NASAA Series 65 — All Questions

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)

An investment adviser representative who is also a broker-dealer registered representative will earn commissions on products she recommends to clients who already pay an advisory fee. Under NASAA's model rule, the adviser must

• a.disclose the arrangement in writing as a material conflict before any advice is given✓
• b.disclose it orally at the first meeting, which the rule treats as equal to written disclosure
• c.disclose it only after the client has made a purchase
• d.disclose it only if the commissions exceed the advisory fee

Failing to disclose in writing, before advice is rendered, a material conflict such as compensation in addition to the advisory fee, or a commission earned on transactions for which an advisory fee is charged, is an unethical practice. The rule specifies written, advance disclosure. Size of the commission relative to the fee is not the test, and disclosure after the sale comes too late.NASAA Model Rule 102(a)(4)-1(k) (fee plus commission conflict)

An adviser pays a broker higher commissions with client money for software that is 60% research tools and 40% back-office administration. Under the Section 28(e) safe harbor, the adviser should

• a.pay for none of it with commissions, because mixed-use items never qualify
• b.make a reasonable allocation, pay cash for the administrative part, and keep records✓
• c.pay for the whole package with commissions if it discloses the 40% use in the brochure
• d.pay for the whole package with commissions, since its primary use is research and the rest is incidental

For a mixed-use product only the eligible research portion may be paid with client commissions. The adviser must reasonably allocate the cost, pay for the ineligible part from its own funds, and keep adequate records. Paying for the whole package because it is mostly research overreaches. A blanket ban on mixed-use items goes further than the safe harbor. Disclosure does not make the administrative part eligible.Exchange Act s.28(e) (mixed-use soft dollar items)

A non-client friend of an adviser praises the firm on social media and has received gift cards worth $400 from the adviser in the past 12 months. Under the Marketing Rule, which statement is correct?

• a.The post must disclose the friend's non-client status and the compensation, but no written agreement is needed because the compensation is de minimis✓
• b.The post is prohibited, because a non-client cannot give an endorsement
• c.A written agreement is required for any compensation, however small
• d.No disclosures are required, because the compensation is de minimis

Compensation of $1,000 or less in the prior 12 months is de minimis, which relieves the adviser of the written-agreement and compensation-terms requirements. The clear and prominent disclosures about the endorser's non-client status, that compensation was given, and any conflicts still apply. The rule expressly covers endorsements by non-clients.Marketing Rule 206(4)-1(b) (de minimis compensation)

A client signs a standing letter of authorization letting an adviser tell the custodian to send money to third-party accounts the client has named. For the SEC staff's relief from the surprise examination to apply, which condition must hold?

• a.The adviser keeps the payees' account numbers current by updating them as they change
• b.The adviser cannot change the third party's name, address or other details✓
• c.The adviser, rather than the custodian, verifies the client's signature on each instruction
• d.The payee may be a related person of the adviser if the relationship is disclosed

An adviser acting under a standing authorization has custody. The staff will not recommend enforcement for skipping the surprise exam if, among other conditions, the client signs the instruction naming the third party, the qualified custodian verifies it and notifies the client after each transfer, and the adviser has no authority or ability to designate or change the payee's name, address or other information. Updating payee information would defeat that safeguard. The custodian, not the adviser, performs the verification. The adviser must keep records showing the payee is not a related party, so a disclosed relationship does not qualify.SEC staff no-action letter to the Investment Adviser Association (Feb. 21, 2017) on SLOAs

An adviser has custody of client accounts only because it deducts its advisory fee directly from accounts held at a qualified custodian. Compared with other advisers that have custody, this adviser

• a.must still undergo an annual surprise examination by an independent accountant
• b.must undergo a surprise examination every other year
• c.is not required to undergo an annual surprise examination✓
• d.must instead give clients an audited balance sheet each year

Custody that arises solely from the authority to deduct the advisory fee is excepted from the surprise-examination requirement, so no accountant visit is needed on that basis. Treating it like any other custody ignores the exception. A two-year cycle appears nowhere in the rule. A balance sheet is a brochure disclosure for prepaid fees and does not replace the examination.Advisers Act rule 206(4)-2(b)(3) (fee-deduction custody)

