NASAA Series 66 — All Questions

Under the Uniform Securities Act, what is the correct order of registration for a security using the coordination method?

• a.The state Administrator is required to personally conduct a full merit review and certify in writing that the offering price is fair and equitable before any coordinated sale may proceed
• b.The security is registered solely at the state level under a self-contained state filing, and no registration statement is ever filed with the SEC under the Securities Act of 1933
• c.Registration becomes effective the very instant the application is delivered to the Administrator's office, with no coordination whatsoever with the federal registration statement's effective date
• d.A federal registration statement under the Securities Act of 1933 is filed simultaneously with the state, and state effectiveness is coordinated with the SEC✓

Registration by coordination is used when a security is registered federally under the Securities Act of 1933 at the same time as the state filing. State effectiveness is timed to coincide with SEC effectiveness. The Administrator never passes on the merits of an offering.Uniform Securities Act

An agent registered in State A takes an unsolicited order from a client who is vacationing in State B, where the agent is not registered. Which statement is most accurate?

• a.The agent is required to immediately obtain full registration in State B and pay all applicable state fees before accepting even a single unsolicited order from the vacationing client
• b.The transaction may be permissible under a limited exemption for existing clients temporarily present in another state✓
• c.The client is required to open an entirely new brokerage account domiciled in State B before any order originating there can be treated as lawful under the Act
• d.The transaction is always strictly prohibited because the agent holds no registration in State B, regardless of where the client ordinarily resides or maintains the account

An agent typically must be registered where the client is located, but limited exemptions exist for transactions with existing clients who are only temporarily present in another state. The order being unsolicited and the client's transient presence are relevant factors. This narrow relief prevents technical violations during travel.Uniform Securities Act

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

• a.A general obligation bond issued by a municipality✓
• b.A sale to an insurance company
• c.A private placement sold to 40 non-institutional buyers
• d.An unsolicited transaction by an existing customer

A municipal general obligation bond is an exempt security because of the nature of the issuer. The other choices describe exempt TRANSACTIONS, which relate to how or to whom a security is sold rather than the security itself. Distinguishing exempt securities from exempt transactions is a core Series 66 concept.Uniform Securities Act

An investment adviser representative learns material nonpublic information about a public company from a client who is a corporate insider. The IAR then buys the stock for personal gain. This conduct is best described as:

• a.A prohibited practice constituting insider trading✓
• b.An exempt transaction because it was unsolicited
• c.A permitted use of client-provided research
• d.Acceptable if the IAR discloses it in the next ADV update

Trading on material nonpublic information is prohibited regardless of how the information was obtained. No disclosure or exemption cures the violation. The IAR breached both securities law and fiduciary duty by placing personal interest ahead of the duty to the market and clients.Uniform Securities Act

Under the Uniform Securities Act, which person would MOST likely need to register as an agent?

• a.An administrative assistant who merely schedules client meetings and maintains the office calendar without ever soliciting or effecting any securities transaction
• b.A back-office clerk who only processes and files completed trade confirmations and account statements and never communicates with the investing public about securities
• c.An individual employed by a broker-dealer to solicit securities transactions from the public for compensation✓
• d.An officer of the issuer who sells the issuer's exempt securities to the public but receives no commission or other special remuneration for those sales

An agent is an individual who represents a broker-dealer or issuer in effecting securities transactions. The person soliciting transactions from the public for a broker-dealer meets the definition. Clerical and ministerial employees who do not solicit or effect trades are generally excluded.Uniform Securities Act

Which of the following professionals would most likely qualify for the exclusion from the definition of investment adviser because advice is incidental to their practice and no special compensation is received?

• a.An individual who manages discretionary accounts for a wrap fee
• b.An accountant who occasionally comments on the tax effect of an investment while preparing a return✓
• c.A person whose sole business is publishing a paid stock-picking newsletter with specific client advice
• d.A financial planner who charges a fee for creating investment plans

The Investment Advisers Act excludes certain professionals — lawyers, accountants, engineers, and teachers — when advice is incidental to their profession and no special compensation is received. An accountant commenting on tax effects during return preparation fits this LATE exclusion. Charging separately for investment advice defeats the exclusion.Investment Advisers Act of 1940

A federal covered investment adviser with clients in five states is generally subject to registration and oversight primarily by:

• a.No securities regulator at any level, because a federal covered adviser is entirely exempt from oversight once it crosses the federal threshold
• b.The SEC, though states retain antifraud authority✓
• c.Each and every individual state in which the adviser happens to have even a single advisory client, on a full-registration basis
• d.Only the single state in which the adviser maintains its principal office and place of business, to the complete exclusion of the SEC

A federal covered adviser registers with the SEC rather than with individual states. However, states retain antifraud jurisdiction and can require notice filings and fees. This preserves state enforcement power while avoiding duplicative registration.Investment Advisers Act of 1940

An agent tells a customer, 'This stock is guaranteed to go up because the state Administrator approved the registration.' This statement is:

• a.A prohibited misrepresentation of the effect of registration✓
• b.Permissible so long as the statement is made only to accredited investors who meet the applicable income or net-worth qualifications
• c.Entirely accurate, because effectiveness of a state registration does in fact signify that the Administrator has approved the security's merits
• d.A lawful and ordinary description of the process of registration by qualification as it is conducted at the state level

Registration with the Administrator never means the state approved the merits or guaranteed the security. Implying that registration ensures profit is a material misrepresentation and a prohibited practice. Agents must not misstate the effect of registration.Uniform Securities Act

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

• a.An isolated non-issuer transaction not effected through a broker-dealer✓
• b.A general solicitation directed to one hundred retail investors located within the Administrator's own state, each contacted by mail
• c.A solicited retail sale of open-end mutual fund shares to an individual customer at that customer's private residence
• d.A public offering of newly issued common stock distributed to the public through registration by qualification at the state level

An isolated non-issuer transaction is a classic exempt transaction because it is a one-off sale not part of a regular business. Exempt transactions depend on the manner of sale rather than the security's identity. Public retail offerings and general solicitations do not qualify.Uniform Securities Act

The state Administrator may deny, suspend, or revoke the registration of an agent if the agent:

• a.Recommends an investment product that the Administrator happens to personally dislike, even though the recommendation was otherwise entirely suitable
• b.Has been convicted of a securities-related felony within the past ten years✓
• c.Chooses to work simultaneously for more than one broker-dealer while maintaining proper and current registration with each of those firms
• d.Earns an unusually high level of commissions during a given calendar year while servicing a book of satisfied and well-informed clients

The Administrator may take disciplinary action for enumerated causes, including a securities-related felony conviction within the prior ten years. High commissions or personal preference are not statutory grounds. Registration actions must be based on cause and are subject to notice and hearing rights.Uniform Securities Act

Under NASAA model rules on custody, an investment adviser that has custody of client funds or securities generally must:

• a.Take affirmative steps to avoid any surprise examination by an independent accountant so as to keep the custody arrangements confidential
• b.Maintain the assets with a qualified custodian and arrange for account statements to be sent to clients✓
• c.Commingle the client's cash together with the adviser's own operating funds in a single account for administrative efficiency and convenience
• d.Hold all client securities certificates in the adviser's personal safe deposit box rather than with any third-party financial institution

NASAA custody rules require use of a qualified custodian and delivery of account statements to clients, often supplemented by a surprise examination. Commingling client and firm assets is prohibited. These safeguards protect clients against misappropriation.NASAA Model Rule

A broker-dealer with no place of business in a state deals exclusively with which type of client and may qualify for an exemption from registration in that state?

• a.Retail clients who were first referred to the firm through local newspaper and radio advertising placed within that particular state
• b.Retail walk-in customers who visit the firm's premises even though the firm maintains no place of business in the state
• c.Institutional clients such as other broker-dealers and banks✓
• d.First-time individual investors who have never previously held or maintained a brokerage account anywhere in the country

A broker-dealer with no place of business in the state may be exempt from registration if it deals only with institutional clients, other broker-dealers, or issuers. Dealing with retail customers in the state generally triggers registration. The exemption is designed for limited, professional-to-professional activity.Uniform Securities Act

Under the Investment Advisers Act, an adviser's brochure (Form ADV Part 2) must be delivered to a client:

• a.Never, because Form ADV Part 2 is a confidential regulatory filing that is not shared with advisory clients
• b.At or before entering into the advisory agreement, with annual updates offered✓
• c.Only after the client has lodged a formal written complaint about the adviser's services, fees, or performance
• d.Only to institutional clients such as banks and insurers, and never to any individual retail advisory client

The brochure rule requires delivery of Form ADV Part 2 at or before entering into the advisory contract, with an annual delivery or offer of an updated brochure. This ensures clients receive material disclosures about the adviser's business, fees, and conflicts. It is a cornerstone of the fiduciary disclosure framework.Investment Advisers Act of 1940

An investment adviser wants to enter a contract that assigns the advisory agreement to another firm following a merger. Under the Uniform Securities Act, assignment of an advisory contract generally requires:

• a.Approval solely by the Administrator
• b.No client involvement whatsoever
• c.Consent of the client✓
• d.Only a notice filing with the SEC

An advisory contract may not be assigned without the client's consent. This protects the personal nature of the advisory relationship. A change in control of the adviser may also constitute an assignment requiring consent.Uniform Securities Act

Which of the following best describes a fiduciary obligation that an investment adviser owes but a broker-dealer historically did not owe under a pure suitability standard?

• a.A fiduciary duty that is owed exclusively to large institutional clients and never extends to any individual retail advisory customer
• b.A duty to affirmatively guarantee a minimum level of investment performance and to reimburse the client for any market losses
• c.A duty limited to ensuring that a single transaction is not unsuitable at the precise point of sale, with no continuing obligation
• d.An ongoing duty of loyalty and care requiring the adviser to place the client's interest first and disclose all material conflicts✓

An investment adviser is a fiduciary with continuing duties of loyalty and care, including full disclosure of material conflicts and placing the client's interest first. A historical suitability standard focused on whether a specific recommendation was suitable at the moment of sale. No adviser can guarantee performance.Uniform Securities Act

An agent 'churns' a client's account. This unethical practice is best defined as:

• a.Prudently diversifying a client's holdings across multiple asset classes in accordance with the client's stated objectives
• b.Excessive trading designed to generate commissions rather than to benefit the client✓
• c.Rebalancing a client's portfolio approximately once per year to restore the agreed-upon strategic asset allocation
• d.Recommending long-term buy-and-hold securities that generate comparatively little commission revenue for the agent

Churning is excessive trading in a customer's account driven by the agent's desire for commissions rather than the client's interests. It is a prohibited practice regardless of whether individual trades are suitable. Frequency and cost relative to the client's objectives are key indicators.Uniform Securities Act

Under the Uniform Securities Act, the term 'security' would NOT typically include:

• a.A fixed-payment whole life insurance policy✓
• b.A share of common or preferred stock issued by a domestic operating corporation to its investors
• c.A note, bond, debenture, or other evidence of corporate indebtedness sold to public investors
• d.An investment contract under the Howey test in which investors expect profits from the efforts of others

A fixed, guaranteed whole life insurance policy and fixed annuities are generally excluded from the definition of a security. Investment contracts, notes, bonds, and stock are securities. Variable products, by contrast, are securities because of investment risk borne by the holder.Uniform Securities Act

An agent shares in the profits and losses of a customer's account. Under NASAA standards, this is permitted only if:

• a.The agent shares proportionally in the account's gains and losses without obtaining any written approval from the firm or the customer
• b.The customer merely gives a verbal agreement at the point of sale, with no written authorization from the employing broker-dealer
• c.The customer and the broker-dealer give written consent and sharing is proportional to the agent's own contribution✓
• d.The account happens to earn a net profit for the particular calendar quarter in which the sharing arrangement is in effect

Sharing in a customer account is prohibited unless the agent obtains written authorization from both the customer and the broker-dealer, and shares only in proportion to the agent's financial contribution. Verbal agreement alone is insufficient. This rule limits conflicts of interest.Uniform Securities Act

A client sends an unsolicited written complaint to an agent alleging unauthorized trading. The agent should:

• a.Destroy the written complaint letter as quickly as possible in order to avoid any further escalation of the underlying dispute
• b.Ignore the complaint entirely unless the client repeats the same allegation in writing on at least three separate occasions
• c.Personally settle the matter directly with the client using firm funds, without providing any notice to a supervisor
• d.Promptly forward the complaint to a designated supervisor or compliance for handling and recordkeeping✓

Written customer complaints must be promptly forwarded to the firm's designated supervisor or compliance for review and recordkeeping. Agents may not conceal, destroy, or unilaterally settle complaints. Proper handling protects both the client and the firm's compliance obligations.Uniform Securities Act

Under the Investment Advisers Act, a performance-based fee that charges a share of capital gains is generally permitted only when the client is:

• a.A client who is under the age of twenty-one at the time the performance-based advisory fee arrangement is first entered into
• b.Any retail client at all, provided the client simply signs a written waiver acknowledging the performance-fee arrangement
• c.A qualified client meeting minimum net worth or assets-under-management thresholds✓
• d.A first-time investor who is opening a securities advisory relationship for the very first time in his or her life

Performance-based compensation is generally prohibited unless the client is a qualified client meeting net worth or assets-under-management thresholds. This protects less sophisticated investors from fee structures that could encourage excessive risk-taking. A signed waiver alone does not qualify a retail client.Investment Advisers Act of 1940

The Administrator may issue a cease and desist order:

• a.Only after the respondent has first been criminally convicted of a felony related to the securities business
• b.Only after first obtaining the express written consent of the Securities and Exchange Commission in Washington
• c.With or without a prior hearing to prevent a violation of the Act✓
• d.Only against federal covered investment advisers, and never against a state-registered broker-dealer or agent

The Administrator has authority to issue cease and desist orders, and may do so with or without a prior hearing when necessary to prevent an ongoing or imminent violation. This is a preventive administrative power. It does not require a criminal conviction first.Uniform Securities Act

An IAR recommends a securities transaction that will generate a large commission for the IAR's affiliated broker-dealer. To act ethically, the IAR must at minimum:

• a.Disclose the conflict of interest so the client can make an informed decision✓
• b.Increase the client's advisory fee by a corresponding amount in order to offset and neutralize the underlying conflict of interest
• c.Deliberately avoid mentioning the compensation arrangement to the client so as to keep the client calm and unconcerned
• d.Cancel the recommended transaction entirely, since any commission-generating trade is automatically impermissible for an IAR

