NASAA Series 65 — All Questions

Under NASAA model rules, a state-registered adviser that exercises discretion but does not have custody must generally maintain a minimum net worth of:

• a.$35,000
• b.$50,000
• c.$5,000
• d.$10,000✓

The NASAA model financial requirements set a minimum net worth of $35,000 for an adviser with custody and $10,000 for an adviser that has discretionary authority but no custody. An adviser that accepts prepayment of more than $500 in fees six or more months in advance must maintain a positive net worth. A surety bond in the required amount may generally be posted in lieu of the net worth.Uniform Securities Act

Under the code of ethics rule adopted by the SEC for investment advisers, the firm's access persons must:

• a.Refrain from owning individual securities of any kind whatsoever
• b.Report their personal securities holdings and transactions periodically✓
• c.Disclose their personal net worth to clients in the firm brochure
• d.Obtain client approval before trading in any personal account

Rule 204A-1 requires every SEC-registered adviser to adopt a written code of ethics setting a standard of business conduct, requiring compliance with securities laws, and requiring access persons to submit an initial and annual holdings report plus quarterly transaction reports. Personal trading is not banned; it is monitored so the firm can detect front running and conflicts with client trades.Investment Advisers Act of 1940

Under the Insider Trading and Securities Fraud Enforcement Act, a person who trades on material nonpublic information may face a civil penalty of up to:

• a.Twice the profit gained or the loss avoided, plus any commissions earned
• b.The greater of $1 million or three times the profit gained or loss avoided
• c.Only the profit gained or the loss avoided, returned through disgorgement
• d.Three times the profit gained or the loss avoided✓

Section 21A(a)(2) of the Exchange Act, added by the Insider Trading and Securities Fraud Enforcement Act of 1988, lets a court impose a civil penalty on the person who committed the violation of up to three times the profit gained or loss avoided, in addition to disgorgement and possible criminal prosecution. The greater-of-$1-million-or-three-times figure is the cap for a controlling person, such as a firm that failed to maintain and enforce reasonable policies, not for the trader. Two times is not a statutory figure, and disgorgement alone is not the maximum penalty.Securities Exchange Act of 1934 s.21A(a)(2) (15 U.S.C. 78u-1)

A firm that conducts both investment banking and advisory business maintains information barriers primarily to:

• a.Segregate customers' fully paid securities from the firm's own assets
• b.Spare the firm from disclosing conflicts between its departments to clients
• c.Let investment banking staff review analysts' reports before publication
• d.Prevent material nonpublic information from reaching trading personnel✓

An information barrier, historically called a Chinese wall, separates departments that receive confidential deal information from those that trade or advise. Its purpose is to stop material nonpublic information from reaching trading personnel, and it supports the written policies against misuse of that information that Advisers Act Section 204A requires, backed by restricted lists, watch lists, and surveillance of employee and firm trading. Segregating customer securities from firm assets is a custody and net-capital protection, a different rule. A barrier does not excuse conflict disclosure. Letting bankers review research before publication would pull the wall down, not build it.Advisers Act s.204A (15 U.S.C. 80b-4a)

Under the SEC's current marketing rule, an adviser may use a client testimonial in an advertisement if the adviser:

• a.Uses only testimonials from clients whose accounts outperformed their benchmark
• b.Files the advertisement with the SEC before it is first used
• c.Discloses whether the person was compensated and any material conflicts✓
• d.Uses only unpaid testimonials, since paid ones remain banned

The marketing rule replaced the old flat ban on testimonials with a disclosure and oversight framework. The advertisement must clearly and prominently disclose whether the speaker is a client, whether cash or non-cash compensation was provided, and any material conflicts, and the adviser must have a reasonable basis to believe the testimonial complies and a written agreement with compensated promoters; ineligible persons may not be compensated promoters. Showing only favorable results is not fair and balanced, advertisements are not filed with the SEC for pre-approval, and paid testimonials are allowed when the conditions are met.17 CFR 275.206(4)-1(b)

When an adviser advertises the performance of a strategy, presenting gross performance without also showing net performance is:

• a.Prohibited, because fees and expenses materially reduce investor returns✓
• b.Permitted only when the strategy has outperformed its benchmark
• c.Permitted, provided a footnote states that past results may vary
• d.Required, because gross figures allow comparison across advisers

The marketing rule requires that gross performance never be presented without net performance shown with at least equal prominence and calculated over the same period using the same methodology. Fees compound, so a gross-only presentation systematically overstates the investor's experience. Advertised performance must also not be presented in a way that is otherwise materially misleading, such as cherry-picked periods or accounts.Investment Advisers Act of 1940

Under the SEC's pay-to-play rule, an adviser that makes a political contribution above the de minimis amount to an official able to influence adviser selection is generally:

• a.Required to refund the contribution and file an amended Form ADV promptly
• b.Permitted to continue if the contribution is disclosed in the firm brochure
• c.Prohibited from advising any government entity for the following five years
• d.Barred from receiving compensation from that government client for two years✓