During a surprise examination of an adviser's custody, the independent accountant finds a material discrepancy. The accountant must notify the SEC within

• a.4 business days
• b.120 days
• c.30 calendar days
• d.1 business day✓

A material discrepancy found in the examination must be reported to the SEC within one business day of the finding. Four business days is the window for reporting that the accountant has been terminated or has resigned. One hundred twenty days is the deadline for filing the examination certificate on Form ADV-E. Thirty days does not appear in the rule.Advisers Act rule 206(4)-2(a)(4) (surprise exam findings)

A client gives an adviser representative oral discretionary authority, and the first trade under it is placed on Wednesday, March 4, 2026. Counting business days with no holidays, by what date must the adviser obtain written discretionary authority under NASAA's model rule?

• a.April 3, 2026
• b.March 11, 2026
• c.March 14, 2026
• d.March 18, 2026✓

The rule gives ten business days after the date of the first transaction placed under oral authority. Counting Thursday, March 5 as day one, the tenth business day is Wednesday, March 18. March 11 is only five business days. March 14 treats ten calendar days as the limit and lands on a Saturday. April 3 counts about thirty calendar days, which is not the rule.NASAA Model Rule 102(a)(4)-1(b) (written discretionary authority)

An adviser that also trades for its own account wants to sell a bond from its inventory to an advisory client. Under section 206(3) of the Advisers Act, the adviser must

• a.obtain consent only if the price is above the market price
• b.disclose its principal capacity on the confirmation after settlement
• c.disclose in writing before completing the trade that it is acting as principal, and obtain the client's consent✓
• d.do nothing further if the bond is sold at the best available price

A principal trade with a client requires written disclosure of the adviser's capacity before the transaction is completed and the client's consent to that transaction. Disclosure after settlement comes too late. Fair pricing does not remove the requirement, and neither does the price being at or below market.Advisers Act s.206(3) (principal trades)

A dually registered representative, acting as broker for another customer, matches that customer's sell order against a buy order for an advisory client's account. Section 206(3) requires

• a.disclosure to the selling customer only
• b.written disclosure of the capacity in which she acts before completion, and the advisory client's consent✓
• c.no disclosure, because the trade is done at a market price
• d.approval from the firm's compliance officer in place of client consent

Acting as broker for someone other than the advisory client while effecting a trade for that client is covered by the same written-disclosure and consent requirement as a principal trade. A market price does not remove it. The disclosure and consent must come from the advisory client whose account is involved. Internal approval cannot substitute for the client's consent.Advisers Act s.206(3) (agency cross transactions)

A client hires an adviser only for a one-time written financial plan, with no ongoing management. Which statement about the adviser's fiduciary duty is correct?

• a.No fiduciary duty applies, because the engagement is a one-time project
• b.The duty applies only if the contract expressly uses the word fiduciary
• c.The duty applies only while the adviser has discretion over the account
• d.The duty applies, but its content reflects the limited scope of the engagement✓

The SEC explained that the fiduciary duty cannot be waived but applies in a manner that reflects the agreed scope of the relationship, so a limited engagement shapes what the duty requires without removing it. A short engagement does not escape the duty. The duty arises from the Act, not from contract language, and it does not depend on discretionary authority.SEC fiduciary interpretation IA-5248 (scope of the duty)

Under the SEC's 2019 interpretation of the adviser's fiduciary duty, which obligation is part of the duty of care?

• a.Always recommending the lowest-cost product available
• b.Seeking best execution of client trades when the adviser selects the broker-dealer✓
• c.Eliminating every conflict of interest from the advisory business
• d.Guaranteeing that recommended investments will outperform their benchmarks

The duty of care covers advice in the client's best interest, seeking best execution where the adviser chooses the broker, and advice and monitoring over the course of the relationship. Cost is a factor, but the SEC said the duty does not necessarily require the lowest-cost option. No adviser can guarantee performance. Conflicts must be eliminated or fully and fairly disclosed, under the duty of loyalty, rather than all removed.SEC fiduciary interpretation IA-5248 (duty of care)

A broker-dealer offers its representatives a trip for selling the most shares of its proprietary fund in the next quarter. Under Regulation Best Interest, the firm

