CSLB General Building (B) — All Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• a.Obtain prior written client consent and disclose the conflict✓
• b.Never disclose the arrangement to clients
• c.Guarantee the client a profit
• d.Charge a performance fee

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

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

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

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

Which activity constitutes a prohibited misuse of material nonpublic information?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• a.The custody rule's surprise examination
• b.Privacy rules (such as Regulation S-P) governing the safeguarding of customer information✓
• c.The performance-fee restriction
• d.The brochure rule's 48-hour delivery standard

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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