A fiduciary must disclose material conflicts of interest, such as additional compensation to an affiliate, so the client can evaluate the recommendation. Concealment violates the duty of loyalty. Disclosure, not necessarily cancellation, is the baseline requirement, though the recommendation must still be in the client's best interest.Uniform Securities Act

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

• a.A security issued by a bank organized under U.S. law✓
• b.A newly issued penny stock aggressively offered to retail clients through cold-calling campaigns across the state
• c.A limited partnership interest in a speculative venture that is sold to members of the general investing public
• d.A promissory note issued by an early-stage start-up and sold door to door to first-time individual investors

Securities issued by banks are exempt securities under the Act because of the regulated nature of the issuer. Public limited partnership interests, speculative promissory notes, and penny stocks are not automatically exempt. The exemption rests on issuer characteristics.Uniform Securities Act

An agent guarantees a customer against loss on a stock recommendation to close the sale. This practice is:

• a.Prohibited because agents may not guarantee customers against loss✓
• b.Affirmatively required by the suitability rule whenever a recommendation carries a meaningful degree of market risk
• c.Fully permitted so long as the guarantee against loss is reduced to writing and signed by the agent and customer
• d.Permitted whenever the customer happens to qualify as an accredited investor under the applicable income test

Agents and broker-dealers may not guarantee a customer against loss. Such guarantees misrepresent the risk of investing and are a prohibited practice. Putting the guarantee in writing does not make it permissible.Uniform Securities Act

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

• a.A short window of only thirty calendar days measured from the date the security was originally sold to the buyer
• b.A flat ten years measured from the date of sale, running regardless of when the buyer discovered the violation
• c.The earlier of two years after discovery or three years after the sale (subject to state variation)✓
• d.Unlimited in duration, so that a purchaser may bring a civil action at any time no matter how long ago the sale occurred

Civil liability suits are generally subject to a statute of limitations tied to discovery of the violation and the date of sale, commonly framed as two years after discovery or three years after the transaction, subject to state adoption. This limits stale claims. Exact periods can vary by state enactment.Uniform Securities Act

A remedy available to a defrauded purchaser under the civil liability provisions of the Act typically allows recovery of:

• a.Automatically triple the original purchase price of the security, awarded as a matter of right in every proven case
• b.Punitive damages in all cases, imposed upon the seller to punish and deter future violations of the securities laws
• c.Only the future lost profits the purchaser would have earned had the security performed as the seller had represented
• d.The consideration paid plus interest, costs, and attorney fees, less any income received✓

The civil liability provision generally allows a purchaser to recover the amount paid plus interest at a specified rate, court costs, and reasonable attorney fees, reduced by any income already received. Automatic treble or punitive damages are not the standard remedy. The measure is designed to make the buyer whole.Uniform Securities Act

An investment adviser exercises discretion in a client account. Under the Uniform Securities Act, this generally requires:

• a.A written performance guarantee assuring the client of a minimum rate of return on the discretionary account
• b.Nothing at all beyond an informal verbal understanding reached between the adviser and the client at account opening
• c.Prior written discretionary authority from the client✓
• d.Only the prior written approval of the state Administrator, obtained before any discretionary trade may be entered

Exercising discretion in a client's account requires written discretionary authorization from the client. For investment advisers, oral discretion may be permitted for a limited initial period regarding price and time only, but full discretion needs written authority. This protects clients from unauthorized transactions.Uniform Securities Act

NASAA's model rule on unethical business practices of investment advisers would consider which of the following a violation?

• a.Borrowing money from a client who is not a lending institution or affiliate✓
• b.Fully disclosing all advisory fees and charges within the written advisory contract before it is signed by the client
• c.Delivering the required disclosure brochure to the client at or before entering into the written advisory contract
• d.Rebalancing a client's portfolio strictly in accordance with the client's own previously stated investment policy

Borrowing money or securities from a client is an unethical practice unless the client is in the business of lending, such as a bank, or is an affiliate. It creates a serious conflict of interest. Proper fee disclosure and policy-based rebalancing are appropriate conduct.NASAA Model Rule

Which threshold generally determines whether a mid-sized adviser registers with the SEC rather than the states?

• a.The total number of employees the advisory firm maintains, counted entirely without any regard to assets under management
• b.Assets under management crossing a regulatory threshold (with $100 million as a key dividing line under federal rules)✓
• c.The size of the adviser's annual marketing and advertising budget relative to that of competing advisory firms
• d.The total number of years the adviser has been continuously in business under its current ownership and firm name

Assets under management determine federal versus state registration, with $100 million as a key dividing line for many advisers, and $110 million as the point requiring SEC registration, plus buffer rules. Below the threshold, an adviser is generally state-registered. Employee count and marketing budget are not the test.Investment Advisers Act of 1940

An agent effects a transaction that is not recorded on the books of the employing broker-dealer, without the firm's knowledge or authorization. This is best described as:

• a.A fully permitted private transaction that an agent may lawfully conduct outside of the employing firm's supervision
• b.Selling away, a prohibited practice✓
• c.Registration of securities by qualification at the state level as described in the Uniform Securities Act
• d.Registration of securities by the coordination method used in conjunction with a federal registration statement

Selling away is when an agent effects private securities transactions outside the employing broker-dealer's supervision and records without authorization. It is prohibited because it evades supervision and firm oversight. Agents must have firm approval and, where required, recordkeeping.Uniform Securities Act

The definition of 'sale' or 'offer to sell' under the Uniform Securities Act generally includes:

• a.A bona fide gift of nonassessable stock
• b.A bona fide pledge of securities as loan collateral
• c.A gift of assessable stock✓
• d.A stock dividend where no consideration is given

The Act treats a gift of assessable stock as a sale because the recipient may owe future assessments, constituting value. Bona fide gifts of nonassessable stock, stock dividends, and collateral pledges are generally not sales. These definitional nuances affect when the Act applies.Uniform Securities Act

An Administrator's authority to conduct investigations and subpoena witnesses generally extends to conduct that:

• a.Involves only federal covered securities and never touches any security that is registered at the state level
• b.Bears no connection whatsoever to the state, its residents, or any offer made or accepted within its borders
• c.Occurs strictly and entirely within the Administrator's own state and nowhere else, with no interstate element at all
• d.Originates in, is directed to, or is accepted within the state, even across state lines✓

The Administrator has jurisdiction over an offer or sale that originates in, is directed into, or is accepted within the state. This includes cross-border activity touching the state. The Administrator may investigate and subpoena to enforce the Act within that jurisdictional reach.Uniform Securities Act

A broker-dealer wishes to withdraw its registration. Under the Uniform Securities Act, withdrawal generally becomes effective:

• a.Only after a mandatory waiting period of five full years has elapsed from the date on which the withdrawal was filed
• b.Only upon obtaining the express prior approval of the Securities and Exchange Commission in addition to the state
• c.30 days after filing, unless the Administrator institutes a proceeding✓
• d.Immediately upon the mere filing of the withdrawal request, with no waiting period of any kind ever applying at all

A withdrawal of registration typically becomes effective 30 days after filing, provided no revocation or other proceeding is pending or instituted. The Administrator retains authority to act on violations for a period after withdrawal. This orderly process protects investors during transitions.Uniform Securities Act

An adviser engages in an agency cross transaction, arranging a trade between two of its advisory clients. To do this properly, the adviser generally must:

• a.Obtain client consent, disclose its role and any compensation, and not recommend the transaction to both sides✓
• b.Guarantee both advisory clients a profit on the cross transaction before it may lawfully be arranged and executed
• c.Never disclose the arrangement to either client so as to preserve the confidentiality of the firm's trading strategy
• d.Charge a performance-based fee to each participating client in order to compensate the adviser for the arrangement

Agency cross transactions require written client consent, disclosure of the adviser's role and compensation, and the adviser generally may not have recommended the trade to both parties. These safeguards address the conflict of representing both sides. Annual statements of cross transactions are also required.Investment Advisers Act of 1940

Under the Uniform Securities Act, the least intrusive method of state registration for a well-established issuer with a strong track record filing a federal statement is:

• a.Registration completed purely at the state level without any accompanying federal registration statement being filed
• b.Registration by qualification, the most demanding and disclosure-intensive method available under the Act
• c.A door-to-door offering conducted directly with individual retail investors throughout the Administrator's state
• d.Notice filing for a federal covered security✓

Federal covered securities, such as those listed on major exchanges or certain investment company shares, are subject only to state notice filings and fees rather than full state registration. Qualification is the most burdensome method used when no federal registration exists. Notice filing is the least intrusive for covered securities.Uniform Securities Act

An agent recommends a security to a client without any reasonable basis to believe it is suitable, simply to meet a sales quota. This conduct:

• a.Entirely acceptable, because meeting internal sales quotas is a legitimate and ordinary business objective for the firm
• b.Fully permitted whenever the security being recommended happens to be exempt from registration under the Act
• c.Exempt from any suitability obligation whenever the client happens to be a wealthy or high-net-worth individual
• d.Violates the agent's obligation to have a reasonable basis for recommendations✓

Recommending securities without a reasonable basis for suitability is a prohibited practice, regardless of sales quotas or the client's wealth. Agents must consider the client's financial situation, objectives, and needs. Quotas never justify unsuitable recommendations.Uniform Securities Act

Which of the following persons is EXCLUDED from the definition of 'broker-dealer' under the Uniform Securities Act?

• a.A firm making a market in over-the-counter stocks for state residents
• b.An agent, issuer, or bank acting within the statutory exclusions✓
• c.A dealer with a branch office in the state
• d.A firm soliciting retail securities orders in the state

The definition of broker-dealer excludes agents, issuers, and banks, savings institutions, and trust companies. These persons are regulated under other provisions or excluded by policy. Firms soliciting or making markets for state residents generally are broker-dealers requiring registration.Uniform Securities Act

Under NASAA model recordkeeping rules, a state-registered investment adviser must generally preserve required books and records for a minimum of:

• a.Five years, with the first two years in an easily accessible location✓
• b.One single year measured from the end of the fiscal year in which the record was originally created by the adviser
• c.Two years in total, with the records kept in any location the adviser reasonably chooses at its own discretion
• d.Six months from creation, after which the adviser may lawfully destroy the required books and records entirely

State-registered advisers must generally keep required records for five years, with the most recent two years readily accessible, often at the principal office. This ensures records are available for examination. Shorter periods do not meet the model rule.NASAA Model Rule

An agent commits fraud in connection with the sale of a security that is itself exempt from registration. Under the Uniform Securities Act, the antifraud provisions:

• a.Apply only if the defrauded client happens to be a resident of the Administrator's own state at the time of the sale
• b.Do not apply at all, because the exempt status of the security also exempts the transaction from the antifraud rules
• c.Still apply, because antifraud provisions apply to exempt and non-exempt securities alike✓
• d.Apply exclusively to federal covered securities and never to a security that is exempt at the state level

The antifraud provisions of the Act apply to all securities transactions, including those involving exempt securities and exempt transactions. Exemption from registration never exempts a person from the duty not to commit fraud. This is a frequently tested distinction.Uniform Securities Act

An IAR wishes to advertise using a client testimonial. Historically under NASAA and adviser rules, the treatment of testimonials has been:

• a.Always freely permitted with no conditions whatsoever, so long as the quoted client actually made the statement
• b.Restricted or requiring specific conditions and disclosures to avoid being misleading✓
• c.Affirmatively required in every single advertisement an IAR disseminates to the investing public within the state
• d.Prohibited only for broker-dealers and their agents, while investment advisers may use them without any limits

Adviser advertising involving testimonials has historically been restricted and, where permitted under updated marketing rules, requires clear disclosures to prevent misleading impressions. Unconditioned use risks being deceptive. Advisers must ensure advertising is not false or misleading in any respect.Uniform Securities Act

An individual represents an issuer and sells that issuer's securities only in transactions that are themselves exempt under the Act, receiving no commission. Under the Uniform Securities Act this individual is:

• a.Required to register as a broker-dealer since the person is effecting transactions for compensation
• b.Automatically deemed an investment adviser representative subject to the fiduciary standard of care
• c.Required to register as an agent because any person selling securities must register with the state
• d.Excluded from the definition of 'agent' and therefore not required to register in that capacity✓

USA §401(b) excludes from the 'agent' definition an individual who represents an issuer in effecting transactions in certain exempt securities or in exempt transactions. Because the sales fall within an exempt transaction, the person is not an agent and need not register. This issuer-exclusion is a frequent Series 66 trap.

A broker-dealer has no place of business in a state and effects transactions in that state exclusively with existing customers who are not residents but are only temporarily present there. Under the Uniform Securities Act the broker-dealer:

• a.Is generally excluded from the state's broker-dealer definition and need not register there✓
• b.Must obtain the written approval of the state Administrator for each individual transaction it effects
• c.May transact only if it also registers each of its agents individually in that state first
• d.Must register as a broker-dealer before contacting any customer who is physically in the state

USA §401(c) excludes from a state's broker-dealer definition a firm with no place of business in the state that deals only with existing customers who are not residents and are merely temporarily present. This 'snowbird' relief prevents technical violations when clients travel. It parallels the limited agent relief in §201.

An investment adviser with no place of business in a state gives advice during any 12-month period to fewer than six clients who are residents of that state. Under the Uniform Securities Act this adviser most likely:

• a.Qualifies for the de minimis exemption from state investment-adviser registration in that state✓
• b.Must instead register with the SEC regardless of its total assets under management nationwide
• c.Must register in the state because giving advice to any resident triggers mandatory registration
• d.Is required to register only its individual representatives while the firm itself remains exempt

USA §201 and NASAA rules provide a de minimis exemption: a state-covered adviser with no place of business in the state and five or fewer clients in the state during any 12 months need not register there. The sixth client removes the exemption. This mirrors relief in the National Securities Markets Improvement Act framework.

Under the Uniform Securities Act, which person is EXCLUDED from the definition of 'investment adviser'?

• a.A pension consultant who, for a separate fee, advises corporate retirement plans on the selection and ongoing monitoring of the investment managers who run the plan's assets
• b.A broker-dealer whose performance of advisory services is solely incidental to its brokerage business and who receives no special compensation for the advice✓
• c.A financial planner who prepares comprehensive written financial plans and charges a distinct, separately stated fee attributable to the securities-advice portion of that engagement
• d.A person who, for compensation, publishes and distributes reports containing specific investment advice that is tailored to the individual circumstances of each paying subscriber

USA §401 excludes a broker-dealer whose advice is solely incidental to brokerage and who takes no special compensation for it. Once a separate advisory fee is charged, the exclusion is lost. IA-1092 confirms that tailored, compensated advice as a business converts a person into an adviser.