• a.must have policies reasonably designed to eliminate this sales contest✓
• b.may keep it if retail customers give written consent to the arrangement
• c.may keep it if the trip's value is capped at a nominal dollar amount
• d.may keep it if it discloses the contest to retail customers in writing

The Conflict of Interest Obligation requires policies reasonably designed to eliminate sales contests, quotas, bonuses and non-cash compensation based on sales of specific securities or types of securities within a limited period. For these practices disclosure and consent are not enough, and a cap does not cure the incentive.Regulation Best Interest 240.15l-1 (conflict of interest obligation)

Under Regulation Best Interest, a retail customer is

• a.a person who receives the recommendation in writing instead of orally
• b.any customer of a broker-dealer, including corporations and trusts
• c.a natural person who gets a recommendation and uses it primarily for personal, family or household purposes✓
• d.any natural person who is not an accredited investor

The definition turns on who the customer is and why the recommendation is used: a natural person, for personal, family or household purposes. Entities are outside it. Accredited status is not part of the definition, and the form of the recommendation is irrelevant.Regulation Best Interest 240.15l-1 (retail customer)

On September 1, a broker-dealer detects that an identified customer made two $9,000 cash deposits on consecutive days that appear designed to avoid currency reporting. Assuming the SAR threshold is met, by what date must the firm file a SAR?

• a.November 30
• b.October 1✓
• c.October 31
• d.September 16

A broker-dealer must file within 30 calendar days of initial detection of facts that may constitute a basis for filing. September 1 plus 30 days is October 1. The longer 60-day outer limit applies only when no suspect has been identified, and here the customer is known, so October 31 and November 30 are too late. September 16 is shorter than necessary.31 CFR 1023.320 (SAR filing deadline)

A customer suspects a broker-dealer reported something to the government and asks the registered representative whether a SAR was filed. The representative should

• a.tell the customer if the customer is not the subject of the report
• b.disclose it once 30 days have passed since filing
• c.neither confirm nor reveal whether a SAR exists, and refer the matter to the AML compliance officer✓
• d.confirm that a SAR was filed but refuse to describe its contents

A SAR and any information that would reveal its existence are confidential, and the firm may not tip off the person involved. Confirming the filing, even without details, reveals its existence. Whether the customer is the subject is not a basis for disclosure, and time does not lift the confidentiality.31 CFR 1023.320(e) (SAR confidentiality)

A broker-dealer opens a new account for an individual who is a US person. Under its customer identification program, which information must it obtain before opening the account?

• a.Name, date of birth, employer and bank reference
• b.Name, signature, net worth and investment objective
• c.Name, mailing address, occupation and annual income
• d.Name, date of birth, street address and TIN✓

The minimum identifying information for an individual is name, date of birth, a residential or business street address, and a taxpayer identification number for a US person. Occupation, income, employer, references and net worth may be collected for suitability or other reasons but are not the CIP minimum. A mailing address alone would not meet the street address element.31 CFR 1023.220 (customer identification program)

An investment adviser representative asks a retired client for a $5,000 personal loan, promising repayment with interest under a signed note. Under NASAA's model rule, this is

• a.acceptable, because the loan is documented by a signed note
• b.acceptable, if the person has been a client for over a year
• c.unethical, because the client is not a lender, a broker-dealer or an affiliate✓
• d.acceptable, if the interest rate is at or above market rates

Borrowing money or securities from a client is prohibited unless the client is a broker-dealer, an affiliate of the adviser, or a financial institution in the business of lending. A written note, a market rate or the length of the relationship does not create an exception.NASAA Model Rule 102(a)(4)-1(f) (borrowing from clients)

A client's adult son phones an adviser and tells her to sell a stock in the client's account. The client has signed nothing for the son. If the adviser places the order, NASAA's model rule treats it as

• a.acceptable, if the adviser has discretionary authority over the account
• b.acceptable, if the client confirms the trade within 10 business days
• c.an unethical practice, because there was no written third-party trading authorization from the client✓
• d.acceptable, because the son is a family member

Placing an order on a third party's instruction without first obtaining the client's written third-party trading authorization is an unethical practice. Family relationship does not substitute for it. Discretionary authority is the client's grant to the adviser and does not cover instructions from someone else. The 10-business-day window applies to documenting discretion, not to a third party's orders.NASAA Model Rule 102(a)(4)-1(e) (third-party trading authorization)

