NASAA Series 65 — All Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Under Regulation Best Interest, a retail customer is

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• a.0.22
• b.45
• c.4.5✓
• d.9.0

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A private non-operating foundation holds $40 million of investment assets, none used directly in its charitable programs, and has no acquisition debt. Using the statutory minimum investment return, about how much must it distribute for the year?

• a.About $1.6 million, which is 4% of the assets
• b.About $2.8 million, which is 7% of the assets
• c.About $2.0 million, which is 5% of the assets✓
• d.About $1.2 million, which is 3% of the assets

IRC 4942(e)(1) sets the minimum investment return at 5% of the foundation's non-exempt-use assets less acquisition debt, so 5% of $40 million is $2.0 million. Four percent is a common endowment spending rule, not the foundation payout rate. Seven percent is the optional UPMIFA presumption-of-imprudence threshold for endowments. Three percent has no basis in the foundation rules. A shortfall draws a 30% excise tax on undistributed income.IRC s.4942(e)(1)

A university endowment has fallen below the total of the original gifts. The board asks the adviser what UPMIFA allows. Which statement is correct?

• a.The board may still appropriate funds after weighing prudence factors such as inflation, expected total return and the fund's purposes✓
• b.Spending must stop until the fund recovers to the historic dollar value of the original gifts, and only then may appropriations resume
• c.Spending is limited to the interest and dividends the fund actually received that year, with no use of capital gains at all
• d.Spending may not exceed 5% of the fund's value in any year, as the payout rule for a private foundation requires

UPMIFA dropped the historic-dollar-value floor of the older UMIFA, so a fund below its gift value can still support appropriations if the board acts prudently under the listed factors. The floor-based rule describes the old act. An income-only limit is also not in UPMIFA, which uses a total-return approach. The 5% figure belongs to private foundations under IRC 4942, and UPMIFA's only percentage is an optional 7% presumption of imprudence.UPMIFA s.4

A trust pays all net income to the settlor's widow for life, and the principal passes to the settlor's children at her death. The trustee's adviser proposes putting 100% of the trust in high-yield bonds. Which statement best captures the trustee's duty?

• a.The trustee must favor the children, because they hold the ultimate interest and the principal should be preserved for them above all
• b.The trustee must act impartially, weighing the widow's need for income against the children's interest in preserving and growing principal✓
• c.The trustee must favor whichever beneficiary the trustee judges to have the greater financial need, since need sets the order of priority in a trust
• d.The trustee must favor the widow, because she is the only current beneficiary and the trust exists mainly to support her during her lifetime

UPIA s.6 requires a trustee of a trust with two or more beneficiaries to act impartially and take account of their differing interests, so an all-income portfolio shortchanges the remainder beneficiaries. Favoring the current beneficiary, favoring the remaindermen, or favoring the needier party each breaks that duty by ranking one group above the other.Uniform Prudent Investor Act s.6

A corporation's treasurer asks the adviser to invest $5 million that will be needed for a plant purchase in four months. Which ordering of priorities is most appropriate?

• a.Liquidity first, then yield, then safety of principal
• b.Safety of principal first, then liquidity, then yield✓
• c.Yield first, then liquidity, then safety of principal
• d.Safety of principal first, then yield, then liquidity

Cash earmarked for a known near-term outlay must be there in full when needed, so safety comes first, then the ability to convert it to cash, and only then yield. Putting yield ahead of safety invites principal loss. Putting yield ahead of liquidity, as the other two orderings do, risks holding assets that cannot be sold promptly at the payment date.Prudent investor standard; institutional cash management

An adviser holds a client's valid durable power of attorney naming the client's daughter as agent. The client dies on Friday. On Monday the daughter calls to sell stock in the client's account. What should the adviser do?

