NASAA Series 66 — All Questions

An investor sells stocks that have gained but holds stocks that have lost, to avoid realizing a loss. This pattern is called:

• a.herding behavior in markets
• b.recency bias in forecasting
• c.the disposition effect bias✓
• d.home bias toward domestic stocks

The disposition effect is the tendency to realize gains quickly while holding on to losers. Herding is following the crowd into popular investments. Recency bias is overweighting the latest performance. Home bias is favoring domestic securities.

A portfolio holds U.S. stocks (beta 1.2), international stocks (beta 0.9) and Treasury bonds (beta 0.0). If the U.S. market rises 10%, which holding would be expected to gain the most?

• a.International stocks, since diversification amplifies gains
• b.All three equally, since each is exposed to the market
• c.Treasury bonds, since they rise when equities rally
• d.U.S. stocks, since their beta of 1.2 is the highest✓

Expected response to the market scales with beta, so a beta of 1.2 implies roughly a 12% gain against about 9% for the international stocks and little or none for Treasuries. Diversification reduces risk but does not amplify gains. A beta of 0.0 means the bonds are not tied to equity moves. Different betas mean the holdings do not move equally.

An investor worried about inflation eroding the real return on bonds would most likely consider:

• a.long-term fixed-rate Treasury bonds with constant coupons
• b.zero-coupon Treasury strips with a fixed maturity value
• c.fixed-rate corporate bonds paying a higher stated yield
• d.TIPS, whose principal is adjusted for CPI changes✓

TIPS principal is adjusted for CPI changes, and the fixed rate is paid on the adjusted principal, so income and principal keep pace with inflation. Long-term fixed-rate Treasuries lose the most when inflation rises. A zero-coupon strip pays a fixed amount known today, so inflation reduces its real value. A higher corporate yield compensates for credit risk, not inflation, and the coupon remains fixed.

To keep its special tax status, a REIT must distribute at least what percentage of its taxable income to shareholders?

• a.90%✓
• b.50%
• c.100%
• d.75%

A REIT must distribute at least 90% of its taxable income to qualify for pass-through treatment. The 75% figure is the test for the share of income and assets that must come from real estate sources, not the payout. A 50% payout is below the requirement. A REIT is not required to distribute 100%, though it pays tax on anything it retains.

A Treasury bond has a duration of 5 years. If interest rates rise by 1 percentage point, its price should change by approximately:

• a.a decline of 1%
• b.a decline of 5%✓
• c.a rise of 5%
• d.a decline of 0.2%

Duration estimates the percentage price change for a 1-point move in rates, and the relationship is inverse, so a 5-year duration implies about a 5% price decline. A 5% rise reverses the direction. A 1% decline uses the rate change as the price change and ignores duration. A 0.2% decline divides the rate move by the duration instead of multiplying.

Holding maturity and yield constant, which change would lengthen a bond's duration?

• a.A shorter remaining time to maturity
• b.A higher market yield to maturity
• c.A lower coupon rate on the bond✓
• d.A higher coupon rate on the bond

A lower coupon pushes a larger share of the bond's cash flow to maturity, which lengthens duration. A higher coupon returns cash sooner and shortens duration. A shorter maturity shortens duration directly. A higher yield discounts distant cash flows more heavily and also shortens duration.

Compared with a coupon bond of the same maturity, a zero-coupon bond is:

• a.more exposed to default, because zero-coupon issuers are all lower-rated
• b.equally sensitive to interest-rate changes, because both mature on the same date
• c.more sensitive to rate changes, since all of its value is paid at maturity✓
• d.less sensitive to interest-rate changes, because it pays no coupons to reinvest

A zero-coupon bond has a duration equal to its maturity, which is longer than that of a coupon bond with the same maturity, so its price swings more. Lacking coupons removes reinvestment risk but raises price sensitivity. Equal maturity does not mean equal sensitivity, since coupons shorten a bond's duration. Credit quality depends on the issuer, and many zero-coupon bonds are Treasury strips.