An adviser lists an individual client's name on its website to attract prospects, without asking the client. Under NASAA's model rule, this is

• a.acceptable if the client is an institution rather than an individual
• b.unethical, unless the client consented or the law requires it✓
• c.acceptable if only the name, not the holdings, is shown on the site
• d.acceptable if the client is a public figure or local business owner

The model rule bars disclosing the identity, affairs or investments of any client unless the law requires it or the client consents. Limiting the disclosure to a name does not satisfy the rule. Neither public prominence nor client type creates an exception.NASAA Model Rule 102(a)(4)-1(n) (client confidentiality)

To save the client time, an adviser representative logs into a client's brokerage account with the client's own username and password and places trades. Under NASAA's model rule, this is

• a.an unethical practice, because accessing an account with the client's own login credentials is prohibited✓
• b.acceptable if the client gives written permission
• c.acceptable if the adviser also has discretionary authority
• d.acceptable if the adviser stores the credentials in an encrypted file

Accessing a client's account by using the client's own unique identifying information, such as a username and password, is listed as an unethical practice. Client permission and discretionary authority do not change that. The only carve-out in the rule's note covers read-only data aggregation where the adviser never knows or holds the password. Encrypted storage still means the adviser has the credentials.NASAA Model Rule 102(a)(4)-1(v) (client login credentials)

A person becomes an access person of an investment adviser on September 1. Under the code of ethics rule, when is her initial holdings report due?

• a.September 11✓
• b.November 30
• c.September 30
• d.October 16

The initial holdings report is due no later than 10 days after the person becomes an access person, so September 11. September 30 would be 30 days, which is the deadline for quarterly transaction reports after quarter end. October 16 is 45 days, which is how current the holdings information may be, not the filing deadline. November 30 is 90 days and has no basis in the rule.Advisers Act rule 204A-1 (initial holdings report)

Under the code of ethics rule, which transaction by an access person does not have to appear on her quarterly transaction report?

• a.Automatic dividend-reinvestment purchases✓
• b.Shares she bought and held for less than 30 days
• c.Bonds she bought in an IRA that she directs herself
• d.Shares she sold in a joint account with her spouse

Transactions made under an automatic investment plan, including dividend reinvestment, are excepted from transaction reports. A joint account she can influence is within the rule, and so is an IRA she directs. The holding period of a trade does not remove the reporting duty.Advisers Act rule 204A-1 (reportable transactions)

An access person at an adviser wants to buy shares in a private placement. The adviser's code of ethics must require her to

• a.get the adviser's approval before buying✓
• b.only report the purchase within 30 days after quarter end
• c.get approval only if the adviser's clients hold the same issuer
• d.do nothing special, because private placements are exempt from the code

The code must require access persons to obtain approval before acquiring securities in an initial public offering or a limited offering such as a private placement. After-the-fact reporting alone is not enough. Private placements are the very type the pre-approval rule targets, and the approval does not depend on client holdings.Advisers Act rule 204A-1 (pre-approval of limited offerings)

An adviser hires a covered associate who will not solicit government entities. Eight months before joining, she gave $2,000 to a city mayoral candidate for whom she could not vote. Under the pay-to-play rule, the adviser's compensation from the city is

• a.barred for two years from the date of the gift, since any gift within two years of hire counts for a new hire
• b.not subject to a time-out, because she could not vote for the candidate
• c.barred for one year from the hire date, because the gift exceeded the de minimis amount for the associate
• d.not subject to a time-out, because it predates the six-month look-back for a non-soliciting new associate✓

For a new covered associate who does not solicit government clients, the look-back reaches only six months before the person became a covered associate. An eight-month-old gift falls outside it. The two-year look-back applies to associates who solicit. The inability to vote only lowers the de minimis limit to $150, and $2,000 is well above that, so it would not rescue a gift that was inside the look-back.Advisers Act rule 206(4)-5 (new covered associate look-back)

A client account has average equity of $200,000. During the year, purchases in the account total $900,000. Measured by purchases, the annual turnover rate is

