NASAA Series 65 — All Questions

Under the Investment Advisers Act of 1940, an investment adviser owes clients which standard of care?

• a.A mere suitability standard with no loyalty obligation
• b.A fiduciary duty to act in the client's best interest✓
• c.No duty beyond executing trades promptly
• d.A duty only to disclose commissions

The Investment Advisers Act of 1940 imposes a fiduciary duty on investment advisers, requiring them to act in their clients' best interests and to place client interests ahead of their own. This includes duties of loyalty and care and full disclosure of material conflicts. It is a higher standard than the suitability obligation historically applied to broker-dealers.Investment Advisers Act of 1940

Which of the following best distinguishes the fiduciary standard from a suitability standard?

• a.Suitability requires putting the client's interest first at all times
• b.The fiduciary standard applies only to broker-dealers
• c.Suitability requires eliminating all conflicts of interest
• d.A fiduciary must act in the client's best interest and disclose or avoid conflicts, not merely recommend an acceptable product✓

A fiduciary must place the client's interests first, manage or disclose conflicts of interest, and provide advice in the client's best interest. A suitability standard only requires that a recommendation be appropriate given the client's profile, without the same loyalty and conflict-management duties. This distinction is heavily tested for investment advisers.Investment Advisers Act of 1940

Under the Investment Advisers Act of 1940, which three elements define a person as an investment adviser (the 'three-prong test')?

• a.Providing advice about securities, as a business, for compensation✓
• b.Managing over $100 million, having employees, and using a custodian
• c.Custody, discretion, and compensation
• d.Registration, bonding, and examination

The three-prong test defines an investment adviser as a person who (1) provides advice or analysis about securities, (2) does so as part of a business, and (3) receives compensation for it. Meeting all three prongs generally triggers the definition. Certain professionals may qualify for exclusions if their advice is incidental.Investment Advisers Act of 1940

Generally, an investment adviser managing $110 million or more in assets registers with which regulator?

• a.The Securities and Exchange Commission (SEC)✓
• b.Only the state securities administrator where its office is located
• c.The Federal Reserve
• d.FINRA as a member firm

Advisers with assets under management of $110 million or more are generally required to register with the SEC as federal covered advisers, while smaller advisers typically register with the states. The $100 million to $110 million range creates a buffer to reduce frequent switching. FINRA regulates broker-dealers, not investment advisers.Investment Advisers Act of 1940

Under the Uniform Securities Act, the state official who administers securities law is known as the:

• a.Administrator✓
• b.Registrar of Deeds
• c.Trustee
• d.Comptroller

The Uniform Securities Act refers to the state securities regulator as the Administrator, who enforces the act, registers securities and professionals, and pursues violations. The Administrator has broad authority to make rules, conduct investigations, and issue orders. This term is used consistently throughout state blue-sky law.Uniform Securities Act

Under the Uniform Securities Act, an 'investment adviser representative' (IAR) is best described as:

• a.A broker-dealer that sells mutual funds
• b.Any clerical employee of an advisory firm
• c.An individual associated with an investment adviser who provides advice or solicits advisory clients✓
• d.A bank that holds client assets in custody

An investment adviser representative is an individual, associated with an investment adviser, who makes recommendations, manages accounts, or solicits advisory services for the firm. Purely clerical or administrative personnel are generally excluded. IARs typically must register in the states where they have clients or a place of business.Uniform Securities Act

An investment adviser that has custody of client funds or securities is generally required to do which of the following?

• a.Take permanent title to client securities
• b.Follow the custody rule's safeguards, such as using a qualified custodian and providing account statements✓
• c.Commingle client assets with firm assets for efficiency
• d.Avoid any independent verification of holdings

Under the custody rule, an adviser with custody must safeguard client assets by using a qualified custodian, ensuring clients receive account statements, and, in many cases, undergoing a surprise independent verification. Commingling client and firm assets is prohibited. These safeguards protect clients against misappropriation.Investment Advisers Act of 1940

Under the Uniform Securities Act, which of the following is generally considered a prohibited practice for an investment adviser?

• a.Maintaining accurate books and records
• b.Borrowing money from a client who is not a lending institution✓
• c.Delivering the brochure to clients before or at the time of entering an advisory contract
• d.Disclosing all material conflicts of interest to clients

Borrowing money or securities from a client who is not a bank, broker-dealer, or other financial institution in the business of lending is a prohibited practice because it creates a serious conflict of interest. Disclosing conflicts, keeping accurate records, and delivering the brochure are all required, proper conduct. Prohibited practices are heavily tested on the exam.Uniform Securities Act

An investment adviser's Form ADV Part 2 (the 'brochure') primarily serves which purpose?

• a.Reporting the adviser's quarterly trading profits to the SEC
• b.Registering individual securities for sale
• c.Disclosing the adviser's services, fees, conflicts of interest, and disciplinary history to clients✓
• d.Guaranteeing investment performance

Form ADV Part 2, the brochure, is a plain-English disclosure document that describes the adviser's business, services, fee schedule, conflicts of interest, and disciplinary history for clients and prospective clients. It must generally be delivered before or at the time an advisory agreement is entered. It is central to the adviser's disclosure obligations.Investment Advisers Act of 1940

Regarding advisory fees, which arrangement is generally prohibited for most retail advisory clients?

• a.A fee based on a percentage of assets under management
• b.A flat annual fee for financial planning
• c.An hourly fee for consultations
• d.A performance-based fee charged to a non-qualified retail client✓

Performance-based fees, which compensate the adviser based on gains in the account, are generally prohibited except for qualified clients meeting income or net worth thresholds, because they can encourage excessive risk-taking. Flat, hourly, and asset-based fees are commonly permitted. This restriction protects less sophisticated retail investors.Investment Advisers Act of 1940

Under the Uniform Securities Act, which of the following is excluded from the definition of a 'security'?

• a.An investment contract
• b.A corporate bond
• c.A share of common stock
• d.A fixed insurance policy or fixed annuity✓

Fixed insurance policies and fixed annuities are generally excluded from the definition of a security because they do not involve investment risk to the purchaser in the same way. Stocks, bonds, and investment contracts are securities subject to registration and antifraud provisions. Variable annuities, by contrast, are securities.Uniform Securities Act

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

• a.Disclosing all transactions to the employing firm
• b.Executing trades exactly as the firm directs
• c.Selling securities transactions outside the scope of employment without the firm's knowledge or approval✓
• d.Recommending only securities on an approved list

Selling away occurs when an agent effects private securities transactions outside the employing broker-dealer's supervision and without its knowledge or approval, a prohibited practice. It deprives the firm of oversight and exposes clients to unvetted risks. Agents must conduct approved business through their firm.Uniform Securities Act

An adviser wishing to enter into an agency cross transaction (acting as broker for both sides) must generally do which of the following?

• a.Never disclose the arrangement to clients so as to keep the cross transaction entirely confidential
• b.Obtain prior written client consent and disclose the conflict✓
• c.Charge a performance fee
• d.Guarantee the client a profit on the securities involved in the cross transaction

An adviser engaging in an agency cross transaction, acting as broker for both the advisory client and the other party, must obtain the client's prior written consent, disclose the conflict of interest, and comply with related requirements. This protects clients from undisclosed conflicts. Such transactions may not be recommended to both sides of the trade.Investment Advisers Act of 1940

Under the Uniform Securities Act, the antifraud provisions apply to which persons?