Rule 206(4)-5 imposes a two-year 'time out' during which the adviser may provide advisory services to that government entity but may not be compensated for them. The rule is prophylactic: no proof of an actual quid pro quo is required, which is why firms maintain preclearance procedures for political contributions by the firm and its covered associates. Disclosure does not cure the violation.Investment Advisers Act of 1940

The antifraud provisions of Section 206 of the Investment Advisers Act of 1940 apply to:

• a.Only advisers that maintain custody of client funds or securities
• b.Any investment adviser, whether or not that adviser is registered✓
• c.Only advisers that are registered with the SEC in Washington
• d.Only advisers with more than one hundred individual advisory clients

Section 206 reaches any person meeting the definition of investment adviser, including advisers exempt from registration. Registration status determines filing and examination obligations; it does not create or limit the duty not to defraud. This mirrors the Uniform Securities Act, whose antifraud provisions likewise apply to any person who offers or sells securities or gives advice in the state.Investment Advisers Act of 1940

An SEC-registered adviser whose assets under management decline must generally withdraw and register with the states once its reported assets fall below:

• a.$25 million, the SEC registration threshold before Dodd-Frank
• b.$110 million, the level at which SEC registration becomes mandatory
• c.$100 million, the minimum for SEC registration
• d.$90 million, the buffer set below the $100 million threshold✓

Dodd-Frank created a mid-sized adviser category and the SEC built in a buffer so that ordinary market fluctuation does not force repeated switching. An adviser may register with the SEC at $100 million, must register at $110 million, and need not withdraw until it reports less than $90 million of assets under management on its annual updating amendment. Below that, state registration is required where applicable. Withdrawing at $100 million or $110 million ignores the buffer, and $25 million was the pre-Dodd-Frank SEC threshold.17 CFR 275.203A-1(a)(1)

A private fund adviser with less than $150 million in assets under management in the United States generally:

• a.Is entirely free of any filing obligation or antifraud responsibility
• b.Must register with every state in which any fund investor resides
• c.Must register with the SEC on the same terms as a retail adviser
• d.Files only limited portions of Form ADV as an exempt reporting adviser✓

The private fund adviser exemption relieves a qualifying adviser of full registration, but it does not create invisibility. An exempt reporting adviser must still file and update specified items of Form ADV Part 1 through the IARD system, remains subject to the antifraud provisions of Section 206, and may be examined. States may also impose their own notice filing requirements.Investment Advisers Act of 1940

Excessive trading in a client's account designed to generate commissions rather than serve the client's objectives is called:

• a.Churning, a prohibited unethical business practice✓
• b.Hypothecation, the pledging of securities as collateral
• c.Arbitrage, a permitted risk-reduction trading strategy
• d.Scalping, buying for oneself ahead of a recommendation to clients

Churning is judged by the frequency and size of trading measured against the client's stated objectives and resources, together with the representative's control over the account; no single turnover number is decisive. Scalping is trading for one's own account ahead of a recommendation to clients, which is a different abuse that does not turn on commissions. Arbitrage is a legitimate strategy, and hypothecation is the routine pledging of securities in a margin account.NASAA Model Rule 102(a)(4)-1(c)

Under NASAA model rules, an investment adviser representative may borrow money from a client only when the client is:

• a.A lending institution in the business of making loans✓
• b.A client who gives informed written consent after full disclosure
• c.An accredited investor with a net worth above $1 million
• d.A close relative of the representative

Borrowing from a client creates a direct conflict between the representative's interest and the client's, so Model Rule 102(a)(4)-1(f) prohibits it unless the client is a broker-dealer, an affiliate of the adviser, or a financial institution engaged in the business of loaning funds. Disclosure and written consent do not cure the conflict. Wealth does not matter, and a family relationship is not an exception.NASAA Model Rule 102(a)(4)-1(f)

An agent who promises to buy back a customer's shares at the original purchase price if the stock declines has:

• a.Created a lawful private repurchase agreement with the client
• b.Provided a permitted service known as a standby commitment
• c.Guaranteed the customer against loss, a prohibited practice✓
• d.Satisfied the suitability standard for a conservative investor

Guaranteeing a customer against loss, or guaranteeing a specific gain, is expressly prohibited under NASAA's model rules on dishonest and unethical practices. Only an issuer or a third party such as an insurer may guarantee a security's payments. The prohibition protects the integrity of the risk disclosure that a securities recommendation depends on.Uniform Securities Act

An investment adviser representative who is also a registered agent of a broker-dealer and earns commissions on the trades he recommends must:

• a.Rebate all commissions earned into the client's advisory account
• b.Obtain the Administrator's written approval before each transaction
• c.Disclose the capacity in which he acts and the resulting conflict✓
• d.Choose one registration and withdraw from the other within 30 days