An accountant, lawyer, engineer, or teacher may be excluded from the 'investment adviser' definition. This exclusion is available only when the advice is:

• a.Given for a stated flat retainer that the professional bills separately as investment counsel
• b.Provided to institutional clients such as banks and insurance companies but never to retail clients
• c.Limited strictly to municipal securities and other securities that are exempt under the Act
• d.Solely incidental to the practice of the profession and given without any special compensation✓

USA §401 and IAA §202(a)(11) exclude lawyers, accountants, teachers, and engineers (the 'LATE' group) when advice is incidental to their profession and no special compensation is received. Charging separately for the advice defeats the exclusion. Series 66 tests both prongs together.

Under Release IA-1092, a person is generally deemed an investment adviser when a three-part test is met. Those three elements are that the person:

• a.Manages more than one hundred million dollars, has custody of client assets, and exercises full discretion over the client accounts
• b.Holds a professional securities license, maintains a fixed place of business, and files Form ADV with the appropriate regulator
• c.Has passed a qualifying examination, carries a securities surety bond, and delivers a written disclosure brochure to every client
• d.Provides advice about securities, does so as a regular part of a business, and receives compensation for it✓

SEC Release IA-1092 (1987) sets the three-prong test: (1) the person gives advice about securities, (2) as part of a business, and (3) for compensation. Meeting all three makes the person an investment adviser regardless of title, licensing, or AUM.

A person's advice covers only U.S. government securities and gives no advice about any other security. Under the Investment Advisers Act of 1940, this person is:

• a.Automatically treated as a federal covered adviser that is fully subject to the custody, brochure, and recordkeeping rules of the Act
• b.Regarded as a broker-dealer for that purpose and thereby required to register nationally with the SEC before advising anyone
• c.Required to register as a state investment adviser in each and every state in which any of its advisory clients happen to reside
• d.Excluded from the federal definition of investment adviser because the advice concerns only government securities✓

IAA §202(a)(11) excludes a person whose advice relates solely to securities that are direct obligations of, or guaranteed by, the United States. Because the advice is limited to U.S. government securities, the person is not an investment adviser under the federal Act.

The publisher of a bona fide newspaper, magazine, or financial publication of general and regular circulation is excluded from the investment-adviser definition. This publisher's exclusion is LOST if the publication:

• a.Renders advice based on specific situations of individual clients rather than general commentary of regular circulation✓
• b.Is distributed nationally to a very large number of paid subscribers spread across many different states and territories
• c.Occasionally quotes current market prices and reports on general economic and business conditions of broad public interest
• d.Contains paid advertising sold to brokerage firms and mutual-fund sponsors positioned alongside its regular articles

IAA §202(a)(11) and the Lowe v. SEC line of authority protect bona fide publications of regular circulation offering only impersonal, general commentary. The exclusion is lost when the publication is not of regular circulation or tailors advice to specific individual clients.

Under the Uniform Securities Act, when a broker-dealer registers in a state, its agents:

• a.Are automatically registered along with the firm itself and therefore need file nothing whatsoever of their own with the state
• b.Are permitted to solicit only institutional clients until each of them separately passes an additional qualification examination
• c.May transact securities business the very moment the firm itself becomes effective in the state, with each agent's own individual registration filings due to be submitted at some later date
• d.Must each separately register, and an agent's registration is generally not effective during any period the agent is not associated with a registered broker-dealer✓

USA §201 requires each agent to register separately, and an agent's registration is effective only while the agent is associated with a registered broker-dealer or issuer. When the association ends, the agent's registration is no longer effective. The firm's registration does not carry the agents automatically.

Under the Uniform Securities Act, an application for registration as a broker-dealer, agent, investment adviser, or IAR generally becomes effective:

• a.Only after the Administrator affirmatively signs and personally mails to the applicant a certificate approving the applicant's character and financial responsibility
• b.Immediately upon the applicant's electronic submission of the required forms and fees, without any waiting period at all
• c.On the first business day of the calendar quarter that follows the quarter in which the application was originally filed
• d.At noon on the 30th day after a complete application is filed, absent a denial or a proceeding, or sooner if the Administrator so orders✓

USA §202 provides that a registration becomes effective at noon on the 30th day after a complete application is filed, unless a denial order or proceeding is pending, and the Administrator may set an earlier effective date. Registration is not instantaneous and does not require an affirmative merit approval.

The Uniform Securities Act permits the Administrator to require which of the following of a registered broker-dealer or investment adviser?

• a.Personal advance approval by the Administrator of every individual recommendation before it may be communicated to a customer
• b.A binding guarantee that clients will never lose money in any account the firm manages, introduces, or otherwise services
• c.Minimum net capital or net worth, surety bonds where applicable, and the maintenance of specified books and records✓
• d.A written promise never to charge advisory fees that exceed a maximum ceiling fixed from time to time by the Administrator's staff

USA §202 and §203 authorize the Administrator to set minimum financial requirements (net capital/net worth), require surety bonds, and prescribe recordkeeping. The Administrator cannot demand performance guarantees or approve individual recommendations, and NSMIA limits state net-capital rules on federal covered advisers.

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

• a.Two hundred fifty thousand dollars, an amount matching the SEC's asset threshold for federal covered advisers with custody
• b.Ten thousand dollars, the very same figure required of an adviser that merely exercises discretion but never holds custody
• c.Nothing at all, because a surety bond may always be freely substituted for any and every net-worth requirement under the rules
• d.Thirty-five thousand dollars, and must promptly notify the Administrator if net worth falls below the minimum✓

NASAA's model minimum-financial-requirements rule sets $35,000 net worth for an adviser with custody and $10,000 for one with discretion but no custody. An adviser whose net worth drops below the minimum must notify the Administrator, typically by the next business day, and file a financial report.

A state-registered investment adviser that has discretionary authority over client accounts but does NOT have custody generally must maintain a minimum net worth of, or post a bond in the amount of:

• a.Fifty thousand dollars held in cash within a segregated account maintained at a qualified custodian bank at all times
• b.One hundred thousand dollars, an amount that escalates upward in step with the total assets the adviser has under management
• c.Thirty-five thousand dollars, the identical amount that is required whenever the adviser holds actual custody of client assets
• d.Ten thousand dollars, and if net worth is deficient the adviser must post a bond and notify the Administrator✓

NASAA model rules require $10,000 net worth for a state adviser with discretion but no custody. If net worth is or becomes deficient, the adviser must post a surety bond and notify the Administrator. The $35,000 figure applies to custody, not mere discretion.

Under the Uniform Securities Act, the Administrator may by rule or order require a minimum net capital for broker-dealers but may NOT:

• a.Impose a financial-responsibility requirement higher than, or different from, that imposed on a broker-dealer by the Securities Exchange Act of 1934✓
• b.Suspend a broker-dealer whose net capital has fallen below the prescribed minimum, after providing appropriate advance written notice and a full opportunity for a hearing on the record
• c.Prescribe recordkeeping requirements so that examiners are able to verify the firm's ongoing net-capital position at any time
• d.Require broker-dealers to file periodic financial reports demonstrating their continuing compliance with the applicable standard

Under NSMIA and USA §202/§203, a state may not impose broker-dealer capital, custody, margin, or recordkeeping requirements that differ from or exceed federal (1934 Act) requirements. The state may still require reports, examine, and discipline for deficiencies within the federal ceiling.

An investment adviser wants to charge a fee based on the average value of a client's account measured over a defined period. Under the Uniform Securities Act and NASAA rules this fee arrangement is:

• a.Permitted only if the client first signs a written form purporting to waive the substantive protections of the Advisers Act
• b.Permitted only for clients who are banks, insurance companies, registered investment companies, or other institutional investors
• c.Permitted, because a fee tied to a percentage of assets under management is not a performance-based fee✓
• d.Prohibited outright, because any advisory fee measured against the value of client assets is deemed a performance-based fee

A fee based on a percentage of assets under management is a standard, permitted advisory fee and is not a performance fee. IAA §205 and NASAA rules restrict only fees based on a SHARE of capital gains or appreciation, which require a qualified client. Asset-based and hourly/flat fees are broadly allowed.

When a state-registered investment adviser wishes to withdraw its registration, the withdrawal under the Uniform Securities Act generally becomes effective:

• a.Only after every last advisory client of the firm has first been formally transferred to another registered investment adviser
• b.On the very same day the Administrator receives the withdrawal filing, with no continuing jurisdiction retained thereafter
• c.Immediately upon the adviser simply ceasing to accept any new advisory clients within the borders of that particular state
• d.30 days after the filing of the withdrawal, unless a revocation or other proceeding is then pending✓

USA §204 provides that a withdrawal of registration generally becomes effective 30 days after filing (or such shorter period as the Administrator allows) absent a pending proceeding. Critically, the Administrator retains jurisdiction for one year to institute a revocation or suspension after withdrawal.

Under the Uniform Securities Act, after a registrant files to withdraw its registration, the Administrator retains jurisdiction to begin a revocation or suspension proceeding for a period of:

• a.Ninety days, matching the criminal referral window under the Act
• b.Six months, corresponding to the record-retention period for terminated agents
• c.One year after the withdrawal becomes effective✓
• d.Thirty days from the effective date of the withdrawal and no longer

USA §204 gives the Administrator continuing jurisdiction for one year following the effective date of a withdrawal to revoke or suspend the former registration. This prevents a registrant from escaping discipline by withdrawing after misconduct.

A registered agent leaves broker-dealer X and joins broker-dealer Y. Under the Uniform Securities Act, notice of the change generally must be given to the Administrator by:

• a.Both the agent AND both broker-dealers — the old firm, the new firm, and the agent✓
• b.No one at all, because an agent's state registration is deemed to transfer automatically between firms upon a change of employer
• c.Only the two broker-dealers involved, since agents are registered solely through their firms and file nothing of their own
• d.Only the agent personally, who alone bears the entire responsibility for keeping his or her state registration current

USA §201 requires that when an agent begins or terminates a connection with a broker-dealer, the agent AND both the former and the new broker-dealer must promptly notify the Administrator. The obligation falls on all three parties, not just one.

Under the Uniform Securities Act, the Administrator may require an applicant for registration as an agent or investment adviser representative to:

• a.Personally guarantee, in writing, a minimum rate of return for every future client
• b.Obtain a signed reference letter from each of the applicant's three most recent clients
• c.Successfully pass a written or oral examination as a condition of registration✓
• d.Post collateral equal to one year of projected commissions before approval

USA §202 permits the Administrator to require applicants to pass a written or oral examination as a condition of registration, which is how the Series 63/65/66 qualification requirements are imposed at the state level. Return guarantees and client references are not statutory conditions.

An investment adviser registered in a state and an agent are both required to keep their registrations current. Under the Uniform Securities Act, registrations of persons generally:

• a.Remain valid on a permanent basis once initially granted, with no periodic renewal or additional fee ever being required
• b.Expire on December 31 and must be renewed annually upon payment of the required fee✓
• c.Transfer automatically to any successor firm or employer without the need for any new filing with the Administrator
• d.Expire at the close of each calendar quarter and must accordingly be renewed on a quarterly basis throughout the year

USA §202 provides that registrations of broker-dealers, agents, investment advisers, and IARs expire December 31 and must be renewed annually with the appropriate fee. Registration is not perpetual and does not transfer automatically.

Under the Uniform Securities Act, when a broker-dealer that is a sole proprietor dies or is otherwise incapacitated, the firm's registration:

• a.May be continued by a successor for the remainder of the registration period under the Act's succession provisions✓
• b.Is immediately and permanently canceled the instant the proprietor dies, with no continuation or succession of any kind allowed
• c.Converts by operation of law into a federal covered investment adviser registration administered directly by the SEC
• d.Automatically transfers to the deceased proprietor's estate, which may then operate the firm in perpetuity without any refiling

USA §202 succession provisions allow a successor firm to file and continue the business for the unexpired portion of the registration period, easing transitions on death, dissolution, or reorganization. The registration is not simply extinguished, nor does it perpetually pass to an estate.

A registered investment adviser reorganizes and forms a successor entity. Under the Uniform Securities Act, the successor firm's registration:

• a.Requires an entirely new registration fee to be paid immediately upon the reorganization formally taking effect
• b.May become effective for the unexpired portion of the current year, with any fee due at the next renewal✓
• c.Is barred entirely, because advisory registrations may under no circumstances be assigned to or succeeded to by another entity
• d.Cannot be granted at all until every single existing advisory client has re-executed a brand-new advisory contract

USA §202 permits a successor entity's registration to become effective for the unexpired term of the predecessor's registration; the filing fee for the successor is generally not due until the next renewal. This provides continuity through reorganizations without duplicate fees.

Under the Uniform Securities Act, registration of securities by QUALIFICATION differs from coordination and filing in that qualification:

• a.Requires simultaneous registration under the Securities Act of 1933 with the SEC, exactly as the coordination method does
• b.Becomes effective automatically twenty days after the federal registration statement is filed with the Commission
• c.Is the most demanding method, available to any issuer, with effectiveness set by the Administrator and the most extensive disclosure filed at the state level✓
• d.Is available only to those issuers that have already been publicly traded and filing continuous reports with the SEC for a period of at least five full years before the state filing is made

USA §304 registration by qualification is the most burdensome method, used chiefly for intrastate offerings with no federal registration. The issuer files the most extensive disclosure, and effectiveness occurs when the Administrator so orders. Coordination, by contrast, is tied to a concurrent 1933 Act filing.

Registration of securities by COORDINATION under the Uniform Securities Act generally becomes effective:

• a.At the same time the federal registration statement becomes effective, provided state conditions are met✓
• b.Exactly ninety days after the state filing is made, entirely regardless of the status of the federal registration statement
• c.At the precise moment the state application is first stamped as received by the Administrator's office staff
• d.Only after the Administrator has conducted a full merit review and approved the fairness of the offering price to investors

USA §303 registration by coordination becomes effective simultaneously with the federal registration statement's effectiveness under the Securities Act of 1933, so long as the state materials have been on file for the required period and other conditions are satisfied. State Administrators never conduct a merit-approval of price.