• a.Only issuers of new securities
• b.Only advisers registered with the SEC
• c.Anyone who offers or sells securities or provides investment advice, whether registered or not✓
• d.Only broker-dealers, never investment advisers

The antifraud provisions of the Uniform Securities Act reach any person who offers, sells, or advises on securities, regardless of whether that person is registered. Registration status does not exempt anyone from liability for fraud. This broad reach is a cornerstone of investor protection under state law.Uniform Securities Act

Which activity constitutes a prohibited misuse of material nonpublic information?

• a.Trading on confidential inside information before it is released to the public✓
• b.Reviewing a company's public annual report
• c.Recommending a stock based on published research reports that have already been widely circulated to the general investing public
• d.Discussing widely reported market news with a client

Trading on material nonpublic (inside) information, or tipping others to do so, is insider trading and is strictly prohibited under federal securities law. Advisers must maintain policies to prevent the misuse of such information. Using publicly available research and news, by contrast, is entirely permissible.Investment Advisers Act of 1940

An adviser who wishes to use client testimonials or advertisements must comply with rules that primarily require which of the following?

• a.Hiding any compensation paid for endorsements
• b.Guaranteeing the results shown in the advertisement
• c.Fair and balanced presentation with required disclosures, avoiding misleading claims✓
• d.Presenting only the best-performing accounts

Advertising and testimonial rules require advisers to present information in a fair and balanced manner, disclose material facts such as compensation paid for endorsements, and avoid false or misleading statements. Cherry-picking only top accounts or hiding paid endorsements would be misleading. Guaranteeing results is prohibited.Investment Advisers Act of 1940

Under the Uniform Securities Act, how long must an investment adviser generally retain required books and records?

• a.No retention is required if records are electronic
• b.For a specified minimum period, commonly five years, with recent years readily accessible✓
• c.Permanently, with no exceptions or format requirements
• d.For only 30 days after account closing

State recordkeeping rules under the Uniform Securities Act generally require advisers to preserve required books and records for a set minimum period, commonly five years, with the most recent years kept easily accessible. Records may be maintained electronically if properly preserved. Adequate recordkeeping supports examinations and enforcement.Uniform Securities Act

An investment adviser representative who moves to a new advisory firm must generally do which of the following?

• a.Register only if the new firm is in a different state
• b.Nothing; registration follows the individual automatically nationwide
• c.Notify or re-register through the appropriate regulator, as the registration is tied to the association with a specific firm✓
• d.Wait one year before advising any clients

An IAR's registration is tied to association with a particular investment adviser, so moving firms generally requires updating or re-establishing registration through the appropriate regulator. Both the departing and hiring firms typically have notice obligations. Registration does not automatically transfer with the individual.Uniform Securities Act

An investment adviser exercising discretionary authority over a client account must generally obtain what?

• a.Prior written authorization from the client granting discretion✓
• b.A performance-based fee agreement
• c.Approval from FINRA for each transaction
• d.Nothing beyond an oral instruction for each trade

To exercise discretion, choosing securities, amounts, or timing without contacting the client for each trade, an adviser must generally obtain prior written authorization, such as a limited power of attorney or discretionary agreement. Limited time and price discretion may be treated differently, but full discretion requires written client consent. This protects clients from unauthorized trading.Investment Advisers Act of 1940

Under the Uniform Securities Act, the Administrator may deny, suspend, or revoke a registration for which reason?

• a.The applicant earns a high income
• b.The applicant charges asset-based fees
• c.The applicant has been convicted of a securities-related felony or engaged in dishonest practices✓
• d.The applicant refuses to accept discretionary accounts

The Administrator may deny, suspend, or revoke a registration when it is in the public interest and specific statutory grounds exist, such as a securities-related felony conviction, fraudulent or dishonest conduct, or willful violations of the act. Lawful business choices like charging asset-based fees are not grounds. These provisions safeguard investors and market integrity.Uniform Securities Act

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

• a.A firm that solicits retail clients throughout the state
• b.A firm that advertises to state residents
• c.A firm with an office in the state dealing with the public
• d.A firm with no place of business in the state that deals only with existing clients temporarily present there✓

A firm with no place of business in a state may be excluded from that state's broker-dealer definition if it deals only with certain exempt clients or existing clients who are merely temporarily present. Establishing an office or soliciting the general public in the state triggers registration. These exclusions limit unnecessary duplicate registration.Uniform Securities Act

The 'de minimis' exemption from state investment adviser registration generally applies when an adviser:

• a.Has an office in every state where it advertises
• b.Manages more than $110 million in assets
• c.Has no place of business in the state and had no more than five retail clients there in the prior 12 months✓
• d.Charges only performance-based fees

Under the de minimis standard, an adviser with no place of business in a state need not register there if it had five or fewer retail clients in that state during the preceding 12 months. Establishing an office in the state removes the exemption. This rule avoids burdening advisers with only incidental contacts in a state.Uniform Securities Act

Under the Investment Advisers Act of 1940, an advisory contract must generally provide that:

• a.Fees must always be performance-based
• b.The advisory contract cannot be assigned to another party without the client's consent✓
• c.The adviser may assign the contract to another firm without notice
• d.The client waives all rights under federal securities laws

An investment advisory contract generally may not be assigned to another party without the client's consent, protecting the client's right to choose their adviser. If the adviser is a partnership, the contract must provide for notice to clients of any change in the membership of the partnership. Clients cannot be made to waive rights under the securities laws.Investment Advisers Act of 1940

A federal covered adviser doing business in a state is generally subject to which state requirement?

• a.Full state registration and examination by the Administrator
• b.A notice filing and payment of applicable fees, plus state antifraud jurisdiction✓
• c.No state involvement of any kind
• d.State approval of its advisory contracts before use

A federal covered adviser, registered with the SEC, is not subject to duplicative state registration, but a state may require a notice filing and fees and still enforce its antifraud provisions. This preserves federal-state coordination under the National Securities Markets Improvement Act framework. States cannot impose full registration on federal covered advisers.Uniform Securities Act

If an adviser delivers its brochure at the same time the advisory contract is signed rather than at least 48 hours before, the client generally must be given:

• a.A five-business-day period to rescind the contract without penalty✓
• b.A performance-based fee discount
• c.Nothing further; the timing is irrelevant
• d.A guarantee against loss

The brochure delivery rule requires delivery at least 48 hours before entering the contract, or at the time of entering the contract if the client is given the right to rescind within five business days without penalty. This ensures the client has time to review disclosures. Advisers commonly use the five-day rescission option to meet the requirement.Investment Advisers Act of 1940

When an adviser pays a cash fee to a third-party solicitor for referring clients, the arrangement generally requires:

• a.That the client pay the solicitor directly in cash
• b.That the solicitor personally guarantee investment results
• c.A written agreement and disclosure of the solicitor's compensation to the client✓
• d.No disclosure of any kind to the referred client

Cash referral or solicitation arrangements generally require a written agreement between the adviser and solicitor and disclosure to the prospective client of the solicitor's relationship with the adviser and the compensation paid. This transparency lets clients weigh the conflict of interest behind a referral. Undisclosed paid referrals are prohibited.Investment Advisers Act of 1940

Which use of a professional designation or registration status by an adviser would be considered misleading?