• a.Decline, because the agent's authority ended at the client's death and the personal representative must now give instructions✓
• b.Accept, because a durable power of attorney keeps its effect until the account is formally retitled in the name of the estate or the heirs
• c.Accept instructions from the daughter for up to 30 days while the estate is being opened and a personal representative is appointed
• d.Accept the order, but only if the sale is made to protect the value of the account for the heirs and the daughter documents the reason

Every power of attorney, durable or not, terminates when the principal dies; durability only keeps it alive through incapacity. After death the court-appointed personal representative holds authority over the account. There is no grace period, and no protective-sale exception lets an agent keep acting after the principal's death.Uniform Power of Attorney Act s.110

A 45-year-old beneficiary of an irrevocable trust phones the adviser and demands that the trust's stock be sold to pay for a boat. The trustee is the adviser's client and has given no such instruction. What should the adviser do?

• a.Execute the sale once the beneficiary signs a written indemnity that holds the adviser harmless for any resulting loss to the trust
• b.Decline to act on the beneficiary's demand and take direction only from the trustee, within the terms of the trust document✓
• c.Execute the sale if the beneficiary is the only living beneficiary and the other remainder interests are contingent or unborn
• d.Execute the sale, because the beneficiary owns the economic interest in the assets and is entitled to direct how they are used day to day

Legal title and investment authority sit with the trustee, who must follow the trust instrument; a beneficiary has no right to direct trades. An economic interest, a signed indemnity, or being the only current beneficiary does not transfer the trustee's authority to the beneficiary.Uniform Trust Code s.801; trust instrument

A custodian of a UTMA account for her nephew asks the adviser to sell shares and wire $15,000 to her own bank account to pay off a credit card. Why must the adviser refuse?

• a.A custodian who is a relative of the minor may not withdraw funds under any circumstances
• b.Withdrawals above the annual gift tax exclusion need court approval before any use
• c.UTMA property belongs irrevocably to the minor, and the custodian may use it only for the minor's benefit✓
• d.UTMA property may not be used for anything until the minor reaches the age of majority

A UTMA gift is irrevocable and the assets are the child's; the custodian is a fiduciary who may spend only for the minor's benefit, so paying the custodian's own debt is improper. The custodian may in fact use funds for the minor before majority, so a total freeze is wrong. Court approval is not triggered by the gift tax exclusion, and a relative may serve as custodian and make proper expenditures.Uniform Transfers to Minors Act

An adviser opens an advisory account for a closely held corporation. The president says she alone will give instructions. What should the adviser obtain to confirm who is authorized to act?

• a.A corporate resolution or incumbency certificate from the board naming the authorized persons and the scope of their authority✓
• b.The corporation's most recent audited financial statements together with a certificate of good standing from the secretary of state
• c.A personal financial statement and the latest tax return from the president, showing that she holds the controlling share of the company
• d.A signed power of attorney from each shareholder naming the president as agent for all decisions in the corporation's securities account

An entity acts through officers whose authority comes from its governing documents, so the adviser needs a board resolution or certificate of incumbency identifying who may open the account and instruct. The president's personal financials do not prove corporate authority. Shareholders do not grant trading authority by power of attorney, and audited statements show finances, not who may act.Corporate account documentation; KYC

In planning a joint account, the husband's questionnaire scores as aggressive and the wife's as conservative. Neither will give ground. What is the adviser's best course?

• a.Discuss the difference with both spouses, agree on a joint allocation or separate sub-portfolios, and document the resolution✓
• b.Follow the spouse who earns the larger share of household income, because that spouse bears the greater share of the financial risk
• c.Use the more aggressive profile because the household's horizon is long and the account is meant for growth
• d.Average the two risk scores and invest at the midpoint without any further discussion, since the result is mathematically neutral for both

The adviser's role is to surface the conflict, explain trade-offs, and reach and record a mutually accepted structure, which may include separate sleeves. Silently averaging the scores hides the disagreement. Deferring to the larger earner treats income as authority over risk preferences. Choosing the aggressive profile overrides one client's stated comfort level.Fiduciary duty; suitability of recommendations

A client's questionnaire rated her as having a high risk tolerance. In the last market selloff she sold all of her equity funds at the bottom. At the next meeting, what should the adviser do?