Under the National Securities Markets Improvement Act (NSMIA), securities that are 'federal covered' (such as those listed on a national exchange or issued by a registered investment company):

• a.Are subject to a full state merit review of their fairness before they may lawfully be sold to any resident of the state
• b.Are exempt from state registration, though states may still require a notice filing and retain antifraud authority✓
• c.May be sold only to institutional investors within any given state, and never to any individual retail investor there
• d.Must nonetheless still register at the state level using registration by qualification in each and every state of sale

NSMIA (1996) preempted state registration of federal covered securities, which include exchange-listed securities, securities senior to them, and investment-company shares. States may require a notice filing and fee and keep antifraud jurisdiction under USA §101, but they cannot impose registration or merit review.

Which of the following is an EXEMPT SECURITY under the Uniform Securities Act?

• a.An interest in a private oil-and-gas limited partnership that is marketed to investors through a broad general solicitation
• b.A variable annuity contract whose underlying sub-account values fluctuate directly with the performance of the securities markets
• c.A promissory note issued by a newly formed technology start-up company and sold directly to individual retail investors
• d.A commercial paper note maturing in nine months or less, rated in one of the top categories, issued for current operations✓

USA §402(a) exempts commercial paper with a maturity of nine months or less that is rated in a top category and issued for current transactions. Start-up notes, public partnership interests, and variable annuities are securities that are not automatically exempt. The exemption turns on the security's inherent character.

Under the Uniform Securities Act, which of the following is classified as an EXEMPT SECURITY rather than an exempt transaction?

• a.A private placement that is offered to no more than ten non-institutional buyers within the state over a twelve-month period
• b.A one-time isolated sale made by an executor in the course of settling the estate of a recently deceased individual investor
• c.A security issued or guaranteed by a foreign national government with which the United States maintains diplomatic relations✓
• d.An unsolicited purchase order that is received from an existing brokerage customer without any solicitation by the agent

USA §402(a) exempts securities issued or guaranteed by a foreign government with which the U.S. has diplomatic relations. The other choices describe exempt TRANSACTIONS under §402(b), which depend on how or to whom a security is sold rather than on the issuer's character.

A security is sold in a private placement under the Uniform Securities Act. To qualify as an exempt transaction, the offer generally may be directed to no more than:

• a.Ten persons in the state (other than institutional buyers) during any 12 consecutive months, with limits on commissions and resale intent✓
• b.Any number of buyers at all, so long as not a single one of them is a resident of the Administrator's own state at the time
• c.One hundred institutional and retail buyers combined, provided that each of them signs a formal written subscription agreement before the sale is completed
• d.Thirty-five accredited investors located anywhere nationwide, with unlimited general advertising expressly permitted throughout

USA §402(b) exempts a private-offering (limited-offering) transaction directed to not more than ten non-institutional persons in the state in 12 months, where the seller reasonably believes buyers are purchasing for investment and no commissions are paid to non-registered persons for soliciting retail buyers. Institutional buyers are not counted.

Under the Uniform Securities Act, an 'isolated non-issuer transaction' is an exempt transaction. The word 'non-issuer' means the transaction is:

• a.Conducted only between two registered broker-dealers, each of which is acting as a principal for its own proprietary account
• b.Not for the direct or indirect benefit of the issuer of the security being traded✓
• c.Effected exclusively in securities that were originally issued by a governmental unit or one of its instrumentalities
• d.Limited strictly to securities that have never at any time been registered anywhere in any jurisdiction whatsoever

USA §401 defines a non-issuer transaction as one in which the issuer does not directly or indirectly benefit from the proceeds. An isolated non-issuer transaction (a one-off secondary trade) is exempt under §402(b) because it is not part of a regular securities business.

Which of the following would most likely qualify as an EXEMPT TRANSACTION under the Uniform Securities Act?

• a.A solicited sale of a non-exempt security made to an individual retail investor at that investor's private residence
• b.A door-to-door offering of speculative promissory notes made to first-time individual investors located in the state
• c.A transaction with a bank, insurance company, investment company, or other institutional investor✓
• d.A general newspaper advertisement inviting the investing public at large to purchase a new speculative mining stock

USA §402(b) exempts transactions with institutional investors such as banks, savings institutions, insurance companies, investment companies, and registered broker-dealers. These sophisticated buyers do not need the Act's registration protections. Solicited retail sales and public solicitations are not exempt transactions.

Under the Uniform Securities Act, when a security qualifies as a FEDERAL COVERED security, the state Administrator's remaining authority is generally limited to:

• a.Requiring a notice filing, collecting fees, and enforcing the antifraud provisions of the Act✓
• b.Setting the maximum price at which the covered securities may lawfully be offered to residents of the state
• c.Ordering the issuer to register the covered securities by qualification within the state before any sale occurs
• d.Conducting a full merit review of the fairness of the offering to investors before permitting any sale in the state

Under NSMIA and USA §402, for federal covered securities the state may require only a notice filing and fee and retains antifraud enforcement under §101. It may not require registration, impose merit review, or fix offering prices.

A security is initially sold in an exempt transaction. If a claim of exemption is challenged, under the Uniform Securities Act the burden of proving that the exemption applies rests with:

• a.The person claiming the exemption, such as the issuer, broker-dealer, or agent asserting it✓
• b.The state Administrator, who bears the burden of disproving the claimed exemption by clear and convincing evidence
• c.The federal courts, which alone decide every question concerning state securities exemptions entirely de novo
• d.The purchaser of the security, who is conclusively presumed to know all of the applicable statutory exemptions

USA §402(d) places the burden of proving an exemption (or an exception from a definition) on the person who claims it. If that person cannot establish the exemption, the transaction is treated as non-exempt and the registration requirements apply.

Under the Uniform Securities Act, a transaction by an executor, administrator, guardian, conservator, sheriff, or trustee in bankruptcy is:

• a.Subject to full securities registration, because a fiduciary acting in such circumstances is legally treated as an issuer
• b.An exempt transaction because it is effected by a fiduciary acting under legal authority✓
• c.Permitted only if the underlying security being sold is itself also independently an exempt security under the Act
• d.Prohibited entirely unless the fiduciary first personally registers as an agent within the state before acting

USA §402(b) exempts transactions executed by fiduciaries such as executors, administrators, guardians, conservators, sheriffs, marshals, receivers, and trustees in bankruptcy. These court-supervised or legally authorized sales are exempt regardless of whether the security itself is exempt.

A securities issued by a company subject to full and continuous SEC reporting and listed on the New York Stock Exchange is best characterized under the Uniform Securities Act as:

• a.A non-exempt security that must be registered by qualification in each and every state in which it is sold to residents
• b.A federal covered security whose state registration is preempted, though a notice filing may apply✓
• c.An exempt transaction that must nevertheless be reported to the state Administrator on a recurring quarterly basis
• d.A private security that is lawfully available only to accredited investors and to institutional investors in the state

Under NSMIA and USA §402, exchange-listed securities (and those senior or equal to them) are federal covered securities, formerly called 'blue-chip exempt.' State registration is preempted; the state may impose only a notice filing and keep antifraud authority.

Under the Uniform Securities Act, in the course of an investigation the Administrator has the power to:

• a.Impose a term of imprisonment directly upon a respondent who is found to have willfully violated the provisions of the Act
• b.Seize and then liquidate a firm's client accounts on his own authority without any judicial involvement or court order
• c.Administer oaths, subpoena witnesses and documents, and compel testimony, including in matters that cross state lines✓
• d.Order the Securities and Exchange Commission to revoke a federal covered adviser's registration on a nationwide basis

USA §407 empowers the Administrator to conduct investigations, administer oaths, subpoena witnesses, compel attendance, and require production of records, whether the conduct occurred inside or outside the state. Criminal punishment, however, is imposed by courts under §409, not by the Administrator.

Under the Uniform Securities Act, the criminal penalties for a willful violation generally include a maximum of:

• a.Three years in prison and a fine of five thousand dollars per willful violation✓
• b.Ten years in prison and unlimited fines, mirroring federal insider-trading statutes
• c.Only monetary penalties, since the Act provides no possibility of imprisonment
• d.One year in prison and a fine of one thousand dollars for any violation

USA §409 sets criminal penalties for a willful violation at up to 3 years imprisonment and a fine of up to $5,000 (the classic '3 and 5' at the model level). A person cannot be imprisoned for violating a rule or order of which they had no knowledge.

Under the Uniform Securities Act, a person may NOT be convicted and imprisoned under the criminal provisions if the person:

• a.Had already paid a civil penalty for the same underlying conduct
• b.Merely made a negligent misstatement rather than an intentional one during a sale
• c.Violated the Act while acting on the advice of unlicensed counsel
• d.Proves they had no knowledge of the rule or order that was violated✓

USA §409 provides that no person may be imprisoned for the violation of a rule or order if the person proves they had no knowledge of it. The state must also show a WILLFUL violation. Negligence and reliance on counsel are not the codified defenses; lack of knowledge of the rule/order is.

Under the Uniform Securities Act, criminal prosecutions for violations must generally be brought within:

• a.Three years without regard to when the violation was discovered
• b.Five years after the alleged violation, matching the record-retention period✓
• c.Two years after the buyer discovered or should have discovered the violation
• d.Ten years, the same period used for securities-related felony disqualification

USA §409 provides that no indictment or information may be returned more than five years after the alleged violation. This criminal statute of limitations is distinct from the civil-liability limitation (roughly two years after discovery or three years after the sale).

Under the Uniform Securities Act, the Administrator may seek an INJUNCTION against a person engaged in an act or practice that violates the Act by:

• a.Applying to the appropriate court, which may grant a temporary or permanent injunction and appoint a receiver✓
• b.Requiring the respondent to first consent to entry of the injunction before the Administrator may even seek it in court
• c.Issuing the injunction personally through an administrative order without any application to or involvement of a court
• d.Referring the matter exclusively to the SEC, which alone may bring the federal court action seeking the injunction

USA §408 authorizes the Administrator to APPLY TO A COURT for an injunction; only a court can issue one, and the court may also appoint a receiver over the defendant's assets. The Administrator's own orders (cease-and-desist under §204) are separate administrative remedies.

Under the Uniform Securities Act, the state Administrator's rulemaking and orders:

• a.May be adopted by the Administrator, but no provision of the Act imposes liability for an act done in good-faith conformity with a rule or order later amended or rescinded✓
• b.Require the prior written consent of the entire state legislature before any rule or order may lawfully take effect
• c.Automatically preempt and override any conflicting rule adopted by the SEC on the very same regulatory subject matter
• d.Are valid only when they are word-for-word identical to the corresponding rules that have been separately adopted by every other state securities Administrator across all of the states

USA §412 and related provisions let the Administrator make, amend, and rescind rules and orders necessary to carry out the Act; and no liability attaches for acts done in good-faith conformity with a rule or order, even if it is later changed or found invalid. State rules do not preempt the SEC.

The Uniform Securities Act gives a state Administrator jurisdiction over an offer to sell or to buy when the offer:

• a.Involves only federal covered securities traded on a national exchange
• b.Is made by an issuer that has its principal office in another state
• c.Is published in a bona fide newspaper printed outside the state with limited in-state circulation and a non-local ad
• d.Originates in the state, is directed into the state, or is accepted in the state✓

USA §414 gives the Administrator jurisdiction when an offer originates from, is directed into, or is accepted within the state. This 'originates/directed/accepted' test defines the Act's territorial reach, and a narrow publishing exclusion applies to certain out-of-state media.

Under the Uniform Securities Act, when a radio or television broadcast or a bona fide newspaper offer originates outside the state, the Administrator generally does NOT have jurisdiction if:

• a.The offeror happens to be a federal covered investment adviser rather than an investment adviser that is registered at the state level under the provisions of the Uniform Securities Act
• b.The security that is being offered happens to qualify as an exempt security under the provisions of the Act itself
• c.The publication is not published in the state, or two-thirds of its circulation is outside the state (for broadcasts, the broadcast originates outside the state)✓
• d.The offeror later registers the offered security by the coordination method in some entirely different state altogether

USA §414 excludes from the Administrator's jurisdiction offers made through a TV/radio broadcast originating outside the state and through a bona fide newspaper not published in the state (or with two-thirds of its circulation outside the state). This prevents a state from reaching purely out-of-state media.

Under the civil-liability provisions of the Uniform Securities Act, a buyer who was sold a security in violation of the Act may generally recover:

• a.Nothing at all, because the Act provides solely for administrative sanctions and criminal penalties and no civil recovery
• b.Punitive damages together with treble damages awarded automatically in every single case that involves a proven violation of the Act, entirely regardless of the buyer's actual out-of-pocket loss
• c.Only the difference between the original purchase price and the security's current prevailing market value at the time of suit
• d.The consideration paid plus interest at the statutory rate, and reasonable attorneys' fees and costs, less any income already received on the security✓

USA §410 lets a defrauded buyer sue for rescission: the amount paid plus interest at the statutory rate, plus court costs and reasonable attorneys' fees, minus any income received. If the buyer no longer owns the security, damages are measured similarly. Treble or punitive damages are not the standard remedy.

Under the Uniform Securities Act, a person who offers to rescind a sale made in violation of the Act (a rescission offer) can cut off the buyer's right to sue if the buyer:

• a.Merely acknowledges the rescission offer verbally during a recorded telephone conversation within twenty-four hours
• b.Happens to be an institutional investor rather than an individual retail customer of the offering broker-dealer
• c.Fails to accept the written rescission offer within the specified period (commonly 30 days) after receiving it✓
• d.Has already filed a formal written complaint with the state Administrator concerning the very same transaction

USA §410 lets a seller make a written rescission offer (repaying price plus interest, less income). If the buyer does not accept within the stated period (often 30 days) after receipt, the buyer loses the right to bring the civil action. The offer must include the required financial terms and disclosures.

Under the Uniform Securities Act, liability for a violation may extend beyond the individual who made the sale to include:

• a.The state Administrator personally, in every instance in which the offering had at some earlier point been registered within the state under the Act's registration provisions
• b.Every person who directly or indirectly controls the seller, and certain partners, officers, and employees who materially aided the sale, unless they lacked knowledge and could not reasonably have known✓
• c.Only the transfer agent that mechanically processed the physical securities certificate on behalf of the issuing corporation and its shareholders
• d.The purchaser as well, held jointly and severally with the seller for having failed to independently detect and object to the violation, even where the purchaser had no role whatsoever in structuring or marketing the offering

USA §410 imposes joint and several liability on control persons and on partners, officers, directors, and employees who materially aided in the sale, along with the seller. Such persons may escape liability by proving they did not know, and in exercise of reasonable care could not have known, of the facts giving rise to liability.