• a.Listing genuine professional credentials the adviser holds
• b.Truthfully describing the adviser's years of experience
• c.Implying that registration means the Administrator has approved the adviser's qualifications or endorsed the firm✓
• d.Accurately stating the adviser is registered with the state

It is misleading, and prohibited, for an adviser to imply that being registered means a regulator has approved or endorsed its abilities or the merits of its services. Registration signifies compliance with legal requirements, not government endorsement. Accurately stating registration status and genuine credentials, however, is permissible.Uniform Securities Act

Which professional is most likely excluded from the definition of investment adviser when advice about securities is incidental to their practice and no special compensation is received?

• a.A person holding themselves out as a financial planner
• b.A firm charging a separate fee for portfolio management
• c.An individual publishing paid stock recommendations
• d.A lawyer or accountant whose securities advice is solely incidental to their profession✓

Lawyers, accountants, teachers, and engineers (the 'LATE' exclusions) are generally excluded from the investment adviser definition when their securities advice is solely incidental to their profession and they receive no special compensation for it. Charging a separate fee for advice or holding oneself out as a financial planner removes the exclusion. The exclusion recognizes advice that is truly ancillary.Investment Advisers Act of 1940

An adviser's obligation to protect clients' nonpublic personal information and provide a privacy notice arises principally from which requirement?

• a.Privacy rules (such as Regulation S-P) governing the safeguarding of customer information✓
• b.The custody rule's surprise examination conducted once each year by an independent public accountant
• c.The performance-fee restriction
• d.The brochure rule's 48-hour delivery standard which requires delivery of Form ADV Part 2 at least 48 hours in advance

Privacy rules, including Regulation S-P, require financial firms such as advisers to safeguard clients' nonpublic personal information and to provide privacy notices describing their information-sharing practices. This protects client confidentiality and limits improper disclosure to third parties. It is distinct from custody, performance-fee, and brochure-delivery requirements.Investment Advisers Act of 1940

Under the Uniform Securities Act, a willful violation of the act by an adviser or agent can result in which of the following?

• a.Criminal penalties, including fines and imprisonment, in addition to civil liability✓
• b.Only a private apology to the client
• c.A guaranteed civil settlement with no penalty
• d.Automatic loss of the client's account

A willful violation of the Uniform Securities Act can subject a person to criminal penalties, including fines and imprisonment, as well as civil liability and administrative sanctions such as registration revocation. The act sets statutory limits on the amount and term of criminal penalties. These serious consequences underscore the importance of compliance.Uniform Securities Act

Under the Uniform Securities Act, an individual who represents a broker-dealer in effecting securities transactions is defined as which of the following, and must generally register?

• a.An agent✓
• b.An issuer
• c.An investment adviser representative acting for a bank
• d.A federal covered adviser

An individual who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities is an agent under the Uniform Securities Act and generally must register in the states where they conduct business. Certain representatives of issuers in exempt transactions may be excluded. Agents are distinct from investment adviser representatives, who give advice rather than execute trades.Uniform Securities Act

State rules addressing an adviser that maintains custody or discretion over client accounts commonly require the adviser to do which of the following?

• a.Guarantee client accounts against loss
• b.Ignore any minimum financial requirements
• c.Avoid providing account statements to clients
• d.Meet minimum net worth or bonding requirements set by the Administrator, or provide required notice✓

State rules often impose minimum net worth or surety bond requirements on advisers that have custody of or discretion over client assets, scaled to the level of authority they hold. These financial safeguards help protect clients if the adviser fails or misuses assets. Advisers must also meet applicable notice, disclosure, and statement-delivery obligations.Uniform Securities Act

An adviser is granted authority to decide only the price and time at which to execute a client-specified purchase of a particular security. This is best described as:

• a.Custody of client assets
• b.Full discretionary authority requiring a written trading authorization
• c.Limited time and price discretion, which is not treated as full discretion✓
• d.A prohibited practice under all circumstances

Deciding only the price and time to execute an order that the client has already specified as to security and amount is considered limited time and price discretion, and it is generally not treated as full discretionary authority. Full discretion, choosing the security or quantity without prior client direction, requires written discretionary authorization. This distinction affects the documentation an adviser must obtain.Investment Advisers Act of 1940

Under the NASAA model rules on unethical business practices, which of the following is prohibited for an adviser or agent?

• a.Recommending securities consistent with the client's objectives
• b.Guaranteeing a client against loss or churning the account to generate fees✓
• c.Charging a reasonable, disclosed advisory fee
• d.Explaining the risks of a recommended strategy

NASAA's model rules on unethical business practices prohibit conduct such as guaranteeing a client against loss, churning (excessive trading to generate commissions), and making unsuitable recommendations. These practices harm clients and undermine market integrity. Disclosing risks, charging reasonable disclosed fees, and making suitable recommendations are proper conduct, not violations.Uniform Securities Act

Under the Uniform Securities Act, which of the following is an exempt security (exempt from state registration)?

• a.A newly issued corporate stock offered broadly to state residents
• b.A U.S. government or municipal bond✓
• c.A limited partnership interest sold through general solicitation
• d.A private start-up's common stock sold to the general public

Exempt securities under the Uniform Securities Act include U.S. government and municipal bonds, bank securities, and certain others; they need not be registered with the state, though the antifraud provisions still apply. The trap is confusing an exempt security, based on what the instrument is, with an exempt transaction, based on how it is sold.Uniform Securities Act

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

• 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

An unsolicited customer order is the classic exempt transaction because the customer initiated it. Other exempt transactions include private placements, isolated non-issuer transactions, and sales to institutional or accredited buyers. An exempt transaction turns on how the sale occurs, not on the security itself, so the solicited public sales are the traps.Uniform Securities Act

Registration by coordination under the Uniform Securities Act is available to an issuer that is:

• a.A state-chartered bank not otherwise required to register
• b.Simultaneously registering the same offering with the SEC under the Securities Act of 1933✓
• c.Registering an offering solely within one state with no federal filing
• d.Exempt from all federal registration and selling only intrastate

Registration by coordination is used when a security is registered federally under the Securities Act of 1933 at the same time as at the state level; the state registration becomes effective concurrently with the federal one. Registration by qualification is for offerings with no federal registration, the trap in the last option, and notification is for certain established issuers.Uniform Securities Act

When filing an initial registration application, a broker-dealer, agent, or investment adviser must include a consent to service of process, which:

• a.Waives the applicant's right to a hearing before the Administrator
• b.Must be re-filed with the Administrator every year
• c.Guarantees the applicant will be approved for registration once the Administrator has reviewed the filing and confirmed the applicant's financial statements and professional qualifications
• d.Appoints the Administrator as the applicant's attorney to receive legal papers in actions under the act, with the same effect as personal service✓

A consent to service of process, filed with an initial application, appoints the Administrator to accept legal process on the applicant's behalf in proceedings arising under the act, with the same force as if served personally. It is filed once and remains effective; it is not renewed annually, the trap in the third option, and it does not guarantee approval.Uniform Securities Act

Under the Uniform Securities Act, a purchaser's right to bring a civil suit for a violation is generally subject to a statute of limitations of:

• a.No time limit on such suits
• b.Thirty days after the transaction
• c.Ten years from the transaction in every case
• d.The earlier of two years after discovery or three years after the sale✓