Dual registration is lawful, but it creates a conflict because the same recommendation generates transaction-based compensation. The fiduciary duty and NASAA's rules require full and fair disclosure of the capacity in which the person is acting and of the compensation received, made before or at the time of the transaction so the client can evaluate the advice.Uniform Securities Act

An adviser that receives ongoing 12b-1 payments from mutual funds it recommends to advisory clients must:

• a.Report the payments only if they exceed 1% of the firm's total revenue
• b.Fully disclose the payments and the conflict of interest they create✓
• c.Omit them from disclosure because the fund, not the client, pays them
• d.Credit the payments against the advisory fee as federal law requires

Third-party compensation gives the adviser a financial incentive to favor one fund share class over a cheaper one, which is exactly the conflict the fiduciary duty of loyalty targets. The adviser must disclose the arrangement fully and fairly in its brochure and manage the conflict. Enforcement actions over undisclosed 12b-1 fees and revenue sharing have been a recurring SEC priority.Investment Advisers Act of 1940

A client verbally instructs an adviser to buy 500 shares of a specific stock, but the client has never signed a discretionary agreement. The adviser may:

• a.Execute a similar trade that the adviser considers more appropriate
• b.Execute the order as instructed, because the client chose the trade✓
• c.Place the order only after the Administrator approves the account
• d.Refuse the order until written trading authorization is delivered

Discretion means the adviser selects the security, the amount, or whether to buy or sell. Here the client made all three decisions, so no discretionary authority is being exercised and the order may be entered. Choosing only the time or the price of a client-specified order is likewise not discretion, though a written authorization is still required before the adviser selects trades on its own.Uniform Securities Act

An adviser may disclose confidential client account information without the client's consent when:

• a.Responding to a lawful subpoena or a regulatory examination request✓
• b.A family member of the client telephones and asks for an account balance
• c.An affiliated insurance agency wants to market policies to those clients
• d.A prospective client asks for references from the firm's existing accounts

Regulation S-P and state privacy rules require notice and, for many disclosures, an opportunity to opt out, but they contain exceptions for disclosures required by law, including subpoenas, court orders, and examinations by securities regulators. Marketing to clients through affiliates, giving references, and speaking to relatives all require client authorization.Investment Advisers Act of 1940

Under the Uniform Securities Act, the Administrator may inspect the books and records of a registered investment adviser:

• a.Only during the ten business days that follow an annual renewal filing
• b.Only after obtaining a search warrant from a court of proper jurisdiction
• c.At any reasonable time, within or outside the state, without prior notice✓
• d.Only when a written customer complaint has been filed against the firm

The Administrator has broad authority to conduct announced or unannounced examinations of registrants' records at any reasonable time, and that authority extends to records located outside the state. The Administrator may also issue subpoenas, take testimony under oath, and require records to be kept in a prescribed form, all without a court order or a triggering complaint.Uniform Securities Act

An insurance company authorized to do business in a state issues both fixed and variable annuity contracts. Under the Uniform Securities Act:

• a.Both contracts are exempt securities because the insurer is authorized
• b.The fixed annuity is an exempt security, but the variable annuity is not✓
• c.Neither contract is a security, so state registration can never apply
• d.The variable annuity is an exempt security, but the fixed annuity is not

The Act's exempt securities list includes insurance and endowment policies and annuity contracts under which the insurer promises to pay a fixed sum, issued by an insurer authorized to do business in the state. A VARIABLE annuity is expressly outside that exemption because its value depends on separate account performance, so it is a security requiring registration and a licensed representative.Uniform Securities Act

A customer telephones an agent and asks to buy a nonexempt, unregistered security without any prompting from the firm. This trade is:

• a.Permitted only when the customer is an accredited investor
• b.An exempt transaction, because the customer's order was unsolicited✓
• c.An exempt security, because the buyer initiated the contact first
• d.Prohibited, because the security is not registered in that state

Unsolicited nonissuer transactions are exempt TRANSACTIONS under the Uniform Securities Act, so the registration requirement does not attach even though the security itself is not registered or exempt. The Administrator may require the customer to sign an acknowledgment that the order was unsolicited. Note the vocabulary trap: the exemption attaches to the transaction, never to the security.Uniform Securities Act

Under Regulation D, a natural person qualifies as an accredited investor by having a net worth exceeding:

• a.$1 million, including the primary residence
• b.$5 million, excluding the primary residence
• c.$1 million, excluding the value of the primary residence✓
• d.$300,000 jointly with a spouse, including retirement plan account balances

The net worth test is more than $1 million, individually or jointly with a spouse or spousal equivalent, calculated without counting the primary residence as an asset. Counting the home is the older rule that no longer applies. Five million dollars is a threshold for certain trusts and entities, not for a natural person's net worth. The $300,000 figure belongs to the alternative joint income test, which looks at income in each of the two most recent years, not at net worth. Certain professional certifications also qualify.17 CFR 230.501(a)(5)

The NASAA model rule on business continuity and succession planning requires a state-registered adviser to:

• a.Maintain a written plan addressing disruptions and the loss of key personnel✓
• b.Purchase key-person life insurance on each of the firm's named principals
• c.Hold six months of operating expenses in a segregated bank account
• d.Name a successor firm that will assume all advisory contracts automatically

The model rule requires every state-registered adviser to establish, implement, and maintain written procedures for a business continuity and succession plan, based on the facts and circumstances of its business. The plan must provide for at least the protection, backup, and recovery of books and records, alternate means of communicating with clients, personnel and regulators, office relocation, assignment of duties to qualified persons if key personnel die or become unavailable, and otherwise minimizing service disruption and client harm. It does not require key-person insurance, a segregated reserve of operating expenses, or an automatic successor firm.NASAA Model Rule 203(a)-1A (2002 Act Rule 411(c)-1A)

An agent of a broker-dealer who engages in 'selling away' is doing which of the following?

• a.Executing excessive trades in a client's account to generate commissions
• b.Trading for the agent's own account ahead of a customer's pending order
• c.Selling securities transactions outside the scope of employment without the firm's knowledge or approval✓
• d.Recommending a security without reasonable grounds to believe it is suitable

Selling away means participating in private securities transactions outside the employing firm without giving it prior written notice and obtaining its approval where required; FINRA Rule 3280 prohibits it because the firm cannot supervise what it does not know about. Executing excessive trades to generate commissions is churning, trading ahead of a customer's order is front running, and recommending a security without a suitable basis is an unsuitable recommendation. Each is a separate violation, not selling away.FINRA Rule 3280

Under the NASAA model recordkeeping rule (Rule 203(a)-2) that implements the Uniform Securities Act, how long must a registered investment adviser generally preserve its required books and records?

• a.Three years from the end of the fiscal year of the last entry, with only the latest year kept on site
• b.At least five years from the end of the fiscal year of the last entry, the first two in the principal office✓
• c.Five years from the date each client account is closed, all of it kept in the adviser's principal office
• d.Six years from the date of each entry, held by the client's qualified custodian rather than the adviser

The NASAA model rule requires an adviser to preserve required books and records for not less than five years from the end of the fiscal year in which the last entry was made, with the first two years kept in the adviser's principal office. A shorter three-year period, counting the period from account closing, a six-year period, and leaving the records with a custodian are all wrong. The adviser itself is responsible for keeping the records.NASAA Model Rule 203(a)-2

Under NASAA's model rule on unethical business practices, what must an investment adviser obtain when it exercises discretion over a client's account, and by when?

• a.Written discretionary authority from the client within ten business days after the first discretionary trade✓
• b.Written discretionary authority signed by the client before each separate discretionary trade is placed
• c.Written approval of the Administrator before the account is opened, with a copy sent to the client
• d.Oral authority from the client, which remains sufficient for the life of the account if the adviser records it

The model rule treats exercising discretion without written discretionary authority from the client as an unethical practice, but allows the adviser ten business days after the first trade placed under oral authority to obtain it. Authority is not required for each individual trade, the Administrator does not approve discretionary accounts, and oral authority alone is never enough for lasting discretion. Discretion limited to the price or time of an order for a definite amount of a named security does not need written authority.NASAA Model Rule 102(a)(4)-1(b)

Under the Uniform Securities Act, which firm is excluded from the definition of a 'broker-dealer' in a given state?

• a.A firm with an office in the state that solicits retail clients throughout the state
• b.A firm with no office in the state that directs offers to dozens of individual residents
• c.A firm with an office in the state that deals with members of the public
• d.A firm with no place of business in the state that deals there only with other broker-dealers and institutions✓

Section 401(c) excludes a person with no place of business in the state if the person effects transactions there exclusively with issuers, other broker-dealers, or financial institutions and institutional buyers (or directs no more than 15 offers in twelve consecutive months to anyone else). An office in the state triggers registration whether the firm solicits retail clients or simply deals with the public, and directing offers to dozens of individual residents exceeds the 15-offer limit.Uniform Securities Act (1956) Section 401(c)(4)

Under the NASAA model brochure rule for state-registered investment advisers, if an adviser delivers its Part 2A brochure at the time the advisory contract is signed rather than at least 48 hours before, the client must have:

• a.A five-business-day right to terminate the contract without penalty✓
• b.A ten-business-day right to terminate, less a pro rata charge for services already rendered
• c.A signed waiver of the 48-hour period, after which the contract is fully binding at once
• d.A second copy of the brochure at the first annual review, within 120 days of fiscal year-end

The NASAA model brochure rule (Model Rule 203(b)-1(b)(1)) lets a state-registered adviser deliver the Part 2A brochure either at least 48 hours before the advisory contract is entered into, or at the time of signing if the client may terminate the contract without penalty within five business days. The federal Advisers Act rule, 204-3(b), only requires delivery before or at the time of the contract and has no 48-hour period, which is why the stem names the state rule. A ten-business-day window is the wrong length, a waiver is not an alternative the rule offers, and the annual delivery within 120 days is a separate requirement that does not cure late initial delivery.NASAA Model Rule 203(b)-1(b)(1) (Investment Adviser Brochure Rule; cf. 17 CFR 275.204-3(b))

