewed by the SEC or the state Administrator
• b.The adviser's net performance for the rated period
• c.Only the name of the magazine, since the ranking speaks for itself
• d.The rating's date, its period and who created it✓

A third-party rating must be accompanied by clear and prominent disclosure of the rating's date, the period on which it was based, who created and tabulated it, and whether the adviser paid for it. Naming the magazine alone is incomplete. Suggesting regulatory review is itself a prohibited kind of statement. Net performance for the period is not one of the required items.Marketing Rule 206(4)-1(c) (third-party ratings)

Which of these is most clearly an advertisement under the Marketing Rule?

• a.A recorded video on the adviser's website describing its services to prospective clients✓
• b.The Form ADV Part 2A brochure the adviser files and delivers because the regulation requires it
• c.A spontaneous, live answer by the adviser to a question from an audience member at a seminar
• d.A one-on-one reply email to a client asking about last quarter's statement

An advertisement is a communication to more than one person that offers advisory services, and a recorded website video fits. Extemporaneous live oral remarks are specifically excluded. A one-on-one reply to a client's question is not directed to more than one person and is not an offer of services. Information in a required notice or filing is also excluded.Marketing Rule 206(4)-1(e) (definition of advertisement)

On its own initiative, an adviser emails a single prospect a projection of what a model portfolio would have returned over 20 years. Under the Marketing Rule, the email is

• a.an advertisement only if the prospect later becomes a client
• b.not an advertisement, because email is a private medium
• c.not an advertisement, because it was sent to only one person
• d.an advertisement, because communications with hypothetical performance count even when sent to one person✓

Ordinarily a communication must reach more than one person to be an advertisement, but one that includes hypothetical performance qualifies even when sent to a single recipient, unless it answers an unsolicited request. The email here was unprompted. The medium does not matter, and the label does not depend on whether the prospect becomes a client.Marketing Rule 206(4)-1(e) (hypothetical performance to one person)

An adviser charges 1.00% on the first $1,000,000 of assets and 0.60% on assets above $1,000,000. What is the annual fee on a $1,800,000 account?

• a.$10,800
• b.$14,400
• c.$14,800✓
• d.$18,000

The first tier is 1.00% x $1,000,000 = $10,000. The remaining $800,000 at 0.60% is $4,800. The total is $14,800. Applying the top rate to everything gives $18,000, and applying the lower rate to everything gives $10,800. A flat 0.80% average gives $14,400, which ignores how tiers actually work.Advisory fee calculation (tiered schedule)

A client prepaid a quarterly advisory fee of $1,500 on January 1 under a contract that refunds the unearned portion pro rata. The client ends the contract at the end of January, one month into the three-month quarter. What refund is due?

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

One of the three months was earned, so $1,500 / 3 = $500 is earned and the other two months, $1,000, must be returned. Refunding all $1,500 ignores the service already provided. Returning only $500 refunds the earned part instead of the unearned part. Half, $750, assumes mid-quarter termination.Advisory fee refund (pro rata)

A state-registered adviser requires clients to prepay $800 in fees six months in advance. What must its brochure include?

• a.Only a disclosure of any financial condition likely to impair its ability to meet commitments, with no balance sheet
• b.A balance sheet, but only if the prepayment covers more than twelve months
• c.An audited balance sheet for its most recent fiscal year✓
• d.Nothing extra, because the balance sheet requirement starts above $1,200

Item 18.A of Form ADV Part 2A requires an audited balance sheet when an adviser requires or solicits prepayment of more than $1,200 per client six months or more in advance, but the note to Item 18.B lowers the threshold to more than $500 for advisers registered with state securities authorities. Since $800 exceeds $500, the brochure needs an audited balance sheet for the most recent fiscal year. The $1,200 figure applies to SEC registrants, so it fails here. The Item 18.B disclosure of a financial condition likely to impair the adviser is required in addition to the balance sheet, not instead of it. The trigger is six months in advance, not twelve.Form ADV Part 2A Item 18.A and Note to Item 18.B ($500 threshold for state-registered advisers)

Which fee arrangement is generally prohibited in an advisory contract between a registered adviser and a typical retail client?

• a.A flat fee of $3,000 per year
• b.A fee of 1% of the account's average value over the year
• c.A fee equal to 15% of the capital gains in the client's account✓
• d.A fee based on the account's value on a specific date each quarter

Section 205 bars compensation based on a share of capital gains or capital appreciation, with limited exceptions that do not cover a typical retail client. Fees computed on the account's value averaged over a period or taken at definite dates are expressly permitted. A flat fee does not depend on performance.Advisers Act s.205(a)(1) (performance fees)

Under NASAA's model rule on unethical practices, which item must an investment advisory contract disclose in substance?

• a.Any prepaid fee to be refunded if the contract ends✓
• b.The adviser's trade allocation policy for aggregated orders
• c.The custodian's fee schedule for the client's account
• d.The adviser's disciplinary history over the past ten years

The model rule requires a written contract covering the services, term, fee, fee formula, the amount of prepaid fee returned on termination or non-performance, whether discretion is granted, and the ban on assignment without consent. Disciplinary history belongs in the brochure, the allocation policy in the firm's procedures, and the custodian's fees in the custodian's own documents.NASAA Model Rule 102(a)(4)-1(p) (contract contents)