Under the Uniform Securities Act, a purchaser generally must bring a civil suit within the earlier of two years after discovering the violation or three years after the sale or contract of sale. This uniform two-and-three-year figure is the level the exam tests, even though some federal fraud claims carry longer periods; there is a definite limit, so the first and third options are wrong.Uniform Securities Act

A broker-dealer with no place of business in a state deals only with an existing client who is on vacation in that state for two weeks. Under the Uniform Securities Act, the firm:

• a.May be exempt from registration in that state under the provision for a firm with no place of business there dealing with an existing, temporarily present client✓
• b.Must open a branch office in the vacation state
• c.Must fully register as a broker-dealer in the vacation state immediately and open a supervised branch office there before it may contact the client even once about existing holdings
• d.Automatically commits securities fraud

The Uniform Securities Act does not require a broker-dealer with no place of business in a state to register there when it deals only with an existing client who is not a resident but is merely temporarily present, the so-called snowbird or vacation rule. Establishing an office or soliciting new state residents would, by contrast, trigger registration.Uniform Securities Act

Under the soft-dollar safe harbor, an investment adviser may use client brokerage commissions to pay for which of the following without breaching its duty?

• a.Brokerage and qualifying research services that benefit clients✓
• b.Salaries of the adviser's marketing staff
• c.Personal travel and vacations for the adviser
• d.The adviser's office rent and furniture

The Section 28(e) soft-dollar safe harbor lets an adviser use client brokerage commissions to pay for eligible research and brokerage services that benefit clients. Using soft dollars for overhead such as rent, furniture, travel, or marketing salaries falls outside the safe harbor and creates an undisclosed conflict of interest; those are the traps.Investment Advisers Act of 1940

An agent proposes to share in the profits and losses of a customer's account. Under NASAA rules this is generally permitted only if:

• a.The agent and customer agree to it verbally
• b.It is never permitted under any circumstances
• c.The agent obtains written approval from both the customer and the broker-dealer and shares only in proportion to the agent's own capital contribution✓
• d.The agent personally guarantees the customer against any loss and promises to reimburse the customer for any decline in the account's value below its agreed starting balance

An agent may share in the profits and losses of a customer's account only with the written approval of both the customer and the employing broker-dealer, and only in proportion to the agent's own financial contribution. A verbal agreement is insufficient, and guaranteeing a customer against loss is separately prohibited; those are the traps. Investment advisers face stricter limits still.Uniform Securities Act

Which of the following is a prohibited market manipulation practice?

• a.Entering matched orders or wash trades to create a false appearance of active trading✓
• b.Recommending a suitable, diversified portfolio
• c.Disclosing a material conflict of interest to a client
• d.Executing a client's order at the best available price

Creating a false or misleading appearance of active trading through wash trades, matched orders, or 'painting the tape' is market manipulation, prohibited under the antifraud provisions; front-running client block orders is likewise banned. Best execution, conflict disclosure, and suitable recommendations are proper conduct, so they are the traps.Uniform Securities Act

Under the NASAA model act addressing suspected financial exploitation of vulnerable adults, a qualified firm that reasonably suspects exploitation is generally permitted to:

• a.Notify a state regulator or adult protective services and place a temporary hold on a suspicious disbursement, with the required notices✓
• b.Ignore the concern to avoid any liability
• c.Permanently seize and liquidate the eligible adult's account assets and move the proceeds into an escrow account controlled solely by the firm until the matter is resolved
• d.Guarantee the client's account against fraud losses

Under the NASAA model act on financial exploitation of vulnerable adults, a qualified firm that reasonably suspects exploitation may report it to the state securities regulator or adult protective services and place a temporary, time-limited hold on a suspicious disbursement, notifying the non-suspected parties, with good-faith immunity. It does not permit seizing assets or guaranteeing the account.Uniform Securities Act

A broker-dealer that offers a wrap-fee program, charging a single asset-based fee that covers advice, execution, and custody, generally must:

• a.Charge a performance fee to every client in the program
• b.Register as (or place the account with) an investment adviser, because a bundled asset-based fee for advice is not 'solely incidental' compensation✓
• c.Guarantee the wrap account against loss
• d.Avoid any investment adviser registration entirely, on the theory that bundling the advisory fee together with brokerage commissions keeps the advice solely incidental to the firm's brokerage business

The broker-dealer exclusion from the investment adviser definition applies only when advice is solely incidental to brokerage and no special compensation is received. A wrap fee is a single asset-based charge for advice, execution, and custody, which is special compensation, so the activity requires investment adviser registration and a wrap-fee brochure (Form ADV Appendix 1); the trap is assuming bundling avoids registration.Investment Advisers Act of 1940

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

• a.A deceased individual, a minor, or a person legally declared incompetent✓
• b.A corporation
• c.A government or a political subdivision, together with any agency or instrumentality of such a government
• d.A partnership or a trust

The USA defines person broadly to include individuals, corporations, partnerships, associations, trusts, and governments, but it specifically excludes a deceased person, a minor, and an incompetent, none of whom can lawfully contract. Reference: Uniform Securities Act.

An investment adviser with $60 million under management, located in a state that requires registration and examination, generally must register with:

• a.No regulator, because it is exempt at this size, so it may begin advising clients in any state without filing any application
• b.The SEC only, because it exceeds $25 million
• c.FINRA as a member firm
• d.The state securities Administrator, as a mid-size adviser between $25 million and $100 million✓

Under the Dodd-Frank amendments to the Investment Advisers Act of 1940, mid-size advisers ($25M-$100M) generally register with the state if the home state requires registration and examination, and with the SEC only if it does not or if they would face registration in 15 or more states.

An investment adviser that manages a registered investment company (a mutual fund) must register with:

• a.No regulator, because funds are self-regulated
• b.FINRA as a member firm
• c.The state securities Administrator only
• d.The SEC, regardless of its assets under management✓

Under the Investment Advisers Act of 1940, an adviser to a registered investment company must register with the SEC as a federal covered adviser regardless of assets under management, an exception to the usual dollar threshold.

A pension consultant advising employee benefit plans becomes eligible to register with the SEC once the plan assets on which it advises reach at least:

• a.$25 million
• b.$200 million✓
• c.$500 million
• d.$110 million

Under SEC rules implementing the Investment Advisers Act of 1940, a pension consultant may register federally once it advises on at least $200 million in plan assets. Below that level it registers with the states.

An investment adviser that provides advice to clients exclusively through an interactive website (an internet adviser) generally:

• a.Registers with the SEC as a federal covered adviser under the internet adviser exemption✓
• b.Registers only with FINRA
• c.Is exempt from all registration requirements and may advise clients in every state without notifying any securities regulator
• d.Must register in all 50 states individually

The internet adviser exemption under the Investment Advisers Act of 1940 lets an adviser that gives advice solely through an operational interactive website register with the SEC regardless of assets, avoiding registration in every state where clients reside.

A publisher of a financial newsletter of general and regular circulation, offering only impersonal commentary not tailored to any specific client, is:

• a.An investment adviser representative
• b.Always an investment adviser requiring registration with both the SEC and every state in which a subscriber happens to reside
• c.Excluded from the definition of investment adviser under the publisher's exclusion✓
• d.A broker-dealer under federal law

The publisher's exclusion, affirmed in Lowe v. SEC under the Investment Advisers Act of 1940, covers bona fide publications of regular and general circulation that give impersonal advice not tailored to a specific client. Personalized advice for a fee removes the exclusion.