Under the SEC Marketing Rule (Advisers Act Rule 206(4)-1), when an adviser pays a cash fee to a third-party solicitor for endorsing the adviser to prospective clients, the arrangement generally requires:

• a.Disclosure of the compensation on Form ADV only, with nothing disclosed to the referred client
• b.A written agreement with the solicitor, but client disclosure only if the solicitor is a current client
• c.A written agreement and disclosure of the solicitor's compensation to the client✓
• d.Disclosure to the client, but a written agreement only when annual payments exceed $10,000

Rule 206(4)-1(b) allows a paid endorsement only if the adviser has a written agreement with the endorser describing the scope of the activities and the compensation, and the client is told, clearly and prominently, that compensation was provided and the material terms of that compensation, along with any material conflicts. This replaced the old cash solicitation rule, 206(4)-3, which was rescinded. Disclosure on the adviser's own Form ADV does not substitute for telling the referred client, and disclosure is not limited to solicitors who are clients. The written-agreement requirement is waived only for de minimis compensation of $1,000 or less in twelve months, not $10,000.17 CFR 275.206(4)-1(b)

Under NASAA's model rule on minimum financial requirements for investment advisers, an adviser that has custody of client funds or securities, or discretion without custody, must generally do which of the following?

• a.Keep a fixed $100,000 net worth, with no bonding alternative available to the adviser
• b.Register as a broker-dealer instead once it takes custody of any client assets
• c.Keep client funds in its own operating account as long as a ledger shows each share
• d.Meet minimum net worth or bonding requirements set by the Administrator, or provide required notice✓

The NASAA model rule sets minimum net worth levels ($35,000 for an adviser with custody, $10,000 for discretion without custody), and an adviser that falls below its minimum must notify the Administrator by the close of the next business day; some states add bonding requirements. There is no single $100,000 figure, and no bonding-only alternative is mandated by the model rule. An adviser does not become a broker-dealer by taking custody of client assets. Commingling client funds in the adviser's own operating account is a separate prohibited practice that a ledger does not cure.NASAA Model Rule 202(d)-1

Which of the following is an example of an exempt transaction under the Uniform Securities Act (1956)?

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

A non-issuer transaction effected through a registered broker-dealer on the customer's unsolicited order is exempt from registration because the customer initiated it. Other exempt transactions include isolated non-issuer sales and sales to banks and other institutional buyers. Exemption turns on how the sale occurs, so a solicited retail sale of an unregistered security, a public advertising campaign, and cold calling the public are not exempt.Uniform Securities Act (1956) Section 402(b)(3)

Under the Uniform Securities Act of 1956, a buyer's right to bring a civil suit under the civil-liability section is generally subject to a limitation period of:

• a.Three years after the buyer discovers the violation, but not more than ten years after the sale
• b.The earlier of two years after the buyer discovers the violation or five years after the violation
• c.Ten years after the contract of sale, extended for any period during which the seller concealed it
• d.Two years after the contract of sale, regardless of when the buyer discovers the violation✓

Section 410(e) of the 1956 Act provides that no person may sue under the civil-liability section more than two years after the contract of sale, with no extension for later discovery. The earlier of two years after discovery or five years after the violation is the rule of the 2002 Act, section 509(j)(2), so it is the wrong Act here. A three-year discovery period and a ten-year period extended for concealment appear in neither Act, and the Act does set a definite outside limit rather than leaving suits open.Uniform Securities Act (1956) s. 410(e); cf. USA (2002) s. 509(j)(2)

Under the Uniform Securities Act of 2002, a broker-dealer with no place of business in a state is registered in the home state of a bona fide preexisting customer. The customer is on vacation in that state for two weeks, and the firm deals only with that customer there. In the vacation state, the firm:

• a.Is exempt from broker-dealer registration for transactions with a bona fide preexisting customer who resides in another state✓
• b.Must register there before the first transaction, because a customer physically present in the state makes every transaction a transaction in that state
• c.Must file an application to register within 45 days after the first transaction there and may not trade more than 75 days after filing
• d.Is exempt only while it has no more than three customers in the state during the previous 12 months, counting this customer toward that limit

Under Section 401(b)(1)(E) of the 2002 Act, a broker-dealer is exempt from registration for transactions with a bona fide preexisting customer whose principal residence is not in the state, provided the firm is registered in the state where the customer resides. Where the customer is temporarily visiting, the customer's physical presence does not by itself require registration. The 45-day and 75-day sequence applies to a customer who lives in the state but was not present there when the relationship began, and the three-customer exemption is a separate, additional allowance that does not count this preexisting customer.Uniform Securities Act of 2002, Section 401(b)(1)(E)