Under the Uniform Securities Act, the Administrator may deny, suspend, or revoke a registration if it finds the action is in the public interest AND the applicant or registrant:

• a.Has recommended securities to clients that subsequently declined in market value through no fault of the registrant or the employing broker-dealer firm
• b.Has changed the particular broker-dealer with which the agent is associated at some point during the calendar year
• c.Has earned aggregate commissions during the year that happen to exceed a broad industry-average benchmark figure
• d.Has willfully violated the Act, been convicted of a securities-related felony within 10 years, or been enjoined from the securities business✓

USA §204 lists statutory causes for disciplinary action, including willful violations of the Act, a securities-related felony (or certain other crimes) within 10 years, injunctions, and insolvency. Every action requires a finding that it is in the public interest. Market losses and lawful commissions are not causes.

Under the Uniform Securities Act, before the Administrator enters a final order to revoke a registration (as opposed to a summary postponement or suspension), the registrant is generally entitled to:

• a.Appropriate prior notice, an opportunity for a hearing, and written findings of fact and conclusions of law✓
• b.An automatic trial by jury conducted before the state's highest appellate court prior to any revocation taking effect
• c.Immediate reinstatement of the registration pending the ultimate outcome of any administrative or judicial appeal
• d.A guaranteed monetary settlement paid by the Administrator to the registrant in lieu of holding any hearing at all

USA §204 requires the Administrator to give appropriate prior notice and opportunity for a hearing and to issue written findings before a final revocation order. The Administrator may summarily postpone or suspend pending final determination, but the registrant still receives notice and a hearing.

Under the Uniform Securities Act, a party aggrieved by a final order of the Administrator generally may:

• a.Obtain expedited review directly from the United States Supreme Court within ten calendar days, bypassing every intermediate state and federal appellate court along the way
• b.Obtain judicial review by filing a petition in the appropriate court within 60 days of the order✓
• c.Demand a completely new evidentiary hearing before a different state's Administrator, who must then re-decide the entire matter without any reference to the original record
• d.Only accept and comply with the order, because a final order of the Administrator is conclusive and wholly immune from any form of judicial review

USA §411 allows a person aggrieved by a final order to obtain judicial review by filing a written petition in the appropriate court, generally within 60 days of the order. Filing the petition does not by itself stay the order unless the court so directs.

Under the Uniform Securities Act, the Administrator may issue a summary order (for example, summarily suspending a registration or a securities registration statement) when:

• a.The Administrator personally disagrees with the pricing of an offering and, without any finding of harm, would simply prefer that the shares be sold to retail investors at a lower price in that state
• b.A client has made an unsubstantiated oral complaint about performance that the Administrator has not yet investigated or corroborated in any way
• c.A registrant's commissions in the prior calendar year were unusually high compared with the statewide industry average for other similar firms
• d.The Administrator finds prompt action is required in the public interest, subject to promptly notifying affected parties and granting a hearing if requested✓

USA §204/§306 allow the Administrator to act summarily (e.g., postpone or suspend) when the public interest requires prompt action, provided the Administrator promptly notifies the affected persons and holds a hearing if one is requested within the statutory period. Pricing disagreements and lawful commissions are not grounds.

The antifraud provisions of the Uniform Securities Act (Section 101 for sales and Section 102 for advisory activity) apply to:

• a.Only registered agents themselves, and never to issuers, broker-dealers, or investment advisers, no matter how the underlying transaction happens to be conducted
• b.Only transactions involving federal covered securities that were registered under NSMIA and later sold across two or more separate states
• c.Only those securities that are actually required to be registered by qualification or coordination within the particular state
• d.Any offer, sale, or advice concerning a security, including transactions and securities that are otherwise exempt from registration✓

USA §101 and §102 antifraud provisions reach ALL securities activity, including exempt securities and exempt transactions. An exemption from registration is never an exemption from the antifraud rules, and both agents and advisers are covered.

A person acting as an investment adviser makes a materially false statement to a client to induce advisory business. Under the Uniform Securities Act this conduct is addressed by:

• a.Section 202, which prescribes the detailed registration procedure and annual filing schedule for persons in the state
• b.Section 402, which lists the exempt securities and the exempt transactions recognized under the Act
• c.Section 102, prohibiting fraud and deceit in connection with rendering investment advice✓
• d.Section 301, which governs the registration of securities offerings by coordination and by qualification

USA §102 specifically prohibits fraudulent, deceptive, or manipulative conduct by a person who advises others about securities for compensation. It is the advisory analogue to §101 and applies regardless of whether the adviser is state-registered, federal covered, or exempt.

Under the Investment Advisers Act of 1940 as amended by Dodd-Frank, an investment adviser with $110 million or more in regulatory assets under management generally must:

• a.Register with the SEC as a federal covered adviser✓
• b.Choose freely between SEC and state registration each renewal period
• c.Register in each state where it maintains even a single advisory client
• d.Refrain from registering anywhere until it exceeds one billion dollars in assets

IAA §203A and the Dodd-Frank amendments require SEC registration for advisers with $110 million or more in regulatory AUM. Mid-size advisers ($100M-$110M) may register with the SEC, and smaller advisers generally register with the states. The exact figure is set by rule.

A 'mid-size' investment adviser under the Investment Advisers Act generally has assets under management between $25 million and $100 million and:

• a.May register only with the several states in which its individual clients happen to reside, is expressly barred from ever registering in its own home state, and must withdraw the moment a client moves away
• b.Must always register with the SEC regardless of state law, because every mid-size adviser is automatically treated as a federal covered adviser
• c.Is prohibited from registering with any regulator, state or federal, until its assets under management first reach the $110 million mark
• d.Registers with the state (rather than the SEC) if the adviser's home state requires registration and subjects it to examination, and the adviser is not otherwise required to register with the SEC✓

IAA §203A directs a mid-size adviser ($25M-$100M AUM) to register with its home state IF that state requires registration and examines advisers; otherwise it registers with the SEC. Certain advisers (e.g., those advising registered investment companies) must register with the SEC regardless.

An investment adviser is registered with the SEC and its regulatory assets under management decline. Under SEC rules, to avoid switching between SEC and state registration on small fluctuations, an adviser must generally withdraw from SEC registration only when its AUM falls below:

• a.$100 million exactly, measured on any single day, with no buffer or grace period of any kind permitted
• b.$90 million, a buffer below the $110 million registration threshold✓
• c.$25 million, which is described as the mandatory floor for any and all state registration
• d.$150 million, corresponding to the private-fund adviser exemption line under the Act

SEC rules under IAA §203A create a buffer: an adviser must register with the SEC at $110 million and need not withdraw until AUM drops below $90 million. This band prevents advisers from flipping registration each time assets move slightly.

Under the Investment Advisers Act, which adviser is generally EXEMPT from SEC registration under the 'private fund adviser' exemption?

• a.An adviser to a registered open-end investment company (a mutual fund) as well as to several closed-end funds offered publicly
• b.An adviser solely to private funds with less than $150 million in private-fund assets under management in the United States✓
• c.An adviser that holds itself out to the general public and actively takes on retail separately managed accounts across many states
• d.An adviser managing $500 million in a single publicly offered fund composed entirely of retail investors and pensioners

IAA §203(m) and Rule 203(m)-1 exempt an adviser that acts solely as an adviser to private funds and manages less than $150 million in private-fund assets in the U.S. Advisers to registered investment companies or to retail SMAs do not qualify for this private-fund exemption.

An investment adviser that provides advice to registered investment companies (mutual funds) under the Investment Advisers Act must:

• a.Register with the SEC regardless of the amount of assets it has under management✓
• b.Register only with the individual states in which the funds' underlying shareholders actually reside
• c.Avoid all registration entirely, because advisers to registered investment companies are wholly exempt from the Act
• d.Register with the SEC only after the fund complex crosses the $110 million net asset threshold

IAA §203A requires an adviser to a registered investment company to register with the SEC without regard to its AUM. This is one of the exceptions to the general $110 million threshold and to the mid-size state-registration default.

Under the National Securities Markets Improvement Act (NSMIA), when an adviser is a FEDERAL COVERED adviser registered with the SEC, an individual state may still:

• a.Conduct a full net-capital, minimum-financial, books-and-records, and custody examination that entirely duplicates the SEC's own periodic examination, and impose its own recordkeeping rules on the adviser
• b.Set and enforce the maximum advisory fee schedule the federal covered adviser may charge to residents of that particular state
• c.Force the federal covered adviser to register with the state as an investment adviser before it may accept any client there
• d.Require the adviser to file a notice (a copy of documents filed with the SEC), pay state fees, and require IARs with a place of business in the state to register, and retain antifraud authority✓

NSMIA and IAA §203A preempt state registration of federal covered advisers. States may require a notice filing and fee, may license IARs who have a place of business in the state, and keep antifraud jurisdiction, but cannot require adviser registration or impose their own capital/custody rules.

An investment adviser representative works for a FEDERAL COVERED adviser and has a place of business in State X. Under the Uniform Securities Act and NSMIA, this IAR:

• a.Registers separately in every single state where any one of the employing adviser's clients happens to live, work, or maintain a mailing address
• b.Never registers anywhere at all, because the employing adviser's federal covered status fully shields each of its representatives
• c.Registers directly with the SEC as an individual investment adviser representative on Form ADV alongside the firm
• d.Registers as an IAR in State X, because states retain authority to license IARs who have a place of business in the state✓

Even though the FIRM is federal covered and not state-registered, NSMIA preserves state authority over INDIVIDUAL IARs who maintain a place of business in the state. Such an IAR must register in State X. The SEC does not register individual IARs.

Under the Investment Advisers Act, the SEC's brochure rule (Rule 204-3, delivering Form ADV Part 2) generally requires an adviser to deliver the brochure:

• a.At or before entering into the advisory contract, and thereafter to deliver or offer an updated brochure annually and to notify clients of material changes✓
• b.Once every five years on a fixed cycle, a schedule the SEC chose deliberately to match the adviser's books-and-records retention period, with no delivery required at contract inception
• c.Only upon the client's specific written request submitted after the advisory relationship has already ended
• d.Solely to institutional clients and registered investment companies, and never to natural persons or retail investors

IAA Rule 204-3 requires delivery of the Form ADV Part 2 brochure at or before entering the advisory contract, plus an annual delivery/offer of an updated brochure (or a summary of material changes). This is the federal analogue; states add a 48-hour/5-day rescission feature.

Under NASAA model rules, a state-registered investment adviser's brochure (Form ADV Part 2) must be delivered to a prospective client:

• a.Within 30 calendar days after the client's very first advisory fee payment has cleared, been credited to the adviser's operating account, and been reconciled against the custodian's statement
• b.At least 48 hours before entering into the advisory contract, OR at the time of entering the contract if the client is given a right to rescind within five business days without penalty✓
• c.Only at the client's specific written request, with absolutely no automatic delivery required at or before the contract is signed
• d.Once per calendar year, delivered on the anniversary date of the adviser's original state registration order

The NASAA state brochure rule requires delivery at least 48 hours before the contract, or at signing IF the client has a 5-business-day right to withdraw without penalty. This 48-hour/5-day feature is a key state-level distinction from the plain federal rule.

Under the Investment Advisers Act of 1940, an advisory contract generally may NOT:

• a.Disclose the adviser's fee schedule, the specific services to be rendered, and each and every material conflict of interest known to the adviser at the time the contract is signed
• b.Be assigned to another adviser without the client's consent, or fail to notify the client of a change in the partnership's membership✓
• c.Be terminated by the client without any penalty at all during the first twelve months of the advisory relationship
• d.Provide for compensation based on a fixed percentage of the client's assets under management measured over time

IAA §205 requires that an advisory contract prohibit assignment without client consent and, for partnerships, require notice to clients of any change in the membership within a reasonable time. It also restricts performance-based fees. Asset-based fees and fee disclosure are permitted and expected.

Under the Investment Advisers Act, a 'performance-based fee' (a fee based on a share of capital gains or capital appreciation of client assets) is generally prohibited UNLESS the client is:

• a.A natural person of any income or net-worth level who simply signs a written acknowledgment of the risks involved
• b.A qualified client meeting the net-worth or assets-under-management thresholds set by SEC Rule 205-3✓
• c.Any client who has been continuously advised by the firm for at least one full calendar year beforehand
• d.A resident of a state that has not yet adopted the Uniform Securities Act in any form

IAA §205(a)(1) and Rule 205-3 prohibit performance fees except with 'qualified clients' who meet net-worth or AUM thresholds (dollar figures are inflation-indexed, so the CONCEPT is tested). This protects less-sophisticated clients from fee structures that reward excessive risk.

The dollar thresholds that define a 'qualified client' for performance-fee purposes under the Investment Advisers Act are:

• a.Waived in their entirety the moment any client signs any advisory contract that so much as mentions performance-based compensation, regardless of that client's actual wealth
• b.Determined solely by each individual state Administrator, with no uniform federal standard governing them at all
• c.Periodically adjusted for inflation by the SEC, so exam candidates are expected to know the concept rather than memorize the exact current figures✓
• d.Fixed permanently by federal statute in 1940 and never once subject to change, adjustment, or indexing

Under IAA Rule 205-3, the qualified-client net-worth and AUM thresholds are periodically adjusted for inflation by SEC order. Because the exact dollar figures change, the Series 66 point is the CONCEPT: performance fees require a client above the indexed thresholds.

Under the Investment Advisers Act, an adviser is generally deemed to have CUSTODY of client assets when it:

• a.Recommends that the client engage one particular unaffiliated bank as qualified custodian, reviews the account statements that bank sends, and reconciles them each quarter for accuracy
• b.Holds client funds or securities, or has any authority to obtain possession of them, such as through a general power of attorney or by directly deducting advisory fees✓
• c.Merely provides investment advice without ever holding, touching, or having any authority over client funds or securities
• d.Sends the client periodic quarterly performance reports that it prepares from data supplied by the client's custodian

IAA Rule 206(4)-2 defines custody to include holding client assets or having authority to obtain possession of them, including acting under a general power of attorney or deducting fees directly from the client's account. Custody triggers the qualified-custodian, account-statement, and (often) surprise-examination safeguards.