Under the Uniform Securities Act, 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.Only after a mandatory one-year waiting period imposed by the Administrator on all first-time applicants for registration
• c.Immediately upon filing
• d.Five business days after filing

Under the USA, absent a pending proceeding, registration becomes effective at noon on the 30th day after the application is filed, though the Administrator may set an earlier effective date. Reference: Uniform Securities Act.

Under NASAA model rules, a state-registered investment adviser that maintains custody of client funds or securities must generally maintain a minimum net worth of:

• a.$10,000
• b.$5,000
• c.$100,000
• d.$35,000✓

NASAA's model financial-requirement rule sets minimum net worth at $35,000 for advisers with custody and $10,000 for advisers with discretion but no custody. An adviser that only accepts substantial prepaid fees faces separate requirements.

Under the Uniform Securities Act, an investment adviser whose net worth falls below the required minimum may generally cure the shortfall by:

• a.Guaranteeing client accounts against any loss
• b.Ignoring the requirement if clients consent in writing
• c.Charging a performance-based fee to make up the difference out of client accounts until the required net worth has been restored
• d.Posting a surety bond in the amount required by the Administrator✓

When an adviser's net worth falls below the required minimum, the Administrator may allow or require a surety bond to cover the deficiency, protecting clients. Guaranteeing accounts against loss is separately prohibited, so it is the trap.

Registrations of broker-dealers, agents, and investment advisers under the Uniform Securities Act:

• a.Expire on December 31 each year and must be renewed with payment of fees✓
• b.Are effective permanently once granted and never lapse, so no annual filing or fee is due to the Administrator
• c.Must be renewed every 90 days
• d.Never require any renewal fee

Under the USA, state securities registrations expire on December 31 annually and must be renewed with the appropriate fee. Registration is not permanent and must be kept current to remain in effect.

When a registered person files to withdraw its registration under the Uniform Securities Act, the withdrawal generally becomes effective 30 days after filing, and the Administrator retains jurisdiction to bring proceedings for:

• a.One year after the withdrawal becomes effective✓
• b.An indefinite period with no limit
• c.No period; jurisdiction ends immediately upon withdrawal
• d.10 years after the withdrawal

Under the USA, a withdrawal takes effect 30 days after filing absent a pending proceeding, and the Administrator keeps jurisdiction to institute a revocation or suspension proceeding for one year afterward.

Under the Uniform Securities Act, 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 judicially ordered transfer of securities by an executor
• c.A bona fide gift of securities with nothing given in return
• d.A stock dividend paid on shares already owned, given free of charge to every holder of record on the declaration date set by the board

The USA treats a gift of assessable stock as a sale and a security given as a bonus or inducement to a purchase as part of the offer and sale. A bona fide gift, a stock dividend, and certain judicial transfers are not offers or sales.

A nonissuer transaction under the Uniform Securities Act is one in which:

• a.The issuer sells newly created shares to raise capital directly to the public, with the entire proceeds flowing to the company rather than to any selling shareholder
• b.The transaction always involves the U.S. Treasury
• c.The proceeds go to a selling securityholder rather than to the issuer, as in ordinary secondary-market trading✓
• d.A company issues stock directly to its own employees

In a nonissuer transaction the benefit flows to a selling shareholder, not the issuing company, as in normal secondary-market trades between investors. An issuer transaction, by contrast, raises capital for the issuer.

Under the Uniform Securities Act, which of the following is a federal covered security exempt from state registration?

• a.A local limited partnership interest sold by general solicitation to retail investors throughout the state by broad advertising
• b.A stock listed on the New York Stock Exchange or Nasdaq, and securities senior to it✓
• c.A promissory note issued to the general public
• d.A private start-up's stock sold door to door

Under NSMIA, securities listed on national exchanges such as the NYSE, NYSE American, or Nasdaq, along with securities equal or senior to them and registered investment company shares, are federal covered securities that preempt state registration, though notice filings and antifraud rules can still apply.

The private placement exemption from state registration under the Uniform Securities Act generally applies to an offer directed to no more than:

• a.100 persons of any type
• b.35 institutional buyers only, provided each of them signs an investment-representation letter and the offering is not advertised to the public in any medium during the preceding twelve months
• 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.50 accredited investors

The USA private-placement (limited-offering) exemption covers offers to 10 or fewer non-institutional persons in 12 months, provided the seller reasonably believes buyers are purchasing for investment rather than resale and pays no commission for non-institutional solicitations. Offers to institutions are not counted.

Which of the following is an exempt transaction under the Uniform Securities Act?

• a.A solicited sale of an unregistered security to the general public through a broad advertising campaign directed at retail investors statewide
• b.A sale of securities by an executor, administrator, sheriff, trustee in bankruptcy, or guardian✓
• c.A cold-call solicitation of retail investors
• d.A public advertising campaign for a new offering

Transactions by fiduciaries such as executors, administrators, sheriffs, trustees in bankruptcy, or guardians are exempt transactions because they arise from legal duties rather than a public distribution. Exempt-transaction status turns on how the sale occurs, not the security itself.

A sale of a security to which of the following buyers is most likely an exempt transaction under the Uniform Securities Act?

• a.An individual retail customer responding to a mailer who meets the state's minimum income and net-worth thresholds for accredited status
• b.A first-time investor opening a small account
• c.A member of the general public attending a seminar
• d.An insurance company, bank, or registered investment company (an institutional investor)✓

Sales to institutional investors such as banks, insurance companies, and investment companies are exempt transactions because such sophisticated buyers need less protection. Ordinary retail public sales are not exempt on that basis.

Registration by qualification under the Uniform Securities Act is:

• a.Available only when the security is simultaneously registered with the SEC, becoming effective automatically at the same moment the federal registration statement clears
• b.Automatic upon any federal 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

Registration by qualification is the most comprehensive state method, used for intrastate offerings or securities not registered federally, and it becomes effective when the Administrator determines. Coordination is used when registering federally at the same time.

Under the Uniform Securities Act, 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 cease-and-desist order

The Administrator may investigate, subpoena, issue cease-and-desist orders, and deny, suspend, or revoke registrations, but only a court can grant an injunction on the Administrator's application. Confusing a cease-and-desist order with an injunction is a common trap.

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

• a.A $50,000 fine and 10 years' imprisonment
• b.A fine of up to $5,000 and/or imprisonment of up to 3 years✓
• c.A lifetime industry bar only, with no fine
• d.A $1,000 fine only

The USA sets criminal penalties for willful violations at up to a $5,000 fine and/or up to 3 years in prison, and the statute of limitations for criminal prosecution is 5 years. Some states adopt higher figures, but these are the standard exam numbers.

Under the Uniform Securities Act's civil liability provisions, a buyer who prevails in a rescission suit against a seller may generally recover:

• a.The price paid, plus interest and attorney's fees and costs, minus any income already received on the security✓
• b.Only the commissions that were paid
• c.Triple damages as a statutory penalty
• d.Lost future profits the investor expected to earn

Civil liability under the USA allows the buyer to recover the consideration paid plus interest at the state rate, plus reasonable attorney's fees and court costs, less any income such as interest or dividends already received. It is a make-whole remedy, not a punitive one.