An agent proposes to share in the profits and losses of a customer's account. Under the NASAA model rule on dishonest or unethical business practices of broker-dealers and agents, this is generally permitted only if:

• a.The agent and customer both agree to the arrangement in writing, without any approval from the firm that employs the agent
• b.The broker-dealer's compliance department approves the arrangement in writing, without any need to obtain authorization from the customer
• c.The agent obtains written authorization from both the customer and the broker-dealer the agent represents✓
• d.The agent personally guarantees the customer against any loss, and the customer agrees to the guarantee in writing

Under the NASAA model rule on dishonest or unethical business practices, an agent may share directly or indirectly in the profits or losses of a customer's account only with the written authorization of both the customer and the broker-dealer the agent represents. An agreement with the customer alone, or approval from the firm alone, is not enough, and an arrangement made verbally does not meet the written requirement. Guaranteeing a customer against loss is a separate prohibited practice that written consent does not cure.NASAA Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, Section 2.d

Under the Uniform Securities Act (1956), the term person includes all of the following EXCEPT:

• a.A deceased individual✓
• b.A joint-stock company or an unincorporated organization
• c.A trust where the interests of the beneficiaries are evidenced by a security
• d.A government or a political subdivision of a government

The 1956 Act's definition of person lists an individual, a corporation, a partnership, an association, a joint-stock company, a trust where the beneficiaries' interests are evidenced by a security, an unincorporated organization, a government, and a political subdivision of a government. A deceased individual has no legal capacity to act or contract and is not treated as a person for these purposes.Uniform Securities Act (1956) Section 401(i)

Under the Uniform Securities Act of 1956, if no denial order or proceeding is pending, an application for registration as an agent or investment adviser generally becomes effective:

• a.At noon on the 30th day after a complete application is filed✓
• b.At noon on the 45th day after the application is filed, as the 2002 Act provides
• c.On the day the Administrator receives the filing fee, once no denial order is pending
• d.Only when the Administrator issues an order affirmatively granting the registration

Under the Uniform Securities Act of 1956, if no denial order is in effect and no proceeding is pending, a registration becomes effective at noon on the 30th day after the application is filed, though the Administrator may by rule or order set an earlier effective date. The 45th-day timing belongs to the 2002 Act, registration does not take effect on receipt of the fee, and no affirmative grant order is required.Uniform Securities Act (1956) Section 202(a)

Under the NASAA model rule on minimum financial requirements for investment advisers (Model Rule 202(d)-1), an adviser whose net worth falls below the required minimum must generally:

• a.Notify the Administrator within thirty days and include the shortfall in its next annual updating amendment
• b.Notify only its clients in writing by the next business day, then continue operating unless the Administrator objects
• c.Post a surety bond for the amount of the shortfall and file a financial report only if the Administrator requests one
• d.Notify the Administrator by the next business day and then file a report of its financial condition✓

Model Rule 202(d)-1(d) requires an adviser whose net worth is below the minimum ($35,000 with custody, $10,000 with discretionary authority only) to notify the Administrator by the close of business on the next business day, and then to file a report of its financial condition by the close of business on the next business day, including a trial balance, a statement of unsegregated client funds, the aggregate client ledger debit balances, and the number of client accounts. A thirty-day notice through an annual amendment is far too slow. Telling only clients does not satisfy the duty to notify the regulator. The current rule contains no surety-bond cure, and the financial report is mandatory rather than on request.NASAA Model Rule 202(d)-1(d)

Under the Uniform Securities Act of 2002, registrations of broker-dealers, agents, and investment advisers:

• a.Expire on December 31 each year and must be renewed with payment of fees✓
• b.Expire one year from their effective date, so each registrant renews on its own anniversary
• c.Remain effective for two calendar years before any renewal is required
• d.Renew automatically each December 31 with no filing or fee due unless the Administrator objects

Under the Uniform Securities Act of 2002, a registration is effective until midnight on December 31 of the year for which the application is filed, and it may be renewed each year by filing the required records and paying the fee. The one-year-from-effective-date rule is the 1956 Act's approach, registrations are not valid for two years, and renewal is not automatic without a filing and fee.Uniform Securities Act (2002) Section 406(d)

Under the Uniform Securities Act of 1956, which of the following is considered an offer or sale of a security?

• a.A gift of assessable stock, and a bonus of stock given as an inducement to buy another security✓
• b.A bona fide pledge of securities as collateral for a loan
• c.A bona fide gift of securities with nothing given in return
• d.A stock dividend distributed to existing shareholders, who give nothing of value for the shares received

The Uniform Securities Act of 1956 treats a gift of assessable stock as an offer and sale, and a security given or delivered with, or as a bonus on account of, a purchase as part of the thing offered and sold for value. A bona fide pledge or loan, a bona fide gift for which nothing of value is given, and a stock dividend for which stockholders give nothing of value are not offers or sales.Uniform Securities Act (1956) Section 401(j)

Under the National Securities Markets Improvement Act (Securities Act Section 18), which of the following is a federal covered security exempt from state registration?