• a.0.22
• b.45
• c.4.5✓
• d.9.0

Turnover equals purchases divided by average equity: $900,000 / $200,000 = 4.5, meaning the account's value was turned over four and a half times. Doubling the purchases to count sales as well gives 9.0. Inverting the ratio gives 0.22. Treating the result as a percentage gives 45.Churning (turnover rate calculation)

A retired client whose objective is capital preservation has an adviser representative, who also earns commissions as a broker, trade her account three times a week. Under NASAA's model rule, the central question is

• a.whether the client lost money on the account over the year
• b.whether the trading is excessive in size or frequency given the account's resources, objectives and character✓
• c.whether each trade, taken alone, was a suitable security
• d.whether the representative held discretionary authority over the account

The model rule makes inducing trading that is excessive in size or frequency, in view of the client's resources, objectives and the account's character, an unethical practice, because the representative benefits from the volume. A loss is not required, discretion is not an element, and every trade being individually suitable does not answer whether the pattern is excessive.NASAA Model Rule 102(a)(4)-1(c) (excessive trading)

Under the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, an eligible adult is

• a.a person 65 or older, or one subject to the state's adult protective services law✓
• b.any person 60 or older who has a diagnosed cognitive impairment or dementia, as certified by a physician
• c.only a person age 70 or older, regardless of the person's capacity or circumstances
• d.any retiree who relies on Social Security as the main source of income

The model act defines an eligible adult as a person 65 or older, or a person who is subject to the state's adult protective services statute. Seventy is too high. Sixty plus a diagnosis mixes in elements the act does not use. Retirement status is not the test.NASAA Model Act to Protect Vulnerable Adults (eligible adult)

Under the NASAA model act, a qualified firm suspects exploitation of an eligible adult and delays a disbursement. The securities regulator then requests the single extension the act allows. Counting the initial delay and that extension, the total delay without a court order is

• a.25 business days✓
• b.30 business days
• c.10 business days
• d.15 business days

The firm may delay a disbursement for up to 15 business days, and the securities regulator or adult protective services may request an additional 10 business days, for 25 in total. Further extension requires a court. Fifteen counts only the initial period, 10 only the extension, and 30 is not provided by the act.NASAA Model Act to Protect Vulnerable Adults (delay of disbursements)

A firm will share customers' nonpublic personal information with a nonaffiliated company for marketing. Under Regulation S-P, which opt-out method gives consumers a reasonable means to opt out?

• a.Requiring each consumer to write and send a personal letter
• b.Requiring consumers to visit a branch office in person
• c.A check-off box on a reply form that comes with the notice✓
• d.Sending the notice with no form or instructions on how to opt out

Reasonable ways to opt out include a check-off box on a form included with the notice, a reply form, electronic means, or a toll-free number. Making consumers write their own letter is specifically not a reasonable means. A mandatory in-person visit and a notice with no instructions are likewise unreasonable burdens.Regulation S-P 248.7 and 248.10 (opt-out method)

On November 3, a broker-dealer becomes aware that sensitive customer information was accessed without authorization and is reasonably likely to be misused in a way that causes substantial harm. Absent an Attorney General national-security delay, by what date must it notify the affected individuals?

• a.November 6
• b.December 3✓
• c.February 1
• d.January 2

Notice is due as soon as practicable, but no later than 30 days after the firm becomes aware of the incident. November 3 plus 30 days is December 3. November 6 is 72 hours, the deadline for a service provider to notify the firm. January 2 and February 1 would be 60 and 90 days, longer than permitted.Regulation S-P 248.30(a)(4) (customer notice of a breach)

A cloud vendor that stores an adviser's client records suffers a breach. Under amended Regulation S-P, the adviser's service-provider oversight must require the vendor to notify the adviser as soon as possible, within what maximum time after becoming aware of the breach?