When a seller who made a nonwillful violation offers a buyer a right of rescission (a rescission offer), the buyer generally:

• a.Has 10 years to decide whether to accept
• b.Need not respond and keeps all legal remedies
• c.Automatically receives triple damages
• d.Must accept or reject the offer within 30 days, and loses the right to sue if a reasonable offer is rejected or ignored✓

A seller may cure a nonwillful violation by offering to repurchase the security for the price plus interest, less income received. The buyer typically must accept within 30 days; failing to accept a proper rescission offer generally bars a later civil suit on that violation.

Under the antifraud provisions of the Uniform Securities Act, fraud in connection with a securities transaction includes:

• a.Only intentional false statements, never omissions
• b.An untrue statement of a material fact or the omission of a material fact needed to make statements not misleading✓
• c.Only transactions involving unregistered securities
• d.Only conduct by registered persons

The USA antifraud rule reaches both affirmative material misstatements and material omissions that render statements misleading, and it applies to any person, registered or not, dealing in any security, exempt or not.

Under the Investment Advisers Act of 1940, an investment adviser is generally deemed to have custody of client funds when it:

• a.Merely delivers its brochure to clients
• b.Simply recommends a mutual fund to a client
• c.Has authority to withdraw funds or securities from the client's account, such as deducting its own fees beyond narrow limits, or otherwise holds client assets✓
• d.Has written discretionary authority to select securities for the account

An adviser is deemed to have custody when it holds client assets or can access or withdraw them, including having general authority to deduct fees or receiving client funds. Custody triggers safeguards such as a qualified custodian, account statements, and a surprise exam. Discretion alone is not custody.

When an investment adviser has authority to vote proxies for securities held in client accounts, it must:

• a.Sell any security whose proxy it cannot conveniently vote
• b.Vote proxies in the best interest of clients and keep records of how votes were cast✓
• c.Always vote automatically with company management
• d.Charge a performance fee for the voting service

An adviser with proxy-voting authority owes a fiduciary duty to vote in clients' best interest, adopt written policies to address conflicts, and keep records of votes. Blindly voting with management or ignoring conflicts would breach that duty. Reference: Investment Advisers Act of 1940.

An agent who chooses the security and amount for a client's trade without the client's prior instruction and without written discretionary authority has:

• a.Exercised acceptable time and price discretion
• b.Committed no violation provided the firm is notified within a year
• c.Exercised discretion without authorization, a prohibited practice✓
• d.Acted properly as long as the trade was profitable

Full discretion, meaning choosing the security or quantity, requires prior written authorization. Acting without it, even profitably, is unauthorized discretionary trading and is prohibited. Only limited time and price discretion on a client-specified order may proceed without written authority.

Failing to disclose whether a firm is acting as a principal (trading from its own account) or as an agent (broker) for the client in a transaction is:

• a.Permissible, since the capacity is irrelevant to clients
• b.A concern only for federal covered advisers
• c.A prohibited practice, because clients must know the capacity in which the firm acts✓
• d.Required to be disclosed only for exempt securities

Firms must disclose the capacity in which they act, because acting as principal versus agent carries different conflicts and forms of compensation. Nondisclosure of capacity is an unethical, prohibited practice under the USA.

Before completing a principal transaction with an advisory client (selling the client a security from the adviser's own account), an investment adviser generally must:

• a.Guarantee the client against any loss on the security
• b.Do nothing, since advisers may freely trade with their clients
• c.Charge the client a performance fee
• d.Disclose its capacity and obtain the client's consent before completion of that transaction✓

Section 206(3) of the Investment Advisers Act of 1940 requires an adviser engaging in a principal transaction with a client to disclose that it is acting as principal and obtain the client's consent before the transaction is completed, on a trade-by-trade basis, to protect against undisclosed conflicts.

Under the Investment Advisers Act of 1940, an adviser with discretionary authority, custody, or a requirement of substantial prepaid fees 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.Guarantee client accounts against any loss
• c.Keep the information confidential from clients
• d.Immediately deregister with no notice to clients

An adviser with discretion, custody, or substantial prepaid fees must disclose any financial condition reasonably likely to impair its ability to meet contractual commitments, part of the financial and disciplinary disclosure duty. Concealing a material adverse condition is a prohibited practice.

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

• a.Allowed as long as the adviser is SEC-registered
• b.Permitted for accredited investors only
• c.A prohibited, misleading practice, because advisers may not guarantee investment results✓
• d.Acceptable if placed in small print

Guaranteeing a specific return or against loss is a prohibited, fraudulent practice in advertising and communications under the Investment Advisers Act of 1940. Advisers must present information in a fair and balanced way and must not promise results.

Performance-based advisory fees are generally permitted only for a qualified client, which currently includes a natural person with at least:

• a.$1.1 million in assets under management with the adviser, or a net worth exceeding $2.2 million✓
• b.$100,000 of annual income
• c.$500,000 of net worth
• d.$25 million in assets under management

Performance fees are allowed only for qualified clients, generally those with at least $1.1 million under management with the adviser or more than $2.2 million net worth, and these thresholds are periodically inflation-adjusted. The rule shields less-sophisticated retail investors from the added risk incentive.

An investment adviser placing client trades has a duty of best execution, which means it must:

• a.Direct all trades to an affiliated broker regardless of terms
• b.Always use the brokerage that pays the adviser the most
• c.Seek the most favorable overall terms reasonably available for the client's transactions✓
• d.Execute trades only once per year to save costs

Best execution requires an adviser to seek the most favorable terms reasonably available, considering price, speed, and total cost, for client trades. Routing orders to maximize the adviser's own benefit at the client's expense breaches fiduciary duty under the Investment Advisers Act of 1940.

When an investment adviser representative or agent leaves a firm, the firm generally reports the termination to regulators using:

• a.A prospectus
• b.Form 10-K
• c.Form ADV Part 2
• d.Form U5 (the Uniform Termination Notice)✓

A representative's initial registration uses Form U4, and termination is reported on Form U5, both filed through the CRD/IARD system. Form ADV concerns the advisory firm's own registration and disclosure, so it is the trap.

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

• a.120 days of the end of the adviser's fiscal year✓
• b.30 days of the calendar year-end
• c.5 years, matching the recordkeeping rule
• d.10 business days of any client request only

The brochure rule under the Investment Advisers Act of 1940 requires advisers to deliver, within 120 days of their fiscal year-end, a free updated brochure or a summary of material changes with an offer of the full brochure. Initial delivery must occur before or at the time of contracting.

An investment adviser that has custody of client assets is generally required to arrange for:

• a.Elimination of all client account statements
• b.A surprise annual examination of client assets by an independent public accountant, and use of a qualified custodian✓
• c.A performance-fee arrangement with every client
• d.Personal possession of client stock certificates in the adviser's own office safe

Under the custody rule of the Investment Advisers Act of 1940, an adviser with custody must maintain client assets with a qualified custodian, ensure clients receive account statements, and in most cases undergo a surprise annual verification by an independent accountant. These safeguards deter misappropriation.

Under the Uniform Securities Act, which of the following would be considered an institutional investor?