The extra yield on a high-yield (junk) bond compared with a Treasury of similar maturity primarily compensates the investor for:

• a.higher liquidity of the market for junk bonds
• b.a higher chance that the issuer will default on interest✓
• c.a greater exposure to the inflation rate over time
• d.the absence of any call provisions in the indenture

High-yield bonds are issued by borrowers with weaker credit, so the premium mainly pays for default risk. Inflation affects all fixed-rate bonds similarly and is not the main source of the spread. Many high-yield bonds are callable, so an absence of call features does not explain the yield. The junk-bond market is generally less liquid than the Treasury market, so liquidity does not justify the lower price.

Which right do common stockholders typically have that preferred stockholders usually do not?

• a.A fixed dividend paid before any common dividend
• b.A claim ahead of bondholders if the company liquidates
• c.The right to vote for directors and on major matters✓
• d.The right to convert the shares into corporate bonds

Common stock normally carries voting rights, while preferred is typically non-voting. Neither stock has a claim ahead of bondholders, who rank above all stockholders. A fixed dividend with priority over common is a feature of preferred stock. Conversion into bonds is not a standard feature of either class.

Which statement describes preferred stock as compared with common stock?

• a.It is a debt security, not an equity security, under the securities laws
• b.It has dividend and liquidation priority over common, but usually no vote✓
• c.It pays a dividend that rises automatically as the company's earnings grow
• d.It ranks behind common stock in a liquidation, though it usually carries a vote

Preferred stock has priority over common for dividends and in liquidation and usually does not vote. Ranking behind common stock in liquidation reverses the priority. Preferred dividends are generally fixed, not tied to earnings. Preferred stock is an equity security, ranking below debt but above common stock.

When an investor buys open-end mutual fund shares, the price paid is:

• a.the market price at the moment the order is entered during the trading day
• b.a price negotiated between the investor and the fund's portfolio manager
• c.the next NAV computed after the order is received, usually at the close✓
• d.the net asset value at the opening of the day on which the order is placed

Open-end funds use forward pricing: orders get the next NAV, which is normally computed once per day after the market closes. Intraday market prices apply to exchange-traded shares such as closed-end funds and ETFs. The morning NAV is not available at that time, so orders cannot be priced at it. The price is formula-based, not negotiated.

Which statement about closed-end funds is correct?

• a.Their shares trade only at a discount to net asset value, never at a premium
• b.Their shares trade on an exchange at a price that may be above or below NAV✓
• c.They continuously issue new shares and redeem shares at the investor's request
• d.Their shares are always priced at net asset value, as set by the fund each day

A closed-end fund issues a fixed number of shares in an offering, and they then trade in the secondary market at a price set by supply and demand, either at a premium or at a discount. Pricing at NAV each day describes open-end funds. Trading only at a discount is wrong because premiums also occur. Continuous issuance and redemption is the open-end structure.

How do exchange-traded funds (ETFs) differ from traditional open-end mutual funds?

• a.ETF shares trade throughout the day at market prices✓
• b.ETFs cannot track an index and are always actively managed
• c.ETF shares are priced once per day after the market closes
• d.Individual investors redeem shares directly with the fund company at NAV

ETF shares trade on an exchange all day at market-determined prices. Once-a-day pricing after the close is how traditional mutual funds work. Many ETFs track an index, and individual investors normally sell on the exchange, while direct redemption with the fund at NAV is the mutual fund method; only authorized participants redeem ETF shares with the fund.

A unit investment trust (UIT) is best described as:

• a.a partnership giving each investor an individually managed account
• b.a pooled fund that continuously creates and redeems shares each day
• c.a fixed, unmanaged portfolio of securities with a set termination date✓
• d.a managed portfolio that is continuously rebalanced by an adviser

A UIT buys a fixed portfolio and holds it until it terminates, with no active management. Continuous rebalancing by an adviser describes a managed fund. Continuous creation and redemption describes an open-end fund. A UIT is a pooled investment, not an individually managed account.

A REIT that owns shopping centers and collects rent from the tenants is classified as:

• a.a real estate LP
• b.a mortgage REIT
• c.an equity REIT✓
• d.a hybrid REIT

A REIT that owns properties and earns rental income is an equity REIT. A mortgage REIT holds real estate loans and earns interest. A hybrid REIT mixes both. A limited partnership is a different legal structure and does not give the pass-through treatment of a REIT.