• a.Shares of a company that trades only on the OTC Pink market and is not listed on an exchange
• b.A stock listed on the New York Stock Exchange or Nasdaq, and securities senior to it✓
• c.A security sold in an intrastate offering to residents of the issuer's home state
• d.Stock of a start-up sold to ten investors in the state under that state's own private placement exemption

Under Section 18 of the Securities Act of 1933, as amended by the National Securities Markets Improvement Act, securities listed or authorized for listing on a national securities exchange such as the NYSE or Nasdaq, along with securities of the same issuer that are equal or senior to them, are federal covered securities, so state registration is preempted (notice filings and antifraud authority remain). Over-the-counter stocks, intrastate offerings and offerings sold under a state's own exemption are still subject to state law.15 U.S.C. 77r(b)(1) (Securities Act of 1933, Section 18(b)(1))

Under the Uniform Securities Act of 1956, the private placement exemption from state registration generally applies to an offer directed to no more than:

• a.25 purchasers in the state during any 12 consecutive months, with no general solicitation or advertising and no commissions paid
• b.35 purchasers who are not accredited investors, counted over any 12 consecutive months, as under the federal Regulation D limit
• c.10 non-institutional persons in the state during any 12 consecutive months, with no commissions on non-institutional sales and buyers purchasing for investment✓
• d.10 persons of any type, counting institutional buyers, in any 12 consecutive months, if the seller files a notice with the Administrator

The 1956 Act's limited-offering exemption covers an offer directed to not more than ten persons in the state, other than institutional buyers, during any 12 consecutive months, if the seller reasonably believes the buyers are purchasing for investment and no commission is paid for soliciting buyers in the state (other than institutions). The figure 25 is the 2002 Act's count of purchasers, 35 is a federal Regulation D count, and institutional buyers are not counted toward the ten.Uniform Securities Act (1956) Section 402(b)(9)

Registration by qualification under the Uniform Securities Act (1956) is:

• a.Used only with a simultaneous SEC registration, becoming effective automatically when the federal registration becomes effective
• b.Limited to established issuers with a record of earnings, who register by a short notice-style filing
• c.The most detailed state registration method, used for securities not registered federally, effective when the Administrator so orders✓
• d.The method used exclusively by federal covered securities sold in the state

Any security may be registered by qualification, the fullest-disclosure method, used mainly for securities that are not registered with the SEC. A qualification registration becomes effective when the Administrator so orders. Automatic effectiveness with the federal registration describes registration by coordination, a short filing for established issuers with a record of earnings describes registration by notification, and federal covered securities are not registered by the states at all.Uniform Securities Act (1956) Section 304

Under the Uniform Securities Act (1956), which action is beyond the Administrator's own authority and instead requires a court?

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

The Administrator may investigate and subpoena witnesses, deny, suspend, or revoke registrations by order, and issue stop orders against registration statements, but an injunction can be granted only by a court on the Administrator's application. Confusing an administrative order with a court injunction is the common trap.Uniform Securities Act (1956) Section 408

Under the Uniform Securities Act of 1956, a person convicted of a willful (criminal) violation is subject to a maximum penalty of:

• a.A fine of up to $10,000 and/or imprisonment of up to five years
• b.A fine of up to $5,000 and/or imprisonment of up to 3 years✓
• c.A fine of up to $1,000 and imprisonment of up to one year, as for a misdemeanor
• d.A fine of up to $5,000 only; imprisonment is available only after a second conviction

Section 409(a) of the 1956 Uniform Securities Act sets the criminal penalty for a willful violation at a fine of not more than $5,000, imprisonment of not more than three years, or both, with an optional five-year limit on bringing charges. A $10,000 fine with five years, or a $1,000 fine with one year, are not the Act's figures, and imprisonment is available on a first conviction, so the penalty is not limited to a fine. Some states have enacted larger penalties, so the question names the 1956 Act.Uniform Securities Act (1956) s.409(a)

Under the Uniform Securities Act (1956), a buyer who still owns the security receives, before suing, a written offer to refund the price plus 6% interest less income received (a rescission offer). The buyer:

• a.Keeps the right to sue even if the offer is ignored, because only a court can order rescission
• b.Has 90 days to accept, after which the offer lapses but all of the buyer's remedies are unaffected
• c.Loses the right to sue unless the buyer rejects the offer in writing within the 30-day period
• d.Loses the right to sue if the buyer does not accept the offer within 30 days of receiving it✓

The Act bars a civil suit if the buyer, while still owning the security, received a written refund offer and failed to accept it within thirty days of receipt. The reject-in-writing rule applies instead to a buyer who no longer owns the security. Ignoring the offer, relying on a longer acceptance window, or rejecting in writing while still owning the security does not preserve the suit.Uniform Securities Act (1956) Section 410(e)

An investment adviser's failure to disclose to a client, before a transaction is completed, whether it is acting as principal (trading from its own account) or as agent (broker) is:

• a.Acceptable if the capacity is disclosed orally after the transaction settles
• b.A concern only for federal covered advisers, not state-registered advisers
• c.A prohibited practice, because clients must know the capacity in which the firm acts✓
• d.Required only when the client asks which capacity the firm used

An adviser acting as principal in a trade with a client, or as broker for someone else in a trade for the client, must disclose its capacity in writing before the transaction is completed and obtain the client's consent. Nondisclosure is a prohibited practice. Late oral disclosure does not satisfy the requirement, the requirement does not depend on the adviser's registration category, and it applies whether or not the client asks.Investment Advisers Act of 1940 Section 206(3)

Under SEC rules implementing the Investment Advisers Act of 1940, an adviser with discretionary authority over client assets, custody, or a requirement of substantial prepaid fees (more than $1,200 per client, six months or more in advance) whose financial condition is reasonably likely to impair its ability to meet commitments to clients must:

• a.Promptly disclose that financial condition to affected clients✓
• b.Deliver an audited balance sheet to every client, whether or not it holds client assets
• c.Report it to the state Administrator but not to clients
• d.Disclose it only in the next annual updating amendment

Item 18 of Form ADV Part 2A requires an adviser with discretion, custody, or large prepaid fees to disclose any financial condition reasonably likely to impair its ability to meet its commitments to clients, and the fiduciary duty of full and fair disclosure calls for telling affected clients promptly. The audited balance sheet is required only of advisers that require prepayment of more than $1,200 per client six months or more in advance, not of every adviser. Telling only a regulator, or waiting for the next annual update, leaves clients exposed in the meantime.Form ADV Part 2A, Item 18 (SEC Release IA-3060, 2010)

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

• a.Allowed if the adviser is SEC-registered, since registration vouches for the claim
• b.Permitted if it is sent only to qualified clients or accredited investors
• c.A prohibited, misleading practice, because advisers may not guarantee investment results✓
• d.Acceptable if it carries a disclosure that past performance is no guarantee of future results

A promise of a guaranteed return is an untrue or misleading statement that the SEC's marketing rule prohibits in an advertisement, and NASAA's model rule also lists guaranteeing a client that a specific result will be achieved as an unethical practice. Registration status, a limited audience, and a generic past-performance disclaimer do not cure a guarantee.17 CFR 275.206(4)-1(a); NASAA Model Rule 102(a)(4)-1(l)

Under SEC Rule 205-3, as adjusted by the Commission's order effective June 29, 2026, an adviser may charge performance-based fees to a qualified client, which includes a natural person with:

• a.At least $1.4 million under the adviser's management, or a net worth exceeding $2.7 million✓
• b.At least $1.1 million under the adviser's management, or a net worth exceeding $2.2 million
• c.At least $2.7 million in assets under management with the adviser, or a net worth exceeding $1.4 million
• d.A net worth exceeding $1 million, not counting the primary residence, or annual income above $200,000

Rule 205-3 lets an adviser charge a performance fee to a qualified client. By SEC order IA-6961, effective June 29, 2026, the assets-under-management test rose from $1.1 million to $1.4 million and the net worth test from $2.2 million to more than $2.7 million (primary residence excluded). The earlier figures apply only to contracts entered into before the effective date. Swapping the two figures reverses which test uses which amount. A net worth over $1 million excluding the home, or $200,000 of income, is the accredited investor standard, a different test.Advisers Act s.205(a)(1); 17 CFR 275.205-3(d)(1); SEC Release IA-6961

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

• a.120 days of the end of the adviser's fiscal year✓
• b.90 days of the end of the adviser's fiscal year, the deadline for the annual updating amendment
• c.30 days after the end of the calendar year in which the changes occurred
• d.60 days after the annual updating amendment is filed with the SEC

The brochure rule requires delivery, free of charge, within 120 days after the end of the adviser's fiscal year, of either a current brochure or a summary of material changes that offers the full brochure, when there are material changes since the last annual updating amendment. The 90-day period is the deadline for filing the annual updating amendment, not for delivering it to clients. Calendar-year-end and filing-based periods are not the rule.17 CFR 275.204-3(b)(2)

Under NASAA's model rules, an investment adviser that requires prepayment of more than $500 per client, six or more months in advance, generally must:

• a.Register with the SEC regardless of its size
• b.File an unaudited balance sheet, as an adviser with discretion but no custody would
• c.File an audited balance sheet with the Administrator✓
• d.File its balance sheet within 30 days after receiving each prepayment

An adviser that requires prepayment of more than $500 per client six months or more in advance must file with the Administrator an audited balance sheet as of the end of its fiscal year, prepared under GAAP and audited by an independent CPA, within 90 days after the fiscal year ends. An unaudited balance sheet is the standard for an adviser with discretion but no custody. SEC registration depends on assets under management, not on prepaid fees, and the filing is tied to the fiscal year, not to each prepayment.NASAA Model Rule 203(c)-1(a)