• a.A minor's custodial account
• b.A first-time retail investor with $5,000 to invest
• c.A bank, insurance company, or registered investment company✓
• d.An individual accredited investor

Institutional investors under the USA include banks, savings institutions, trust companies, insurance companies, investment companies, and employee benefit plans meeting size thresholds. Individuals, even wealthy accredited ones, are generally treated as retail for these purposes.

SEC Release IA-1092 clarified that which of the following is generally acting as an investment adviser?

• a.A financial planner, pension consultant, or sports and entertainment representative who advises clients about securities for compensation✓
• b.A newspaper of general circulation printing impersonal market commentary
• c.A lawyer whose securities advice is solely incidental and uncompensated
• d.A bank acting only as a custodian of client assets

Release IA-1092 broadened the understanding of who is an adviser to include financial planners, pension consultants, and sports and entertainment representatives who give securities advice as a business for compensation. Truly incidental professional advice and bona fide publishers may still be excluded.

An investment adviser representative of a federal covered (SEC-registered) adviser must register with a state securities Administrator:

• a.In each state where the representative has a place of business✓
• b.Only if the representative personally manages over $110 million
• c.In all 50 states automatically
• d.Never, because federal registration always preempts state IAR registration

While NSMIA preempts state registration of the covered adviser firm, individual IARs of a federal covered adviser must still register in each state where they have a place of business, and may need to where they serve retail clients. The firm is covered, but its people are still state-registered.

Under NASAA rules, an investment adviser that requires prepayment of more than $500 in fees, six or more months in advance, generally must:

• a.Register with the SEC regardless of its size
• b.Do nothing special beyond ordinary disclosure
• c.Include a balance sheet reflecting its financial condition in its brochure disclosures✓
• d.Guarantee the prepaid fees against loss

An adviser that charges substantial prepaid fees, more than $500 and six or more months in advance, must provide a balance sheet reflecting its financial condition so clients can assess the risk of prepayment. This ties to the custody and financial-disclosure framework.

Under the Uniform Securities Act, an individual who represents an issuer only in effecting certain exempt transactions, such as those in U.S. government or municipal securities, is:

• a.Always required to register as an agent
• b.Treated as an investment adviser representative
• c.Excluded from the definition of agent and need not register for those transactions✓
• d.Automatically classified as a broker-dealer

An individual who represents an issuer only in specified exempt transactions, such as those in government or municipal securities, is excluded from the agent definition and need not register for that activity. Representing an issuer in nonexempt public sales can require registration.

Under the Uniform Securities Act, the Administrator has jurisdiction over an offer to sell a security when the offer:

• a.Reaches the state solely through a television broadcast that originates outside the U.S. and is not directed into the state
• b.Originates in the state, is directed into the state, or is accepted in the state✓
• c.Is never subject to state jurisdiction if the issuer is located out of state
• d.Is made only in a foreign country with no U.S. contact

The Administrator has jurisdiction if an offer or sale originates in, is directed into, or is accepted in the state. This origination-or-acceptance test defines the reach of state blue-sky law over a transaction.

Under the Uniform Securities Act, an isolated nonissuer transaction is:

• a.A solicited sale to the general public
• b.An exempt transaction involving infrequent, isolated trades not made by the issuer✓
• c.A public offering by an issuer raising new capital
• d.Always a prohibited practice

Isolated nonissuer transactions, meaning infrequent secondary trades that do not benefit the issuer, are exempt transactions under the USA because they are not part of a public distribution. Exempt-transaction status depends on how and how often the sale occurs.

Under NASAA rules, an investment adviser that deposits client funds into the adviser's own business operating account is engaged in:

• a.A permitted efficiency measure
• b.Proper use of a qualified custodian
• c.Commingling client and firm assets, a prohibited practice✓
• d.An exempt transaction

Commingling client funds or securities with the adviser's own assets is prohibited; client assets must be segregated and, where custody exists, held with a qualified custodian. Commingling exposes clients to loss if the firm fails.

An agent who, knowing of an impending large client buy order that will move the price, first buys the same security for their own account is engaged in:

• a.Dollar-cost averaging
• b.Front-running, a prohibited practice✓
• c.Best execution of the client's order
• d.Permissible personal trading

Front-running, meaning trading for one's own account ahead of a client's known order to profit from the expected price move, is a prohibited, unethical practice that breaches the duty owed to the client under the Uniform Securities Act.

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of investment adviser?

• a.A pension consultant who advises plans on choosing money managers
• b.A bank or bank holding company that is not itself an investment company✓
• c.A financial planner who charges an hourly fee for advice on securities
• d.A sports agent who advises athletes on selecting specific mutual funds

Section 202(a)(11) of the Advisers Act lists specific exclusions, and banks and bank holding companies that are not investment companies are among them, because banking regulators already supervise them. Anyone else who gives securities advice as a business for compensation meets the three-prong test, and neither an unusual job title nor an institutional clientele defeats it.Investment Advisers Act of 1940

A broker-dealer loses its exclusion from the definition of investment adviser under the Investment Advisers Act of 1940 when it:

• a.Publishes research reports distributed free to all of its brokerage clients
• b.Executes unsolicited orders for customers in listed equity securities
• c.Receives special compensation for advice beyond ordinary brokerage charges✓
• d.Employs registered agents who are compensated solely through commissions

A broker-dealer is excluded only when its advice is solely incidental to its brokerage business AND it receives no special compensation for that advice. Charging a separate advisory or wrap fee is special compensation, so the firm must register as an investment adviser for that activity. Commission-only compensation for executing trades keeps the exclusion intact.Investment Advisers Act of 1940

The brochure supplement, Form ADV Part 2B, must be delivered to a client and describes the:

• a.Custodian's procedures for safeguarding client funds and securities
• b.Performance record of every model portfolio the firm currently manages
• c.Background of the individuals who actually provide advice to that client✓
• d.Firm's fee schedule, advisory services, and disciplinary history

Part 2A is the firm brochure covering services, fees, conflicts, and disciplinary history. Part 2B is the supplement, and it covers the specific supervised persons who formulate advice for or have discretion over that client: their education, business experience, disciplinary events, other business activities, and who supervises them. Clients receive the supplement for their own adviser, not for the entire staff.Investment Advisers Act of 1940

Form CRS, which is Part 3 of Form ADV, is a relationship summary that a registered adviser must:

• a.File with the state Administrator only when the firm changes its legal name
• b.Furnish to regulators annually but never distribute to any advisory client
• c.Provide to institutional clients in place of the standard firm brochure
• d.Deliver to retail investors in plain English at the start of the relationship✓

Form CRS is a short, plain-English relationship summary for retail investors covering the relationships and services offered, fees and costs, standard of conduct, conflicts, disciplinary history, and questions the investor should ask. It must be delivered no later than the time the firm enters into an advisory agreement, and it supplements rather than replaces the Part 2A brochure.Investment Advisers Act of 1940

A registered investment adviser must file an annual updating amendment to Form ADV within:

• a.12 months of the date of its last filing
• b.90 days of the end of its fiscal year✓
• c.120 days of the end of its fiscal year
• d.30 days of the end of its fiscal year

The annual updating amendment is due within 90 days after the adviser's fiscal year end and confirms or corrects the information in Form ADV, including assets under management and the number of clients. This is separate from the brochure delivery obligation, under which an updated brochure or a summary of material changes must reach clients within 120 days of the fiscal year end.Investment Advisers Act of 1940