A convertible bond appeals to investors because it offers:

• a.bond income with downside support and the chance to share in a stock rise✓
• b.protection against interest-rate risk on the bond component
• c.a guaranteed profit if the stock price remains above the conversion price
• d.a yield higher than a straight bond of the same credit quality would pay

A convertible pays interest and has a bond floor, and the conversion feature adds equity upside. Because the conversion option has value, the coupon is usually lower than on a straight bond, not higher. Conversion produces a profit only if the stock rises enough, and nothing is guaranteed. The bond component remains exposed to interest-rate risk.

A call option is in the money when:

• a.the stock price is below the strike price, so the call is worth exercising
• b.the premium paid is larger than the option's intrinsic value
• c.the stock price is above the strike price, giving the call intrinsic value✓
• d.the option is expected to be profitable if held until expiration day

An in-the-money call has a strike price below the current stock price, which gives it intrinsic value equal to the difference. A call with a strike above the market price is out of the money. Being in the money describes the current price relationship, not a forecast of profit. The premium paid has no bearing on whether an option is in the money.

An investor buys a put on a stock already held in the portfolio. This protective put:

• a.sets a floor under the stock's price at the put's strike price✓
• b.caps the stock's potential gain at the put's strike price
• c.profits only if the stock price rises above the strike
• d.generates premium income for the investor while holding the stock

A protective put gives the right to sell at the strike, which limits the loss if the stock falls while leaving the upside open. The gain is not capped. Buying a put costs premium; collecting premium comes from selling an option. A put gains in value when the stock falls below the strike.

Selling a covered call on shares one already owns is most suitable for an investor who:

• a.expects a sharp rally and wants to keep every dollar of the upside
• b.will not accept any chance of the shares being called away
• c.is bearish and wants full protection against a falling stock price
• d.is neutral to modestly bullish and accepts capped upside for income✓

The premium adds income, but the shares may be called away if the price rises above the strike, so the strategy suits a neutral to modestly bullish view. An investor expecting a sharp rally would give up too much of the upside. The premium offers only limited protection against a falling price, so a bearish investor needs a different strategy. An investor who cannot accept the shares being called away should not write calls at all.

Variable annuities are classified as securities because:

• a.the income payments depend on how long the owner lives and not on markets
• b.the insurer guarantees a fixed rate of return for the whole contract term
• c.the owner bears the investment risk and the value follows the market✓
• d.the contract is sold only by agents who hold a life insurance license

In a variable annuity the owner bears the investment risk, which is the feature that makes it a security. An insurer guaranteeing a fixed return describes a fixed annuity. Lifetime payments are an insurance feature and exist in fixed annuities too. A life insurance license alone does not determine whether a product is a security; the sale of a variable annuity also requires securities registration.

A fixed annuity appeals to conservative investors mainly because it:

• a.fully protects the owner against rising prices
• b.offers equity-like growth with no risk of loss
• c.credits a guaranteed minimum interest rate✓
• d.allows tax-free withdrawals before age 59 and a half

A fixed annuity promises a minimum interest rate backed by the insurer, which suits investors who want predictable results. Equity-like growth with no risk is not available. Earnings withdrawn before age 59 and a half are generally taxable and may be penalized. A fixed credited rate does not follow inflation, so purchasing-power risk remains.

A fixed-indexed annuity has an 80% participation rate and a 6% cap. The index gains 10%, the participation rate is applied first, and the result is limited by the cap. What interest is credited?

• a.8%
• b.10%
• c.4.8%
• d.6%✓

Applying the 80% participation rate to the 10% index gain gives 8%, and the 6% cap then limits the credit to 6%. The 8% figure forgets the cap. The 10% figure ignores both features. The 4.8% figure applies the cap first (6% x 80%), which reverses the stated order.

A bond ladder holds bonds that mature in 1, 3, 5, 7 and 9 years. A main benefit of the strategy is:

• a.all of the bonds mature in the same year, which keeps the portfolio simple
• b.it removes both interest-rate risk and reinvestment risk from the portfolio
• c.maturing bonds provide regular cash to spend or reinvest at current rates✓
• d.it is guaranteed to outperform bullet and barbell maturity structures

Because one rung matures regularly, the investor gets liquidity and reinvests at prevailing rates without betting on a single date. No strategy removes interest-rate or reinvestment risk. A ladder has no guaranteed advantage over other maturity structures. The staggered maturities are the whole point; a single maturity date describes a bullet.