Under the Investment Advisers Act custody rule (Rule 206(4)-2), an adviser with custody generally must:

• a.Commingle client assets together with the firm's own proprietary cash and securities in a single omnibus account, so long as the stated goal is to reduce the custodial fees ultimately borne by clients
• b.Maintain client funds and securities with a qualified custodian and have account statements sent, and typically arrange a surprise annual examination by an independent public accountant✓
• c.Avoid using banks or broker-dealers as custodians altogether in order to limit third-party counterparty risk to clients
• d.Store client securities in the adviser's own office safe for convenience and quicker access at settlement time

IAA Rule 206(4)-2 requires use of a qualified custodian (a bank or broker-dealer), delivery of account statements to clients (usually quarterly), and a surprise verification by an independent public accountant, plus an internal-control report where the custodian is affiliated. Commingling and self-storage are prohibited.

Under the Investment Advisers Act, a person who provides advice about securities and also about real estate, coins, and rare art:

• a.Is not an investment adviser at all, because the clear majority of the advice actually given concerns non-securities such as real estate, rare coins, and fine art rather than securities
• b.Escapes the Act entirely simply by disclosing to clients the mixed, multi-asset nature of the advisory practice
• c.Is an investment adviser as to the securities advice, since giving securities advice for compensation as part of a business meets the definition regardless of other services✓
• d.Must instead register separately as a licensed commodities and collectibles dealer rather than as an investment adviser

Under IAA §202(a)(11) and IA-1092, a person who, for compensation and as part of a business, advises others about SECURITIES is an investment adviser as to that activity, even if they also advise on non-securities like real estate or art. The presence of non-securities advice does not remove the securities advice from the Act.

Under the Investment Advisers Act, an adviser that pays a third party a cash fee for soliciting or referring advisory clients (a solicitor/promoter arrangement) generally must:

• a.Comply with the marketing/solicitation rule, including a written agreement and clear disclosure to the client of the solicitor's compensation and any conflict✓
• b.Pay the third-party solicitor only in restricted securities of the adviser rather than in cash, an approach said to remove the referral arrangement from the marketing rule entirely
• c.Obtain the SEC's advance written approval of each and every individual client referral before any fee may be paid
• d.Keep the referral arrangement strictly confidential so as not to influence the referred client's decision to invest

IAA Rule 206(4)-1 (the amended marketing rule, which absorbed former Rule 206(4)-3) requires a written agreement and disclosure to clients that the solicitor/promoter is compensated and describing the conflict. Advance SEC approval of each referral is not required, but disclosure is mandatory.

Under the Investment Advisers Act, the SEC marketing rule (Rule 206(4)-1) governs advertisements. A testimonial or endorsement in an adviser's advertisement is:

• a.Permitted without any accompanying disclosure whatsoever, so long as the underlying statement is technically true, not fabricated, and the promoter genuinely holds the opinion expressed
• b.Permitted only in connection with federal covered securities offerings and never for the promotion of advisory services
• c.Prohibited under each and every circumstance, without any exception, exactly as the rule stood before it was amended
• d.Permitted only with required disclosures, including whether the promoter is a client and whether they were compensated, plus oversight and, where compensated, a written agreement✓

The amended IAA Rule 206(4)-1 (effective in the early 2020s) permits testimonials and endorsements subject to conditions: disclosure of client/non-client status and compensation, adviser oversight, and a written agreement for compensated promoters. It replaced the old blanket testimonial ban.

Under the Investment Advisers Act, Section 204A requires investment advisers to:

• a.Refrain from advising more than one hundred separate clients in any single state during any calendar year, and to withdraw from those relationships once the limit is exceeded
• b.Establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information✓
• c.Register every individual client account separately with the SEC before any advice may be given on it
• d.Guarantee client returns during periods of extreme market volatility and unexpected economic downturn

IAA §204A requires advisers (and broker-dealers) to adopt written policies and procedures reasonably designed to prevent the misuse of material nonpublic (inside) information by the firm or its associated persons. It underpins the firm's insider-trading controls.

Under the Investment Advisers Act, the recordkeeping rule (Rule 204-2) generally requires an SEC-registered adviser to preserve required books and records for a minimum of:

• a.Three years total, but that limited retention period is said to apply only to records that specifically relate to advertising, marketing, and client testimonials
• b.One year from the date each individual record is first created, and it may be kept in any location the adviser chooses
• c.Five years from the end of the fiscal year in which the last entry was made, the first two years in an easily accessible place✓
• d.Ten years for absolutely all records, without any exception, exclusion, or shorter category

IAA Rule 204-2 requires records to be kept five years from the end of the fiscal year of the last entry, with the first two years in an appropriate office of the adviser. NASAA's model rule imposes a comparable five-year requirement on state advisers.

Under the Investment Advisers Act, an adviser relying on the exemption for advisers whose only clients are insurance companies is:

• a.Treated for all purposes as a broker-dealer instead of as an investment adviser under the federal statute
• b.Required to register with the SEC despite the narrowly limited insurance-company client base it serves
• c.Exempt from SEC registration under Section 203(b), because its only clients are insurance companies✓
• d.Still required to register in every single state in which one of its insurer clients is domiciled

IAA §203(b) exempts from SEC registration an adviser whose only clients are insurance companies. Other §203(b) exemptions cover intrastate advisers (no federal-covered-security advice) and certain private-fund and foreign private advisers. State antifraud rules can still apply.

An agent, knowing a large customer buy order is about to be entered that will likely move the stock up, buys the same stock for the agent's own account first. This practice is:

• a.A permissible personal trade, because the agent used only personal funds and not any customer's money
• b.Front-running, a prohibited practice that breaches the duty to the customer and the market✓
• c.Acceptable so long as the agent later discloses the personal trade on a routine monthly account statement
• d.Lawful, because the large customer's order had not yet been formally confirmed on the firm's books

Front-running — trading for one's own account ahead of a known customer order expected to affect the price — is a prohibited, manipulative practice under USA §101/§102 and NASAA model rules. The agent exploits customer order flow, breaching fiduciary and antifraud duties.

An investment adviser borrows $50,000 from an advisory client who is an individual and not in the business of lending money. Under NASAA model rules this is:

• a.An unethical practice, because an adviser may not borrow from a client unless the client is a broker-dealer, an affiliate of the adviser, or a financial institution in the business of lending✓
• b.Permitted so long as the client's overall advisory account remains profitable for the entire duration of the outstanding loan and the adviser repays the full principal before the account is next reviewed
• c.Permitted whenever the adviser simply discloses the borrowing in the very next annual amendment to its Form ADV
• d.Permitted as long as the loan is properly documented with a signed promissory note bearing a market rate of interest

NASAA's Model Rule on unethical practices (and IAA §206) prohibits an adviser from borrowing money or securities from a client unless the client is a broker-dealer, an affiliate of the adviser, or a financial institution in the business of loaning funds. A note or later disclosure does not cure the conflict.

An agent of a broker-dealer lends money to a retail customer to help the customer meet a margin call. Under NASAA model rules, lending to or borrowing from customers by agents is:

• a.Always permitted without any further condition, because a short-term loan of this kind helps the retail customer avoid a forced liquidation of the margined position at an unfavorable price
• b.Permitted whenever the customer signs a simple written acknowledgment memorializing the terms of the loan
• c.Permitted only where the lending broker-dealer earns absolutely no interest or fee on the money advanced
• d.Generally prohibited, unless the customer is a lending institution or the two are in a defined family or business relationship meeting the rule's conditions✓

NASAA's model rule on dishonest and unethical practices of agents generally prohibits lending to or borrowing from customers, with narrow exceptions (e.g., the customer is a financial institution in the lending business, or there is a qualifying personal/business relationship and the firm permits it). A simple acknowledgment is not enough.

An investment adviser recommends a complex, illiquid alternative product to an elderly client with a short time horizon and a stated need for income and safety, without a reasonable basis to believe it fits. This is best described as:

• a.A suitable recommendation, because the alternative product could at least theoretically outperform a conservative income portfolio
• b.A permissible diversification recommendation that broadens the elderly client's overall asset allocation
• c.Acceptable, provided the client signs a written risk-acknowledgment form before the purchase settles
• d.An unsuitable recommendation that violates the adviser's fiduciary duty and NASAA's unethical-practices rule✓

Recommending securities without a reasonable basis that they suit the client's objectives, risk tolerance, and financial situation is an unsuitable recommendation, prohibited under NASAA model rules and inconsistent with the fiduciary duty of care (IAA §206). A signed form does not cure an unsuitable recommendation.

Under the Investment Advisers Act Section 206(3), an adviser that arranges an AGENCY CROSS transaction (acting as broker for both its advisory client and the other party) generally must:

• a.Keep its dual role as broker for both the advisory client and the other side strictly confidential in order to avoid biasing either party's independent decision, and simply net the two opposing orders internally at the day's closing price without any written notice or consent
• b.Execute the agency cross only for institutional advisory clients and never for retail individuals under any circumstances
• c.Obtain prior written consent for agency cross transactions, disclose the adviser's role and any compensation from the other side, not recommend the transaction to both parties, and provide an annual summary of such transactions✓
• d.Advise both parties fully on the specific merits of that particular cross transaction so the resulting outcome is even-handed

IAA §206(3) and Rule 206(3)-2 permit agency cross transactions only with prior written client consent, disclosure of the conflict and compensation, a confirmation for each trade, an annual summary, and the adviser must NOT have recommended the transaction to both the buyer and the seller.

An adviser combines several clients' securities with the adviser's own securities in a single account so that ownership cannot be distinguished. This practice is called:

• a.Coordination, one of the recognized methods of registering securities across multiple state jurisdictions at once
• b.Commingling, a prohibited practice that endangers client assets and violates custody and antifraud rules✓
• c.Netting, a permitted efficiency commonly used in block trading for large institutional accounts
• d.Rebalancing, an activity consistent with each client's individual written investment policy statement

Commingling client assets with the adviser's own assets is prohibited under NASAA model rules and IAA Rule 206(4)-2 (custody). Client property must be segregated and held with a qualified custodian so it is protected from the adviser's creditors and cannot be misappropriated.

An investment adviser has a policy of always executing its own firm's proprietary trades ahead of client orders in the same security. This practice of trading ahead of clients is:

• a.A prohibited conflict — an adviser must place client interests first and may not systematically trade ahead of client orders✓
• b.Permissible, because the firm itself assumes all of the market and inventory risk of holding those securities on its own books before reselling them to the client at a set price
• c.Allowed as long as the firm discloses the practice one single time in its initial delivery of the Form ADV brochure
• d.Acceptable, so long as clients ultimately receive an average execution price across the batched orders

The fiduciary duty of loyalty under IAA §206 requires an adviser to put clients first; systematically trading the firm's account ahead of client orders (a form of front-running) breaches that duty and NASAA's unethical-practices rule. Disclosure does not legitimize a practice that harms clients.

An IAR exercises time-and-price discretion for a client (deciding only the price or time of a specified trade the client authorized that day). Under NASAA rules, this limited discretion:

• a.Requires the IAR to obtain prior written discretionary authority in exactly the same manner that full trading discretion always requires, with no exception for same-day price-or-time decisions
• b.Automatically converts the customer's account into a custody account subject to the surprise-examination rule
• c.Is generally permitted for that day without prior written authority, because deciding only the price or time of an otherwise-specified order is not full discretion✓
• d.Is prohibited in each and every circumstance as a form of unauthorized trading in the customer's account

NASAA and industry rules distinguish full discretion (choosing the security, amount, and action — requiring prior WRITTEN authority) from mere time-and-price discretion over an order the client already specified, which may be exercised for that trading day without written authority. Full discretion needs written authorization.

An investment adviser exercises FULL discretion over a client's account. Under the Uniform Securities Act and NASAA rules, the adviser generally must obtain:

• a.The state Administrator's individual advance approval of each and every discretionary trade before it may be entered, together with a separate written consent from the client for that specific order
• b.A written performance guarantee from the firm before any single discretionary trade may be placed in the account
• c.Written discretionary authorization from the client; for advisers, oral discretion may be used for a limited initial period (commonly the first 10 business days) if written authority follows✓
• d.Nothing more than the client's informal oral instruction given once at the time the account is first opened

For investment advisers, NASAA rules permit oral discretionary authority for a limited period (commonly up to 10 business days from the first discretionary transaction) provided written authorization is obtained thereafter. For broker-dealers, prior written authorization is required before the first discretionary trade.

An agent effects a securities transaction for a client but deliberately fails to follow the client's specific instructions in order to obtain a better commission. This is best characterized as:

• a.An unauthorized transaction and a prohibited/unethical practice under NASAA model rules✓
• b.An acceptable practice, provided that the resulting execution price turned out to be favorable to the client
• c.A merely ministerial error that is not subject to any regulatory discipline or sanction
• d.A permitted exercise of the agent's professional judgment in the client's best interest

Failing to follow a customer's explicit instructions, or effecting transactions the customer did not authorize, is unauthorized trading — a dishonest and unethical practice under NASAA's model rule, and a breach of the agent's duties, regardless of whether the price happened to be favorable.

An agent tells a customer that a mutual fund's past 20% return is 'what you will earn next year, guaranteed.' This statement is:

• a.A prohibited practice: predicting or guaranteeing specific future performance and implying past results guarantee future returns is misleading✓
• b.Acceptable, provided that the fund did in fact actually return twenty percent during the immediately preceding calendar year and the customer initials the illustration
• c.Permitted for front-end load mutual funds but not permitted for no-load mutual funds under the rule
• d.Lawful, because open-end mutual funds are actively managed by registered professional portfolio managers

Guaranteeing or predicting specific future returns, and implying that past performance guarantees future results, is a prohibited, misleading practice under USA §101 and NASAA model rules. No agent or adviser may promise a specific return; performance is never guaranteed.

An investment adviser directs client brokerage to a firm that charges higher commissions in exchange for soft-dollar benefits that do not qualify under the research safe harbor. Under fiduciary principles this is:

• a.Acceptable, because the adviser earns additional revenue from the arrangement, and any extra revenue can in theory be reinvested into research and technology that ultimately benefits the very clients paying it
• b.Always permissible without limit, because the duty of best execution is concerned only with the speed of execution
• c.Wholly irrelevant to the adviser's fiduciary duties, because the commissions are ultimately the client's own expense
• d.A potential breach of the duty of best execution and loyalty, requiring disclosure and a determination that the arrangement benefits clients within the Section 28(e) safe harbor✓

An adviser owes a duty of best execution and loyalty (IAA §206). Soft-dollar arrangements are permitted only within the Section 28(e) research safe harbor and must be disclosed; directing client commissions for the adviser's own benefit outside the safe harbor breaches fiduciary duty.