• a.30 days
• b.72 hours✓
• c.24 hours
• d.10 business days

The amended rule requires a service provider to notify the covered institution of a breach in security resulting in unauthorized access to customer information as soon as possible, but no later than 72 hours after becoming aware of it. The adviser then remains responsible for notifying affected individuals within its own 30-day limit. Twenty-four hours is stricter than required. Thirty days is the customer-notice limit, and ten business days is not in the rule.Regulation S-P 248.30(a)(5) (service provider oversight)

Under NASAA's model rule on business continuity and succession planning, a state-registered adviser's written plan must provide for

• a.pre-approval by each client of a named successor firm to take over the accounts
• b.a cash reserve covering six months of the firm's operating expenses at all times
• c.quarterly testing of the plan by an independent outside consultant who reports to the state
• d.assigning duties to qualified persons if key personnel die or become unavailable✓

The model rule requires the plan to cover backup and recovery of books and records, alternate communications with clients and others, office relocation, assignment of duties to qualified persons if key personnel die or become unavailable, and minimizing service disruption and client harm. It does not require a cash reserve, client pre-approval of a successor, or outside testing.NASAA Model Rule 203(a)-1A (business continuity and succession planning)

An adviser's affiliated broker-dealer will act as broker for both an advisory client and the buyer on the other side of a trade. Which step lets the adviser rely on the SEC's agency cross rule?

• a.The client approves each cross trade by phone before it is sent, and the adviser notes the call in the file
• b.The adviser charges the client a lower commission than it would on an ordinary trade of the same size
• c.The client gives advance written consent after full written disclosure that the firm will hold conflicting loyalties on both sides✓
• d.The adviser sends a confirmation after each trade, and no advance consent is needed if the price matches the prevailing market price on the exchange

Rule 206(3)-2 gives a safe harbor from the principal and agency-cross consent requirement only if the client has signed a written consent that prospectively authorizes agency crosses, given after full written disclosure that the firm acts as broker for both parties, collects commissions from both, and has a potentially conflicting division of loyalties. Confirmations and annual statements are also required, but they do not replace advance written consent. A good price or a low commission does not cure the missing consent.17 CFR 275.206(3)-2(a)(1)

An advisory client signed a valid prospective consent to agency cross transactions. In which situation does the SEC safe harbor still NOT cover a particular cross trade?

• a.The client holds the security in a taxable account instead of a retirement account
• b.The cross trade is executed at the last sale price reported on the exchange where the stock is listed, and the client is told about it afterward
• c.The affiliated broker earns a disclosed commission from the client and also from the other party
• d.The adviser, or an affiliate under common control, recommended that same trade to both the seller and the buyer✓

Rule 206(3)-2(a)(5) removes the safe harbor when the adviser, or a controlled, controlling or commonly controlled person, recommended the transaction to both the seller and the purchaser. Executing at the last sale price is consistent with best execution, collecting commissions from both sides is the very conflict that the written consent covers, and account tax status is irrelevant to the rule.17 CFR 275.206(3)-2(a)(5)

Under the agency cross rule, what must an adviser include in the written disclosure statement it sends to each consenting client at least annually?

• a.The total number of agency cross transactions since the last statement and the total commissions or other remuneration received✓
• b.The realized gain or loss on each cross trade and the tax lot method used to figure it
• c.The adviser's estimate of the price improvement the client got compared with an open market execution on the same day, based on its own model
• d.The name of the counterparty on the other side of every cross trade completed during the period, along with the price paid by each

Rule 206(3)-2(a)(3) requires an annual disclosure, sent with or as part of the account statement, that identifies the total number of agency cross transactions during the period and the total commissions or other remuneration received by the adviser and anyone relying on the rule. It does not require counterparty names, tax data, or price-improvement estimates, although the adviser must still seek best execution.17 CFR 275.206(3)-2(a)(3)

A private fund has $150 million of capital contributions and uncalled committed capital. To keep venture capital fund status under SEC Rule 203(l)-1, what is the most it may hold, right after acquiring an asset, in assets that are not qualifying investments or short-term holdings?

• a.$45 million, which is 30 percent of its contributions and uncalled commitments
• b.$22.5 million, which is 15 percent of its contributions and uncalled commitments
• c.$30 million, which is 20 percent of its contributions and uncalled commitments✓
• d.$15 million, which is 10 percent of its contributions and uncalled commitments

Rule 203(l)-1(a)(2) caps non-qualifying, non-short-term assets at 20 percent of aggregate capital contributions and uncalled committed capital, so 0.20 x $150 million = $30 million. The 15 percent figure is the separate leverage limit, which is why it tempts, but it does not apply to this basket.17 CFR 275.203(l)-1(a)(2)

A venture capital fund has $80 million of capital contributions plus uncalled commitments and needs short-term bridge financing. Which borrowing fits within Rule 203(l)-1?