Class A mutual fund shares typically suit an investor who:

• a.invests heavily or holds long term, earning breakpoint discounts✓
• b.plans to sell within a year or two, when a back-end load would not apply
• c.wants no front-end sales charge and accepts higher annual fees instead
• d.has little to invest and prefers a higher annual 12b-1 fee instead

Class A shares carry a front-end sales charge that shrinks at breakpoints for larger purchases and is spread over a long holding period, so they suit large or long-term investors. Class A shares carry no back-end load, and a short holding period makes the up-front charge costly. An investor who wants no front-end charge and accepts higher annual fees is describing a level-load class such as Class C. A small investor preferring higher annual fees is also better served by that class, since Class A has lower ongoing fees.

Before recommending a portfolio allocation, an investment adviser must first:

• a.pick the investments with the best returns over the past year
• b.learn the client's finances, goals, time horizon and risk tolerance✓
• c.apply the model portfolio the firm assigns to every new account
• d.get the client's signature on the firm's fee schedule and brochure

A recommendation has to rest on a reasonable understanding of the client, and that starts with gathering the client's financial profile and goals. A firm-wide model portfolio ignores individual circumstances. Recent performance says nothing about suitability. A signed fee schedule is a disclosure step and does not tell the adviser what to recommend.

A client holds 60% of the portfolio in the employer's stock. The best way to address this concentration is typically:

• a.to leave the position alone because the client is loyal to the employer
• b.to diversify in stages, mindful of taxes and trading restrictions✓
• c.to sell the entire position at once and buy an index fund
• d.to borrow against the position and buy more of the same stock

Gradual diversification reduces single-stock risk while managing capital gains taxes and restrictions such as blackout periods. Selling everything at once may create a large tax bill and ignores those limits. Leaving the position alone keeps the concentration risk. Borrowing to buy more increases leverage on the same concentration.

An adviser uses a strategic asset allocation for a client. The adviser would:

• a.set long-term targets from risk tolerance and rebalance periodically✓
• b.move the entire portfolio to cash whenever the market falls 10%
• c.shift weights every quarter to follow the best recent performers
• d.hold the original weights for life, whatever the client's circumstances

Strategic allocation sets long-term target weights that reflect the client's goals and risk tolerance and rebalances back to them. Shifting with momentum is tactical or market timing. Moving to cash on declines is also timing. Holding the weights unchanged for life ignores changes in the client's situation, which should lead to a review.

Rebalancing a portfolio by selling appreciated assets and buying depreciated ones is mainly intended to:

• a.guarantee higher returns than a portfolio that is never rebalanced
• b.remove the need for periodic reviews of the client's situation
• c.keep the portfolio's risk in line with its target allocation✓
• d.reduce taxes by realizing the gains in the current year

Rebalancing restores the target weights, so the portfolio does not drift into a riskier mix as winners grow. It does not guarantee higher returns. Selling appreciated assets realizes gains, which can increase taxes in a taxable account. Periodic reviews are still necessary.

A client plans to buy a home in two years. The down payment should be held mainly in:

• a.long-term Treasury bonds, which carry no credit risk
• b.growth stocks with high long-term return potential
• c.speculative options that could double in months
• d.money market funds and short-term high-quality bonds✓

A short horizon calls for capital preservation and liquidity, which money market funds and short-term bonds provide. Growth stocks can fall sharply within two years. Long-term Treasuries have no credit risk but can lose value when rates rise. Speculative option positions risk losing the entire down payment.

Which of the following individuals is NOT an agent under the Uniform Securities Act?

• a.An individual who represents a broker-dealer in effecting securities transactions
• b.An individual who represents an issuer in offering its own non-exempt stock
• c.An individual representing an issuer solely in sales of exempt securities✓
• d.An individual who solicits mutual fund share purchases for a broker-dealer

The act's definition of agent excludes an individual who represents an issuer only in effecting transactions in exempt securities or in exempt transactions. A representative of a broker-dealer is an agent. An individual who represents an issuer in offering non-exempt stock is also an agent, since the exclusion does not reach non-exempt securities. Soliciting mutual fund purchases for a broker-dealer is agent activity as well.Uniform Securities Act Section 401(b)

An investment adviser has $150 million in assets under management and is not otherwise exempt. It must register with:

• a.FINRA, because advisers must be member firms
• b.the SEC, with only a notice filing and fee at the state level✓
• c.the SEC and the state, each through a full registration
• d.the state securities administrator, because the SEC registers only advisers above $1 billion

Advisers with at least $110 million in assets under management register with the SEC, and the states may require only notice filings and fees; advisers with $100 to $110 million may choose. Full dual registration is not required for SEC-registered advisers. States register advisers below the federal threshold. FINRA oversees broker-dealers and their registered representatives, not investment advisers.Investment Advisers Act of 1940 Section 203A; 17 CFR 275.203A-1

An investment adviser with $85 million in assets under management, which does not advise registered investment companies, would generally register with:

• a.both the SEC and the state, as a safeguard
• b.the state securities administrator, not the SEC✓
• c.FINRA, which registers advisers of this size
• d.the SEC, since $85 million is a substantial amount

Below $100 million in assets under management an adviser is generally regulated by the states and not eligible for SEC registration. The SEC route opens at $100 million and becomes mandatory at $110 million. Registering with both is not required. FINRA does not register investment advisers.Investment Advisers Act of 1940 Section 203A; 17 CFR 275.203A-1

Under the Uniform Securities Act, a municipal bond issued by a state agency is an example of:

• a.an instrument outside the securities laws altogether
• b.a non-exempt security that needs state registration
• c.an exempt security, so registration is not needed✓
• d.an exempt transaction, so registration is not needed

Securities issued by a state or its political subdivisions are exempt securities and need not be registered. An exempt transaction is a type of sale, not a type of security. Municipal bonds are securities and remain subject to the antifraud provisions. They are not outside the securities laws.Uniform Securities Act Section 402(a)

A resale of stock between two existing shareholders, with no involvement by the issuer and made in an isolated transaction, is an example of:

• a.an exempt security, so no registration is needed
• b.a non-exempt transaction that must be registered first
• c.an exempt transaction, so no registration is needed✓
• d.a sale outside the act, so the antifraud rules do not apply

An isolated non-issuer transaction is one of the exempt transactions, so the registration requirement does not apply to it. The stock itself is not an exempt security, because the exemption turns on how it is sold, not on what it is. Registration is not required for the sale. The antifraud provisions still apply, so the sale is not outside the act.Uniform Securities Act Section 402(b)(1)

The Administrator may deny, suspend or revoke an agent's registration if the agent was convicted of which of the following?

• a.A felony conviction fifteen years ago, unrelated to securities
• b.A civil suit settled with no admission of wrongdoing
• c.A felony conviction eight years ago, unrelated to securities✓
• d.A misdemeanor conviction for a traffic offense three years ago

The act allows action on a conviction within the past ten years of any felony or of a misdemeanor involving securities or the securities business. A felony fifteen years ago falls outside the ten-year period. A traffic misdemeanor is neither a securities offense nor a felony. A civil settlement without admission is not a conviction.Uniform Securities Act Section 204(a)(2)(C)

An investment adviser also earns commissions on client transactions. The adviser must:

• a.disclose the conflict fully so the client can give informed consent✓
• b.disclose the conflict only if the client asks about it directly
• c.rely on the client's general awareness that conflicts exist in the industry
• d.avoid earning commissions, since commissions are never permitted

As a fiduciary, the adviser must give full and fair disclosure of the conflict so the client can make an informed decision. The adviser is not barred from earning commissions if disclosed. Disclosure cannot wait for the client to ask. General awareness of industry conflicts is not disclosure.Investment Advisers Act of 1940 Section 206

Which fee arrangement is generally prohibited for an adviser's client who does not qualify as a qualified client?

• a.A fee based on a share of the account's gains✓
• b.A flat annual fee that the client pays quarterly
• c.An hourly fee charged for financial planning advice
• d.A fee equal to a percentage of assets under management

Section 205 generally bans performance-based fees, which are tied to capital gains or appreciation in the account, unless the client is a qualified client. Asset-based fees, hourly fees and flat fees are all permitted. This question does not depend on any net-worth or assets-under-management dollar figure.Investment Advisers Act of 1940 Section 205

When must an SEC-registered investment adviser deliver its Form ADV Part 2A brochure to a new advisory client?