An adviser 'churns' a discretionary advisory account. In the advisory context, excessive trading to generate transaction-based compensation is:

• a.A prohibited practice — excessive trading inconsistent with the client's objectives breaches the fiduciary duty and NASAA's unethical-practices rule✓
• b.Permitted, because the adviser already holds full written discretionary trading authority over the account in question and may trade it as actively as it wishes
• c.Acceptable, as long as each individual trade is separately suitable when it is viewed in isolation
• d.Entirely outside the Act, because churning is a concept that applies only to commission brokerage accounts

Churning — trading excessively relative to the client's objectives and resources to generate compensation — is prohibited for advisers and agents alike under NASAA model rules and IAA §206. Having discretion does not license excessive trading, and 'each trade suitable' does not excuse an unsuitable overall pattern.

Under fiduciary principles and the Investment Advisers Act, when an adviser has a material conflict of interest that cannot be eliminated, the adviser must at minimum:

• a.Increase the client's ongoing advisory fee by a stated percentage in order to compensate the client financially for having to bear the unavoidable conflict of interest
• b.Keep the material conflict entirely confidential in order to avoid needlessly worrying or alarming the client
• c.Immediately resign from all advisory engagements the moment any material conflict of interest is identified
• d.Provide full and fair disclosure of the conflict so the client can give informed consent, consistent with the duty of loyalty✓

The fiduciary duty of loyalty under IAA §206 requires an adviser to eliminate or, if that is not possible, fully and fairly disclose material conflicts so the client can provide informed consent. Concealment breaches the duty; disclosure is the baseline, and the advice must still be in the client's best interest.

An adviser learns material nonpublic information through a client relationship and, rather than trading, 'tips' a friend who then trades on it. Under securities law the adviser has:

• a.Has a complete legal defense, because it was the friend and not the adviser who actually executed the securities trade, and the adviser received no share of the resulting profits at all
• b.Done nothing wrong at all, because the adviser personally refrained from trading in the security in question
• c.Engaged in unlawful tipping — conveying material nonpublic information to another who trades on it violates insider-trading prohibitions and Section 204A duties✓
• d.Acted entirely properly by simply keeping the sensitive information out of the firm's own client accounts

Tipping — passing material nonpublic information to another who trades — violates insider-trading law even if the tipper does not trade, and breaches the adviser's §204A duty to prevent misuse of inside information. Both tipper and tippee can face liability.

An agent backdates order tickets and alters trade confirmations to conceal a late execution. Falsifying firm records in this way is:

• a.Acceptable, provided that a branch office supervisor verbally approved the after-the-fact correction to the order tickets and confirmations before they were re-filed
• b.Permitted, so long as the affected customer ultimately suffers no measurable financial loss from the late fill
• c.A minor clerical matter that falls entirely outside the scope of the state and federal securities laws
• d.A prohibited and fraudulent practice — falsifying books, records, or confirmations violates the antifraud and recordkeeping provisions✓

Falsifying, backdating, or altering firm books, records, order tickets, or confirmations is a prohibited and fraudulent practice under USA §101 and the recordkeeping rules. Accurate records are essential to supervision and investor protection; supervisor approval or absence of loss is no defense.

An adviser deducts advisory fees directly from client accounts held at a qualified custodian. To avoid being subject to the full surprise-examination requirement in many states, the adviser typically must:

• a.Send the client and the custodian an itemized fee invoice showing the calculation at the same time it deducts the fee, per NASAA guidance✓
• b.Never take any advisory fees directly out of client accounts under any facts or circumstances whatsoever, and instead bill every client separately by paper invoice
• c.Deduct advisory fees only once every three years in order to minimize its overall custody exposure
• d.Obtain the state Administrator's written pre-approval before making each individual fee deduction

Direct fee deduction is a form of custody, but NASAA guidance provides relief from certain custody requirements when the adviser sends the client (and the custodian) an itemized invoice showing how the fee was calculated at the time of deduction. Documenting the calculation is the safeguard.

An adviser guarantees a client that the client 'cannot lose money' because the adviser will personally cover any losses. Under the Investment Advisers Act and NASAA rules this is:

• a.Permitted for qualified clients who first sign a written acknowledgment accepting the personal guarantee
• b.Acceptable when the guarantee is limited only to the client's original principal and never to any gains
• c.A prohibited practice — an adviser may not guarantee a client against loss or guarantee any specific result✓
• d.Permitted, provided the adviser maintains sufficient personal net worth to actually honor the guarantee if invoked

Guaranteeing a client against loss or guaranteeing a specific result is a prohibited practice under NASAA model rules and IAA §206 antifraud principles. The adviser's own net worth or a signed acknowledgment does not make a performance guarantee permissible.

An adviser fails to disclose that it receives 12b-1 fees and revenue sharing from the mutual funds it recommends to clients. This omission is:

• a.Permissible, so long as the recommended mutual funds are otherwise suitable for the client's stated objectives and time horizon at the moment of the recommendation
• b.Immaterial, because 12b-1 fees and revenue sharing are extremely common throughout the mutual fund industry
• c.Acceptable, provided the compensation is disclosed only to the adviser's larger institutional clients
• d.A breach of the fiduciary duty of loyalty and the antifraud provisions — compensation-driven conflicts must be fully disclosed to clients✓

Undisclosed compensation such as 12b-1 fees and revenue sharing creates a material conflict that must be disclosed under IAA §206 and the fiduciary duty of loyalty. Failing to disclose payments that could bias the adviser's recommendations is a violation even if the funds are otherwise suitable.

An adviser recommends that a client liquidate a diversified portfolio and invest everything in a single stock that the adviser also owns, without disclosing the adviser's position. The undisclosed personal holding is:

• a.Acceptable, so long as the adviser does not itself sell any of its own shares of that stock at the same moment the client is buying, and holds its position for the long term
• b.Permitted, because advisers are generally expected and even encouraged to invest right alongside their clients
• c.Irrelevant, because the adviser genuinely and sincerely believes in the long-term prospects of the single stock
• d.A material conflict that must be disclosed; recommending a security the adviser owns without disclosure breaches the duty of loyalty and antifraud rules✓

An adviser who recommends a security in which it has a personal position has a material conflict that must be disclosed under IAA §206 and NASAA rules (scalping/undisclosed interest). Failing to disclose the holding — and any intent to trade around the client's order — breaches the duty of loyalty.

An adviser publishes a recommendation to buy a security while intending to sell its own holdings into the demand the recommendation creates. This practice is known as:

• a.Scalping, a fraudulent practice prohibited under the Investment Advisers Act✓
• b.Rebalancing, an ordinary and routine portfolio-management activity performed for clients
• c.Coordination, a recognized method of registering securities in a state
• d.Best execution, a core fiduciary obligation owed to advisory clients

Scalping — recommending a security to clients or the public while intending to trade against that recommendation for the adviser's own benefit — is a fraudulent practice under IAA §206 (SEC v. Capital Gains Research Bureau). It breaches the duty of loyalty by exploiting the advice for personal gain.

An agent splits commissions with an unregistered individual who referred several customers to the agent. Under the Uniform Securities Act, sharing commissions is generally permitted only when the other person is:

• a.An unregistered marketing consultant who was hired specifically to generate qualified sales leads
• b.Any individual at all, provided only that the customer consents in writing to the commission split
• c.Properly registered as an agent, and both agents work for the same or affiliated broker-dealers✓
• d.A member of the agent's own immediate family, regardless of that person's registration status

USA §201 and NASAA rules permit splitting commissions only with another properly registered agent of the same broker-dealer or an affiliated broker-dealer under common control. Paying transaction-based compensation to an unregistered person for securities activity is prohibited.

An adviser's client dies. The adviser continues to place discretionary trades in the account for two weeks under the existing discretionary authority. This is:

• a.Acceptable, as long as the discretionary trades placed during that two-week period after the death all happened to turn out profitable for the account and its eventual beneficiaries
• b.Proper, because a grant of discretionary authority is permanent and continues in force once it has been given
• c.Permitted right up until the estate formally notifies the firm in writing several months later
• d.Improper — discretionary authority and the advisory relationship generally terminate on the client's death, and continued trading is unauthorized✓

Under agency law and NASAA model rules, a grant of discretionary authority (like a power of attorney) generally terminates upon the death or incapacity of the client. Continuing to trade the account after death is unauthorized activity and a prohibited practice; the adviser should cease discretionary trading and await instructions from the estate's legal representative.

Under NASAA model rules, an agent who wishes to open a personal securities account at ANOTHER broker-dealer generally must:

• a.Obtain the state securities Administrator's advance written consent before the outside personal brokerage account may lawfully be opened at the other firm
• b.Trade only in mutual funds and municipal bonds within the outside personal brokerage account
• c.Do nothing at all, because personal brokerage accounts are private and entirely unregulated
• d.Notify the employing broker-dealer and, in most cases, the executing firm of the association, so the accounts can be supervised✓

Under NASAA and industry rules, an agent opening an outside brokerage account must notify the employing broker-dealer, and the executing firm must be told of the agent's association so duplicate confirmations/statements can be provided and the activity supervised. This prevents undisclosed, unsupervised trading.

An investment adviser representative accepts an appointment as trustee for a client's trust and begins paying the adviser's own advisory fees out of the trust to itself without independent oversight. This arrangement:

• a.Is automatically valid and entirely proper, because a duly appointed trustee lawfully controls all of the trust's assets and may pay itself reasonable compensation without any outside review
• b.Creates serious conflicts of interest and custody issues that must be disclosed and independently safeguarded under fiduciary and custody rules✓
• c.Requires no disclosure whatsoever, because the IAR is acting purely in the capacity of trustee and not as an adviser
• d.Is clearly beneficial to the client and therefore raises no conflict of interest at all under the rules

Serving as trustee while also charging advisory fees gives the IAR control over client assets (custody) and a self-dealing conflict. Under IAA §206 and Rule 206(4)-2, such arrangements demand full disclosure, informed consent, and custody safeguards; unchecked self-payment breaches fiduciary duty.

An adviser recommends a variable annuity with a large surrender charge and long surrender period to a client who will need access to the funds within a year. The primary problem is that the recommendation is:

• a.Perfectly suitable, because a deferred variable annuity offers valuable long-term tax deferral of gains and a menu of professionally managed subaccounts
• b.Entirely beyond the Act, because variable annuities are regulated only as insurance products
• c.Unsuitable given the client's short liquidity horizon, a violation of the suitability/best-interest and fiduciary standards✓
• d.Acceptable, because the annuity carries a guaranteed death benefit payable to the client's heirs

A recommendation must fit the client's time horizon and liquidity needs. Placing a client who needs funds within a year into a product with a long surrender period and steep charges is unsuitable, breaching NASAA suitability rules and the fiduciary duty of care. Variable annuities are securities and within the Act.

An adviser wishes to assign its advisory contracts to an acquiring firm following a change in control. Under the Investment Advisers Act, a change in control of the adviser is treated as:

• a.A matter solely for the SEC to review and approve behind the scenes, without any notice to, or consent from, the adviser's existing advisory clients before it takes effect
• b.Legally irrelevant, because only a formal transfer of the actual contract paper counts as an assignment
• c.A routine corporate event that requires no client notice, no client consent, and no filing of any kind
• d.An assignment of the advisory contracts, which requires client consent (positive or negative depending on structure) before it is effective✓

IAA §205 and §202(a)(1) treat a change in control of the adviser (e.g., a majority ownership change) as an 'assignment' of the advisory contracts, requiring client consent. The personal nature of the advisory relationship is why consent is needed when control changes hands.

Under NASAA model rules, an agent who exercises discretion in a customer's account without prior written authorization has:

• a.Done nothing wrong at all, provided that the customer's account happened to increase in value afterward
• b.Acted entirely properly under the rule, because informal verbal authority given by the customer is fully sufficient for an agent of a broker-dealer to exercise discretion
• c.Committed a prohibited practice — an agent must have prior written discretionary authority before exercising discretion✓
• d.Engaged in a permitted practice, provided only that each resulting trade was individually suitable

Unlike investment advisers (who may use limited oral discretion briefly), a broker-dealer agent must obtain PRIOR WRITTEN discretionary authorization before exercising discretion. Trading discretion without it is a prohibited practice under NASAA model rules, regardless of suitability or profit.

A broker-dealer effects a transaction and charges a markup that is excessive relative to the prevailing market price and the services provided. Charging an unfair, excessive markup is:

• a.Acceptable, provided that the customer never specifically asks the firm about the price or the size of the markup charged, and the confirmation lists only the net price
• b.A prohibited practice — markups, markdowns, and commissions must be fair and reasonable in relation to the market and the services rendered✓
• c.Always permissible in any principal transaction, because the firm is trading from its own inventory
• d.Beyond any regulation at all, because securities pricing is set entirely by open market forces alone

Charging unfair or excessive markups, markdowns, or commissions is a prohibited practice under NASAA model rules and the antifraud provisions. Compensation must be fair and reasonable considering the market price, the security, and the services provided; concealing an excessive charge compounds the violation.

An adviser tells clients it is 'registered with and approved by the SEC,' implying the SEC has endorsed the quality of its services. This representation is:

• a.Accurate and fully permissible, because SEC registration does in fact signify that the federal government has reviewed and formally approved the overall quality of the adviser's services
• b.Permitted for federal covered advisers registered with the SEC, but not for advisers registered only with a state
• c.A prohibited misrepresentation — stating or implying that registration means the regulator approved or endorsed the adviser's abilities is misleading and unlawful✓
• d.Harmless promotional marketing of the sort that regulators routinely disregard as mere puffery

IAA §208(a) and NASAA rules prohibit stating or implying that SEC or state registration means the regulator has approved or endorsed the adviser or its qualifications. Registration is not approval; representing otherwise is a material misrepresentation.