• a.$16 million on a non-renewable term of 90 calendar days
• b.$12 million on a non-renewable term of 90 calendar days✓
• c.$12 million rolled over every 90 days for as long as the fund needs it
• d.$12 million on a non-renewable term of 150 calendar days

Leverage is capped at 15 percent of contributions and uncalled capital, here 0.15 x $80 million = $12 million, and any borrowing must have a non-renewable term of no longer than 120 calendar days. The rolled-over loan is renewable, the $16 million loan is 20 percent, and the 150-day term exceeds the 120-day limit.17 CFR 275.203(l)-1(a)(3)

Which feature is consistent with the SEC's definition of a venture capital fund?

• a.Investors hold interests that carry no right to redeem or require repurchase, except in extraordinary circumstances✓
• b.Investors may require the fund to repurchase their interests at net asset value once a year after a lock-up period ends
• c.The fund has elected to be regulated as a business development company under the Investment Company Act of 1940 and reports to the SEC
• d.Thirty percent of the fund's capital is invested in shares bought on a national exchange

Rule 203(l)-1(a)(4) allows the fund to issue only securities that give no right, except in extraordinary circumstances, to withdraw, redeem or require repurchase, though pro rata distributions are fine. An annual repurchase right, a BDC election, and a 30 percent exchange-traded basket (above the 20 percent limit on non-qualifying assets) each defeat the status.17 CFR 275.203(l)-1(a)(2), (a)(4), (a)(5)

Which company can be a qualifying portfolio company when a venture capital fund invests in it?

• a.A manufacturer whose shares trade only on a foreign exchange and which files nothing with the SEC or any foreign regulator
• b.A company that borrowed money and distributed the proceeds to the fund in exchange for the fund's investment in it, as part of the same deal
• c.A private fund that invests in early-stage companies and is not itself an investment company
• d.A privately held software firm that is not subject to Exchange Act reporting and has no listing on any organized market✓

Under Rule 203(l)-1(c)(4), a qualifying portfolio company at the time of investment is not reporting or foreign traded, does not borrow to fund a distribution to the fund as part of the deal, and is not an investment company, private fund, or commodity pool. A foreign listing counts as foreign traded even without SEC filings.17 CFR 275.203(l)-1(c)(4), (c)(5)

A U.S. adviser relies on the private fund adviser exemption. Which of these advisers can use the exemption from SEC registration?

• a.An adviser with $120 million in private funds that also advises a mutual fund registered under the 1940 Act
• b.An adviser whose only clients are private funds, with $145 million of private fund assets managed from the United States✓
• c.An adviser whose only clients are private funds, with $172 million of private fund assets managed from the United States
• d.An adviser with $90 million in private funds that also manages one separate account for an individual

Rule 203(m)-1 exempts a U.S. adviser that acts solely as adviser to qualifying private funds and manages less than $150 million of private fund assets. Advisers over the threshold, or those with any client that is not a qualifying private fund (an individual account or a registered fund), do not qualify.17 CFR 275.203(m)-1(a)

A sole proprietor adviser is the only access person at her firm. Which condition lets her skip submitting holdings reports to herself and skip pre-approving IPO purchases under Rule 204A-1?

• a.She invests only in exchange-traded funds and no individual stocks in her personal account
• b.She has fewer than five advisory clients and manages only accounts under $1 million each
• c.Her state securities regulator has reviewed her code of ethics and approved it in writing
• d.She keeps records of all the holdings and transactions that the rule would otherwise have her report✓

Rule 204A-1(d) excuses a firm with only one access person, the owner, from reporting to herself and from obtaining her own approval for IPO and limited offering investments, provided she maintains records of every holding and transaction that would otherwise be reported. Client count, product choice, and regulator approval are not part of the exception.17 CFR 275.204A-1(d)

A firm's code of ethics may relieve an access person of filing a quarterly transaction report for which of these?