• a.Before or at the time of entering into the contract✓
• b.Within 30 days after the client's account is opened
• c.Only if the client requests it in writing first
• d.Within 120 days after the end of the adviser's fiscal year

The brochure rule requires delivery before or at the time the adviser enters into the advisory contract. The 120-day deadline governs the annual update delivered to existing clients. A 30-day window after account opening would let the adviser act before disclosure. Delivery on request only is not permitted; the adviser must deliver it.17 CFR 275.204-3(b)(1)

Which offer would the state Administrator's jurisdiction under the Uniform Securities Act reach?

• a.A call from an out-of-state broker-dealer to a resident at home✓
• b.A sale between two residents of another state completed there
• c.A broadcast from a radio station located in another state
• d.An ad in a newspaper published and circulated mainly in another state

An offer is made in the state when it is directed into the state and received there, as with a call to a resident at home. A bona fide newspaper published outside the state and circulating mainly there is excluded, as are broadcasts that originate outside the state. A sale between residents of another state, completed there, has no connection to the state.Uniform Securities Act Section 414

A purchaser who buys a security in violation of the Uniform Securities Act's registration or antifraud provisions may recover:

• a.the price paid, but only if the seller acted with intent to defraud
• b.only the administrative fines the state collects from the seller
• c.the price paid, plus interest, costs and attorneys' fees, less income✓
• d.triple the amount of the actual loss as punitive damages

The statutory remedy is rescission-like: consideration paid, interest, costs and attorneys' fees, reduced by income received on the security. The act does not provide treble damages. Liability for registration violations does not depend on proof of intent to defraud. Fines go to the state, and the purchaser has a private right of action beyond them.Uniform Securities Act Section 410(a)

Under the SEC custody rule, an adviser that has custody of client funds or securities must generally:

• a.keep them with a qualified custodian such as a bank or broker-dealer✓
• b.hold them in a pooled account titled in the adviser's own name
• c.have a state securities examiner conduct an annual surprise examination
• d.send clients statements at least annually, prepared by the adviser

The custody rule requires client assets to be held by a qualified custodian, which sends account statements at least quarterly, and requires an annual surprise examination by an independent public accountant. Annual statements fall short of the quarterly minimum. The surprise examination is by an independent public accountant, not a state examiner. Holding client assets in the adviser's own account would defeat the rule's purpose.17 CFR 275.206(4)-2

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

• a.sells only securities that the act exempts from registration
• b.has registered the same offering with the SEC under the 1933 Act✓
• c.wants the state Administrator to review the merits of the offering
• d.makes only isolated resales between existing shareholders of its stock

Coordination is for offerings registered federally; the state registration generally becomes effective automatically when the federal one does. Merit review of the offering belongs to registration by qualification. Exempt securities and isolated transactions require no registration at all.Uniform Securities Act Section 303

Which action would most clearly breach an investment adviser's fiduciary duty?

• a.charging a disclosed market-rate fee based on assets managed
• b.recommending an affiliate's fund without disclosing the relationship✓
• c.recommending a diversified portfolio and reviewing it with the client each year
• d.declining a client whose needs are outside the adviser's expertise

Failing to disclose a conflict, such as an affiliation with the recommended fund, breaches the duty of loyalty and full disclosure. A diversified portfolio with annual review is consistent with the duty. Declining a client outside one's expertise is prudent. A market-rate asset-based fee that is disclosed is permitted.Investment Advisers Act of 1940 Section 206

Which of the following is excluded from the definition of a security under the Uniform Securities Act?

• a.An annuity contract under which an insurer promises to pay a fixed sum✓
• b.A share of an open-end investment company that redeems on demand
• c.A variable annuity contract whose owner bears the investment risk
• d.An interest in a limited partnership that invests in real estate

The act's definition excludes insurance and annuity contracts under which the insurer promises to pay a fixed sum, because the insurer bears the investment risk. A variable annuity shifts the investment risk to the owner and is a security. A limited partnership interest is an investment contract and a security. Mutual fund shares are securities.Uniform Securities Act Section 401(m)

An SEC-registered adviser has a fiscal year ending September 30. By what date must it file its annual updating amendment to Form ADV?