An adviser accepts a gift of significant value from a client and does not disclose it, later favoring that client's interests over others in allocation decisions. The failure here most directly implicates:

• a.The registration-by-coordination timing requirements that govern exactly when a federal securities offering may become effective at the state level
• b.The fiduciary duty to treat clients fairly and to disclose conflicts, since undisclosed benefits can bias allocation and breach loyalty✓
• c.The statutory exemption for isolated non-issuer transactions effected through a broker-dealer
• d.The recordkeeping rule's five-year document retention period for advisory books and records

Accepting undisclosed benefits that bias how the adviser allocates opportunities or trades among clients breaches the fiduciary duties of loyalty and fair dealing under IAA §206. Advisers must allocate fairly among clients and disclose conflicts that could influence their impartiality.

An agent, to boost year-end production numbers, recommends that several clients switch mutual-fund families, incurring new sales charges without a meaningful benefit. This practice is:

• a.Encouraged as sound practice, because moving assets among different fund families usefully diversifies the client's overall fund-family exposure and manager risk across the portfolio
• b.Permitted without concern, as long as the client signs a written switch-acknowledgment letter beforehand
• c.Improper switching (a form of churning) — recommending fund switches that generate charges without a legitimate benefit to the client is a prohibited practice✓
• d.Acceptable, because each newly recommended replacement fund is individually suitable for the client

Recommending mutual-fund switches that impose new sales charges without a genuine benefit to the client ('switching' or fund churning) is a prohibited practice under NASAA model rules. It exists to generate charges/commissions and breaches suitability and best-interest obligations.

Under the Uniform Securities Act and NASAA rules, an agent who effects transactions in an account based on inside information provided by a client who is a corporate director has:

• a.Has a valid and complete legal defense, because the agent did not personally originate the material nonpublic information but merely acted on a tip from a corporate insider
• b.Committed only a suitability violation and not any kind of fraud or insider-trading violation
• c.Violated insider-trading prohibitions — trading on material nonpublic information is unlawful regardless of its source✓
• d.Acted lawfully, because the information came directly from the client rather than from the firm itself

Trading on material nonpublic information is prohibited no matter how the information was obtained; the client-source does not create a defense. This violates the antifraud provisions (USA §101) and insider-trading law, and firms must maintain §204A controls to prevent it.

An adviser provides a client with a hypothetical performance illustration that omits the effect of fees and cherry-picks the best historical period. Under the marketing rule and antifraud provisions, this presentation is:

• a.Allowed for accredited investors and qualified purchasers without any further conditions, disclosures, or netting of fees, since sophisticated clients can evaluate the figures themselves
• b.Acceptable, provided the client is simply told that the figures shown are 'for illustration only'
• c.Permitted, because hypothetical performance illustrations are inherently understood to be disclaimed
• d.Misleading and prohibited — performance advertising must be fair and balanced, present net-of-fee results, and not cherry-pick favorable periods✓

IAA Rule 206(4)-1 (marketing rule) and the antifraud provisions require performance advertising to be fair and balanced, to show net-of-fee results, and to avoid misleading cherry-picking of favorable periods. Omitting fees and selecting only the best period is a prohibited, misleading presentation.

An investment adviser wants to keep a client's securities in the adviser's own name 'for convenience.' Holding client securities registered in the adviser's name is:

• a.Acceptable, so long as the adviser sends the client a detailed annual summary listing all of the securities being held registered in the adviser's own name for the client's convenience
• b.A custody arrangement raising misappropriation risk — client securities must be held by a qualified custodian, generally in the client's name, not the adviser's✓
• c.Permitted for any adviser that has filed a current Form ADV Part 2 with its regulator
• d.Encouraged, because registering the securities in the adviser's name streamlines trade settlement

Registering client securities in the adviser's own name is a dangerous form of custody that exposes clients to misappropriation and the adviser's creditors. IAA Rule 206(4)-2 and NASAA custody rules require a qualified custodian and generally that assets be held in the client's name with account statements sent to the client.

A client instructs an agent to buy a security, but the agent, believing a different security is better, buys the different security instead. Regardless of outcome, this is:

• a.Proper and defensible, because the agent used sound professional judgment to buy what it sincerely believed was the better security for the client's benefit and long-term returns
• b.An unauthorized transaction — substituting a different security than the client ordered is a prohibited practice absent discretionary authority✓
• c.Permitted, so long as the substitute security was actually suitable and happened to perform well afterward
• d.A merely ministerial substitution that falls entirely outside the reach of the securities laws

Buying a security other than the one the client specified, without discretionary authority, is an unauthorized transaction and a prohibited practice under NASAA model rules. The agent must follow the client's instructions; good intentions or favorable results do not cure the lack of authorization.

Under the Investment Advisers Act, an adviser that exercises discretion and directs client brokerage owes clients a duty of best execution, which means the adviser must:

• a.Seek the most favorable terms reasonably available under the circumstances, considering price, execution quality, and total cost — not merely the lowest commission✓
• b.Direct every single client trade to whichever broker-dealer happens to pay the adviser the most in soft-dollar credits and other back-end rebates, without regard to price
• c.Ignore execution quality entirely, because commissions are ultimately the client's own responsibility
• d.Always route the order to the broker offering the very lowest commission, regardless of all other factors

Best execution under IAA §206 requires the adviser to seek the most favorable overall terms reasonably available, weighing execution quality, price, speed, and total transaction cost — not simply the lowest headline commission. Directing trades for the adviser's own soft-dollar benefit outside the safe harbor breaches this duty.

An adviser's employee overhears material nonpublic information in an elevator and the firm has no written policies to prevent its misuse. The firm's failure violates:

• a.The exempt-transaction provisions covering isolated non-issuer trades effected through a broker
• b.The registration-by-qualification disclosure requirements applicable to new securities offerings
• c.The civil-liability and rescission provisions found in the Uniform Securities Act, which let a buyer recover the purchase price whenever a security was sold in violation of the Act
• d.Section 204A of the Investment Advisers Act, requiring written policies reasonably designed to prevent the misuse of material nonpublic information✓

IAA §204A requires advisers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (information barriers, restricted lists, training). A firm lacking such controls violates §204A even before any trade occurs.

An investment adviser that is registered in a state moves its principal office and place of business permanently to a different state. Under NASAA rules the adviser generally must:

• a.Register in the new state and comply with that state's requirements, since a place of business there triggers registration (subject to the federal/state division)✓
• b.Do nothing at all until its next scheduled annual registration renewal date comes around on the calendar, at which point it may simply file an address change with the old state
• c.Automatically become a federal covered adviser the moment it relocates across the state line
• d.Cancel all of its existing advisory contracts and start the client relationships over in the new state

Under USA §201 and NASAA rules, maintaining a place of business in a state generally triggers state registration for a state-covered adviser. Relocating the principal office requires registering in the new state and meeting its requirements; relocation alone does not convert a state adviser into a federal covered adviser.

A client asks an agent a question the agent cannot answer accurately. Under NASAA principles, the agent should:

• a.Refer the client to some unrelated third party the agent has never worked with, purely in order to shift and avoid any personal liability for the accuracy of the answer given
• b.Guess based on general market intuition and experience so as not to appear uninformed to the client
• c.Decline to answer beyond the agent's knowledge and obtain accurate information or escalate, rather than make an unsupported or misleading statement✓
• d.Give a confident-sounding answer on the spot in order to preserve the client's trust and confidence

Making statements the agent cannot support, or answering confidently without a basis, risks misrepresentation under USA §101 and NASAA rules. The proper course is to obtain accurate information or refer the matter internally, never to fabricate an authoritative-sounding answer.

An adviser wishes to use social media testimonials from happy clients in its advertising. Under the current SEC marketing rule this is:

• a.Permitted subject to conditions — disclosure of client status and any compensation, adviser oversight and adoption/entanglement responsibility, and a written agreement for compensated promoters✓
• b.Entirely outside the reach of the Advisers Act and its marketing rule, because social-media platforms and the third-party posts appearing on them are wholly unregulated by the SEC and the states
• c.Flatly and absolutely prohibited under all circumstances, exactly as testimonials once were before the rule changed
• d.Permitted only where the testimonials are completely unpaid and were posted spontaneously by total strangers

The amended IAA Rule 206(4)-1 permits testimonials/endorsements, including on social media, subject to conditions: disclosure of whether the promoter is a client and whether compensated, adviser oversight, disqualification provisions, and a written agreement for compensated promoters. The old blanket ban no longer applies.

An agent's broker-dealer is not registered in a state, but the agent solicits several retail residents there. Under the Uniform Securities Act, the agent's solicitation is:

• a.Fully lawful, because individual agents are automatically covered by their broker-dealer's federal registration and therefore need not obtain any separate state license to solicit residents
• b.Acceptable, as long as each solicited resident afterward places only genuinely unsolicited follow-up orders
• c.Permitted, because only the broker-dealer firm, and not the individual agent, must register in the state
• d.Unlawful — both the broker-dealer and the agent generally must be registered in the state to solicit its retail residents (absent an exemption)✓

Under USA §201, to solicit retail residents in a state, both the broker-dealer and the agent generally must be registered there, unless an exemption applies. An agent cannot lawfully transact for a firm that is not properly registered in the state, and there is no automatic federal cover for retail solicitation.

An investment adviser representative leaves a state-registered adviser. Under NASAA rules, the obligation to notify the Administrator of the IAR's termination falls on:

• a.The state securities Administrator itself, which is expected to track all such IAR terminations automatically without any filing from the firm or the representative
• b.Only the departing investment adviser representative, acting entirely on their own initiative
• c.The investment adviser (the employing firm), which must notify the Administrator when an IAR's employment ends✓
• d.No one at all, because an IAR's state registration simply lapses silently upon termination

Under USA §201 and NASAA rules, for state-registered advisers the FIRM (the investment adviser) is responsible for notifying the Administrator when an IAR begins or ends employment. This differs from the broker-dealer/agent context, where the agent and both firms notify. Registrations do not simply lapse without notice.

A broker-dealer wants to combine (net) a customer's purchase and sale in the same security to reduce the customer's commissions on a legitimate transaction. Compared with 'painting the tape,' this legitimate netting is:

• a.Identical in every meaningful respect to unlawful market manipulation such as painting the tape, and therefore flatly prohibited by the antifraud provisions of the Act
• b.Prohibited in all cases unless the state Administrator affirmatively approves the netting in advance
• c.Permissible when it reflects genuine transactions executed for a bona fide purpose, unlike manipulative matched orders designed to create false activity✓
• d.Allowed only for large institutional customers and never for ordinary retail customers of the firm

Genuine transactions executed for a bona fide economic purpose are lawful, even when they net a customer's activity. What the antifraud provisions (USA §101) prohibit is SHAM activity — matched or wash trades designed to create a false appearance of trading. Intent and economic reality distinguish the two.

An adviser discovers it made a trading error that harmed a client account. Consistent with fiduciary duty, the adviser should:

• a.Quietly conceal the trading error from the affected client in order to preserve the client's ongoing confidence in the firm, and absorb the loss internally without ever mentioning the mistake
• b.Promptly correct the error and make the client whole, and disclose the error consistent with the duty of loyalty and care, rather than shifting the loss to the client✓
• c.Wait patiently to see whether the market naturally recovers the loss on its own before doing anything
• d.Charge the full cost of correcting the error back to the client as an ordinary account expense item

The fiduciary duties of loyalty and care under IAA §206 require an adviser to handle trade errors in the client's favor — promptly correcting them and bearing (not shifting) the resulting loss — and to have policies for error correction. Concealing an error or passing its cost to the client breaches those duties.

An agent recommends a security that is suitable for the client but fails to disclose a substantial, known risk specific to that issuer. The failure to disclose the material issuer-specific risk is:

• a.Permissible, provided the specific issuer risk is described somewhere within the many pages of the security's official statutory prospectus, whether or not the client ever reads it
• b.A material omission — suitability does not excuse omitting a material fact needed to keep statements from being misleading✓
• c.Fully excused, because the recommendation itself was determined to be suitable for the client overall
• d.Acceptable, because issuer-specific risk is assumed and understood by all investors as a matter of course

Even a suitable recommendation must be accompanied by disclosure of material facts; omitting a known, material issuer-specific risk violates the antifraud provisions (USA §101). Suitability and full disclosure are separate obligations — satisfying one does not excuse breaching the other.

An IAR tells a prospective client that the IAR 'personally guarantees' the advisory firm's recommendations will beat the market every year. This representation is:

• a.Valid and permissible, because the IAR happens to have a strong, documented, and independently verifiable historical track record of beating the market over many prior years
• b.Merely acceptable puffery of the sort that securities regulators generally do not bother to scrutinize
• c.Permitted for prospective clients who separately qualify as accredited investors under federal rules
• d.A prohibited guarantee and misrepresentation — no adviser or IAR may guarantee performance or that recommendations will outperform✓

Guaranteeing performance or that recommendations will beat the market is a prohibited practice and a material misrepresentation under IAA §206 and NASAA rules. Past results, accreditation, or 'puffery' labels do not make a performance guarantee permissible; future results can never be guaranteed.

Under the Uniform Securities Act, when an adviser deducts fees, exercises discretion, or otherwise touches client assets, the single most important protection for the client's assets against misappropriation is:

• a.Using a qualified custodian and delivering independent account statements to the client, so client assets are segregated and independently verifiable✓
• b.Requiring the client to sign a detailed written waiver that expressly gives up the standard qualified-custodian and independent-statement protections in exchange for lower fees
• c.Allowing the adviser to hold the client's assets in the adviser's own personal account for efficiency
• d.Relying solely and exclusively on the disclosures the adviser makes within its Form ADV filing

The custody framework (IAA Rule 206(4)-2 and NASAA custody rules) protects clients by requiring a qualified custodian and independent account statements, so client assets are segregated from the adviser and independently verifiable. Disclosure alone or client waivers do not substitute for these structural safeguards.

An adviser fails to update its Form ADV after a material change (for example, a new disciplinary event or a change in fee structure). Under the Investment Advisers Act, the adviser has:

• a.Complete discretion to decide entirely for itself whether any particular material change is even worth reporting to regulators, and may defer the amendment until it becomes convenient to file
• b.Violated its updating obligations — Form ADV must be amended promptly for material changes and updated at least annually, and clients must receive updated brochure information✓
• c.A duty to update the Form ADV only if and when a specific client actually requests the current information
• d.No obligation to update the Form ADV at all until the next scheduled five-year renewal cycle arrives

Under IAA Rule 204-1 and the brochure rule, an adviser must amend Form ADV promptly for material changes (such as disciplinary events or fee changes) and at least annually, and must deliver updated brochure information/material-change summaries to clients. Failing to update material information also implicates the antifraud provisions.