• a.A purchase of a private placement interest through a broker that sends no duplicate statements
• b.A sale of a stock held in a joint account with the access person's spouse
• c.Purchases made through an automatic investment plan✓
• d.A purchase of shares in an initial public offering that the compliance officer pre-approved

Rule 204A-1(b)(3) lets the code skip transaction reports for accounts over which the person has no influence or control, for transactions under an automatic investment plan, and for reports that would only duplicate confirmations or statements the firm already holds. Pre-approved IPO purchases, trades in a jointly owned account (beneficial ownership), and private placements without duplicate statements remain reportable.17 CFR 275.204A-1(b)(3)

Which holding of an access person is a reportable security under Rule 204A-1, so that it must appear in the access person's holdings report?

• a.Shares of a closed-end fund listed on a stock exchange✓
• b.A bank certificate of deposit with a twelve-month term
• c.Shares of a money market fund held in a brokerage account
• d.A U.S. Treasury bill held directly in a TreasuryDirect account

Reportable security means a security as defined in section 202(a)(18) except direct U.S. government obligations, bankers' acceptances, bank CDs, commercial paper and high-quality short-term debt, money market fund shares, shares of open-end funds that are not reportable funds, and certain unit investment trusts. A closed-end fund share is not on the exclusion list, so it is reportable.17 CFR 275.204A-1(e)(10)

An adviser registered with the SEC adds a new disciplinary event to Item 9 of its Form ADV Part 2A brochure in the middle of the year. What does Rule 204-3 require it to do?

• a.File the amendment with the SEC and send nothing to clients unless they request the brochure from the adviser's website
• b.Deliver the update only to clients whose accounts are affected by the event, within 45 days
• c.Wait and include the update in the annual summary of material changes sent within 120 days of fiscal year end
• d.Deliver the amended brochure, or a statement of the material facts of the change, to each client promptly✓

Rule 204-3(b)(4) requires prompt delivery to each client when an amendment adds a disciplinary event, or materially revises disclosure about one, in response to Item 9 of Part 2A (or Item 3 of Part 2B). Either the amended brochure with a statement of the material facts, or just the statement, will do. The annual 120-day delivery applies to other material changes and is too late here.17 CFR 275.204-3(b)(4)

An adviser pays an unaffiliated promoter $600 over the preceding 12 months to give an endorsement in its advertisement. Which Rule 206(4)-1 requirement still applies to that endorsement?

• a.A reasonable-care check that the promoter is not an ineligible person with a disqualifying event
• b.A written agreement describing the scope of the promoter's activities and the compensation
• c.The clear and prominent disclosure that the promoter is not a client and was paid for the endorsement✓
• d.No requirement applies, because compensation of $1,000 or less exempts the arrangement entirely

Under Rule 206(4)-1(b)(4)(i), an endorsement paid no more than $1,000 (de minimis) in the preceding 12 months is excused only from the written agreement and disqualification provisions. The disclosures about the person's status, the compensation, and any material conflicts must still be made. The idea that a small payment removes all conditions is the common error.17 CFR 275.206(4)-1(b)(1), (b)(4)(i), (e)(2)

Under the SEC Marketing Rule, an adviser may not pay for an endorsement from a person who had a disqualifying event, such as a certain felony conviction, within what period before the endorsement is disseminated?

• a.Three years
• b.Five years
• c.Ten years✓
• d.Seven years

Rule 206(4)-1(e)(4) defines a disqualifying event as one that occurred within ten years prior to the person disseminating the testimonial or endorsement, and a disqualifying Commission action bars the person with no lookback limit. Advisers must not pay someone they know, or with reasonable care should know, is an ineligible person.17 CFR 275.206(4)-1(b)(3), (e)(4)

An adviser's advertisement to retail clients shows the gross performance of a separately managed account composite. What must the advertisement also include?

• a.The gross performance of the benchmark index shown for the same period and nothing else
• b.Net performance in a footnote, as long as the footnote is no smaller than the surrounding text and appears on the same page
• c.Net performance with at least equal prominence, over the same period and using the same methodology✓
• d.A statement that the SEC has reviewed the gross-to-net reconciliation for accuracy

Rule 206(4)-1(d)(1) prohibits showing gross performance unless the advertisement also gives net performance with at least equal prominence to, and in a format designed to facilitate comparison with, the gross figure, over the same period and by the same methodology. A footnote does not give equal prominence, and implying SEC review is itself prohibited by paragraph (d)(3).17 CFR 275.206(4)-1(d)(1), (d)(3)