• a.November 29 (60 days)
• b.January 28 (120 days)
• c.December 29 (90 days)✓
• d.December 31 (year end)

Rule 204-1 requires the annual updating amendment within 90 days of the adviser's fiscal year end. October has 31 days and November has 30, so day 90 after September 30 is December 29. January 28 is day 120, which is the outer limit for sending clients a brochure or summary of material changes, not the SEC filing date. November 29 is only day 60 and is not a deadline in the rule. December 31 matters for state registrations, which expire on that date, but the SEC amendment follows the adviser's own fiscal year.17 CFR 275.204-1(a)(1)(i)

Which part of Form ADV is prepared for individual supervised persons and is delivered to clients, but when amended is not filed with the SEC?

• a.Part 1A, the data and disclosure pages that are filed on the IARD
• b.Part 2A, the firm brochure that is filed on the IARD in narrative form
• c.Part 2B, the supplement describing each advising individual✓
• d.Part 3, the relationship summary for retail clients

Part 2B supplements describe the individuals who provide advisory services and are delivered to clients, but Rule 204-1 states that amendments to them are not filed with the SEC. The Part 2A firm brochure is filed electronically, Part 3 (Form CRS) is filed for advisers with retail investors, and Part 1A is the structured registration data filed through the IARD. Confusing the supplement with the firm brochure is the usual error because both are narrative documents delivered to clients.17 CFR 275.204-1(b)(1); Form ADV Part 2B

Wren Advisers is SEC-registered with a December 31 fiscal year and made material changes to its brochure during 2026. By what date in 2027 must it deliver to clients either the current brochure or a summary of material changes?

• a.March 31 (90 days)
• b.June 29 (180 days)
• c.April 30 (120 days)✓
• d.January 30 (30 days)

Rule 204-3(b)(2) gives the adviser 120 days after fiscal year end to deliver the current brochure, or a summary of material changes offering the brochure free, when there have been material changes since the last annual updating amendment. January has 31 days, February 28, March 31 and April 30, which makes April 30 day 120. March 31 is the 90-day deadline for filing the annual updating amendment with the SEC, a different obligation. January 30 and June 29 are not periods used in the rule.17 CFR 275.204-3(b)(2)

Mid-year, an SEC order is entered against an SEC-registered adviser, and the adviser must add it to its brochure under the disciplinary information item. What must it deliver to existing clients?

• a.Nothing until the annual summary of material changes, which goes out within 120 days after fiscal year end
• b.The amended brochure within 30 days, but only to clients whose accounts are discretionary
• c.Promptly, the amended brochure with a statement of the material facts, or that statement alone✓
• d.A statement of the facts, but only to clients who ask for one after seeing the order on IAPD

Rule 204-3(b)(4) singles out new or materially revised disciplinary disclosure. The adviser must deliver the amended brochure with a statement of the material facts, or just the statement, to each client promptly after creating the amendment. It may not wait for the annual summary, may not make delivery depend on a client request, and may not limit delivery to a subset of clients such as discretionary accounts.17 CFR 275.204-3(b)(4)

Eight supervised persons of an SEC-registered adviser jointly provide advice to one client. For how many of them must the client receive a Part 2B brochure supplement?

• a.One, only the team member with the longest tenure at the adviser firm
• b.All eight, because each team member helps to formulate the advice for the client
• c.Five, those with the most significant day-to-day advisory responsibility✓
• d.None, because supplements are required only for registered representatives

Rule 204-3(b)(3) requires a supplement before or when a supervised person begins to advise the client, but when advice comes from a team of more than five supervised persons, supplements are needed only for the five with the most significant responsibility for the day-to-day advice. Delivering all eight is not required, tenure is not the test, and the supplement requirement turns on providing advisory services rather than on separate registration status.17 CFR 275.204-3(b)(3)

On March 3, a state-registered adviser moves its principal place of business. Under the NASAA model rule on updating Form ADV, by what date is an amendment filed 'promptly'?

• a.March 13 (10 days)
• b.April 17 (45 days)
• c.June 1 (90 days)
• d.April 2 (30 days)✓

The NASAA model rule treats an amendment as filed promptly if it is filed within 30 days of the event that requires it. March 3 plus 28 days is March 31, and two more days make April 2. March 13 would be a 10-day period, April 17 a 45-day period, and June 1 is the 90-day period that applies to the separate annual updating amendment. Treating the annual deadline as the deadline for event-driven changes is the error the question tests.NASAA Model Rule USA 2002 403(a)(d); 1956 Act Rule 202(a)-1