When information in Form ADV Part 1 about an adviser's disciplinary history becomes materially inaccurate, the adviser must:

• a.Notify only those clients affected by the specific disciplinary event
• b.Disclose the change orally to clients but make no regulatory filing
• c.File a promptly amended Form ADV rather than wait for the annual update✓
• d.Wait until the annual updating amendment is due after the fiscal year

Certain Form ADV items, including disciplinary disclosure, custody, and the adviser's contact information, must be amended promptly whenever they become inaccurate in any material respect, not saved for the annual cycle. Because disciplinary history is precisely what a prospective client needs to evaluate the firm, delayed amendment can itself be treated as a material omission under the antifraud provisions.Investment Advisers Act of 1940

Under the Investment Advisers Act of 1940, an advisory contract may not be assigned to another adviser without:

• a.The client's consent to the assignment✓
• b.A new examination for each representative
• c.An independent appraisal of the contract
• d.The written approval of the Administrator

Section 205(a)(2) requires that every advisory contract provide that it may not be assigned without the client's consent. The rule exists because a client selected a particular adviser, and an advisory relationship is personal. A change in control of the firm or a change in a majority of a partnership's members is treated as an assignment for this purpose.Investment Advisers Act of 1940

If an investment adviser organized as a partnership experiences a change in a minority of its partners, the firm must:

• a.File a new initial registration application with the state Administrator
• b.Terminate all existing advisory contracts and negotiate new agreements
• c.Obtain each client's written consent before the change takes effect
• d.Notify its advisory clients of the change within a reasonable time✓

Section 205(a)(3) draws a line at the majority. A change in a MINORITY of the partners requires only that clients be notified within a reasonable period. A change in a MAJORITY of the partners is treated as an assignment of the advisory contracts, which requires client consent. Candidates should keep the notice rule and the consent rule paired but distinct.Investment Advisers Act of 1940

An advisory contract provision stating that the adviser is not liable for any client losses except in cases of gross negligence is generally:

• a.A misleading hedge clause that may violate the antifraud provisions✓
• b.Acceptable whenever the client initials the paragraph at account opening
• c.A provision that NASAA rules require in discretionary contracts
• d.An enforceable limitation permitted for all state-registered advisers

Section 215 of the Advisers Act voids any provision purporting to waive compliance with the Act. Regulators view hedge clauses as misleading because they lead clients to believe they have surrendered nonwaivable rights, including rights under the antifraud provisions and the adviser's fiduciary duty. A client signature does not cure the problem, since the rights are not the client's to waive.Investment Advisers Act of 1940

An investment adviser that inadvertently receives a client's check made payable to a third party can avoid being deemed to have custody by:

• a.Holding the check until the client's next quarterly review meeting
• b.Endorsing the check over to the adviser's affiliated broker-dealer
• c.Forwarding the check to the third party within three business days✓
• d.Depositing the check in the adviser's own operating account promptly

An adviser that holds client funds or securities, or has authority to obtain possession of them, has custody and triggers the qualified custodian, notice, statement, and surprise examination requirements. Inadvertent receipt of a third-party check is not custody if the adviser forwards it to the third party within three business days and keeps a record. Depositing it or holding it defeats the safe harbor.Investment Advisers Act of 1940

An adviser with custody of client assets is generally subject to an annual surprise examination performed by:

• a.An independent public accountant at a time not known in advance✓
• b.The qualified custodian that holds the client funds and securities
• c.The state Administrator's examination staff on a published schedule
• d.The adviser's own chief compliance officer each calendar quarter

The custody rule requires client assets to be held by a qualified custodian, requires account statements to go directly to clients from that custodian, and adds an annual verification of client funds and securities by an independent public accountant on a surprise basis. Surprise is essential: an examination the adviser can anticipate does little to detect misappropriation. Pooled vehicles may substitute an annual audit distributed to investors.Investment Advisers Act of 1940

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.The commissions earned on the offending transaction
• b.Ten times the profit gained or the loss avoided
• c.One-half of the profit gained or the loss avoided
• d.Three times the profit gained or the loss avoided✓

The treble damages provision authorizes a civil penalty of up to three times the profit gained or loss avoided, in addition to disgorgement and possible criminal prosecution. The Act also created controlling person liability, so a firm that fails to maintain and enforce reasonable policies to prevent insider trading can be penalized for a supervised person's violation.

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

• a.Satisfy a requirement that all client records be stored in one place
• b.Keep advisory fee schedules from being seen by competing departments
• c.Allow research analysts to preview pending underwriting terms early
• d.Prevent material nonpublic information from reaching trading personnel✓

An information barrier, historically called a Chinese wall, physically and procedurally separates departments that receive confidential deal information from those that trade or advise. It is the principal defense a multi-service firm maintains against insider trading and controlling person liability, and it is backed by restricted lists, watch lists, and surveillance of employee and firm trading.

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

• a.Limits the testimonial to clients who lost money using the strategy
• b.Obtains prior written approval of the exact wording from the SEC staff
• c.Discloses whether the person was compensated and any material conflicts✓
• d.Presents at least ten testimonials so that the sample is representative

The modernized marketing rule replaced the old flat ban on testimonials with a disclosure and oversight framework. The advertisement must clearly disclose whether the person giving it is a client, whether cash or noncash compensation was provided, and any material conflicts, and the adviser must oversee compliance and have a written agreement with compensated promoters. Disqualified persons may not be compensated promoters.Investment Advisers Act of 1940

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 floor for any investment adviser registration at all
• b.$110 million, the level at which SEC registration becomes mandatory
• c.$50 million, the midpoint of the mid-sized adviser AUM range
• 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 may remain SEC-registered until reported assets fall below $90 million on the annual updating amendment. Below that, state registration is required where applicable.Investment Advisers Act of 1940

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.Matching, a technique used to stabilize a new issue

Churning is judged by the frequency and size of trading measured against the client's stated objectives and resources, together with the agent's control over the account. No single turnover number is decisive. Matched orders are a manipulation offense, arbitrage is a legitimate strategy, and hypothecation is the routine pledging of securities in a margin account.Uniform Securities Act

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 signs a written waiver of the restriction
• c.An accredited investor with a net worth above $1 million
• d.A relative of the representative by blood or by marriage

Borrowing from a client creates a direct conflict between the representative's personal interest and the client's, so the model rules on unethical business practices prohibit it unless the client is in the lending business, such as a bank or a broker-dealer, or in some formulations an affiliate of the adviser. Wealth, family ties, and client consent do not cure the conflict.Uniform Securities Act

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 value of the primary residence
• b.$5 million, excluding the value of the primary residence
• c.$1 million, excluding the value of the primary residence✓
• d.$200,000, including all retirement plan account balances

The net worth test is $1 million individually or jointly with a spouse, computed without the primary residence, a change made after the 2008 financial crisis. The alternative income test is more than $200,000 individually, or $300,000 jointly, in each of the two most recent years with a reasonable expectation of the same in the current year. Certain professional certifications and knowledgeable employees also qualify.

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 a written business continuity and succession plan tailored to the firm, addressing protection and backup of books and records, alternate means of communicating with clients and regulators, office relocation, assignment of duties to qualified people, and the death or unavailability of key personnel. Failure to maintain such a plan is itself an unethical practice under the rule.Uniform Securities Act