• a.Move the whole account to cash permanently, since the sale shows that she cannot bear any investment risk and will always sell at the bottom
• b.Rely on the signed questionnaire, because it is the client's own written statement of tolerance and one selloff proves little about it
• c.Make no change until the next annual questionnaire is completed, so that the profile stays consistent from year to year with her signed answers
• d.Treat the behavior as evidence of lower real tolerance, discuss it with her, and revise the risk profile and IPS if she agrees✓

Observed behavior under stress is often a better gauge of tolerance than a questionnaire, so the adviser should discuss the gap and update the documented profile. A signed form does not outrank what the client actually did. Permanent cash ignores her growth needs and capacity. Waiting a year leaves a recommendation based on a profile the adviser has reason to doubt.Fiduciary duty; know-your-client updating

A 58-year-old client has $4 million, a pension that covers all her living costs, and a 25-year horizon, but says a 10% decline would make her ill. How should the adviser set the allocation?

• a.Ask her to sign a waiver acknowledging the risk and then invest to her capacity regardless of what she says about her tolerance
• b.Base the allocation on capacity alone, since only capacity is measurable and feelings should not drive it
• c.Treat her low willingness as a binding limit, explain the long-term cost of lower growth, and document the choice✓
• d.Split the difference by averaging her capacity and her tolerance and setting the allocation midway between them

Capacity is what she can afford to lose; tolerance is what she is willing to endure. When tolerance is the lower of the two, it constrains the recommendation, and the adviser's job is to educate and record the trade-off. A waiver does not make an unsuitable fit suitable, and capacity alone ignores the client who will abandon a plan she cannot stomach. Averaging the two measures produces a portfolio that fits neither the client's circumstances nor her temperament.Risk capacity vs risk tolerance

A client has three goals: a house down payment in 3 years, a child's college in 12 years, and retirement in 27 years. How should the adviser set the investment approach?

• a.Give each goal its own horizon and risk level, with the 3-year money invested conservatively✓
• b.Use the 3-year horizon for all of the assets so that none of the money is ever exposed to a loss
• c.Use the 27-year retirement horizon for the whole portfolio, since the longest horizon gives the most growth potential
• d.Use the roughly 14-year average of the three horizons for one portfolio

Each goal has a different deadline and loss tolerance, so goals-based planning matches assets to each. Applying the longest horizon exposes the down-payment money to equity risk it cannot absorb. Applying the shortest starves the retirement goal of growth. Blending the horizons to a 14-year average fits none of the three goals.Goals-based planning; fiduciary duty

A client's assets are a $420,000 home, $310,000 in retirement accounts, $85,000 in a taxable account, $30,000 in vehicles and $25,000 in cash. Liabilities are a $290,000 mortgage, an $18,000 auto loan and $7,000 of credit card debt. What is the client's net worth?

• a.$870,000
• b.$555,000✓
• c.$580,000
• d.$135,000

Total assets are 420,000 + 310,000 + 85,000 + 30,000 + 25,000 = $870,000. Total liabilities are 290,000 + 18,000 + 7,000 = $315,000. Net worth is 870,000 - 315,000 = $555,000. The $580,000 figure subtracts only the mortgage, the $135,000 figure leaves out the home while still subtracting the mortgage, and $870,000 is total assets with no liabilities deducted.

A client earns $9,000 a month before tax and $7,000 after tax. Monthly obligations are a $1,980 mortgage payment including taxes and insurance, a $450 car loan, a $320 student loan and $150 in minimum credit card payments. What is the back-end debt-to-income ratio?

• a.32.2%✓
• b.10.2%
• c.41.4%
• d.22.0%

Total monthly debt payments are 1,980 + 450 + 320 + 150 = $2,900, and 2,900 / 9,000 gross income = 32.2%. The 22.0% figure is the front-end ratio using the housing payment alone. The 41.4% figure divides by take-home pay, which is not the convention. The 10.2% figure leaves out the housing payment.

A client with no current savings wants $300,000 in 15 years. She expects a 6% annual return and will deposit the same amount at the end of each year. About how much must she deposit annually?

• a.$12,159, which assumes deposits at the start of each year
• b.$20,000, which divides the goal by 15 and ignores growth
• c.$18,000, which is 6% of the goal
• d.$12,889, using the future value of an annuity factor✓

The future-value-of-annuity factor at 6% for 15 years is (1.06^15 - 1) / 0.06 = 23.276, so the deposit is 300,000 / 23.276 = about $12,889. Dividing $300,000 by 15 gives $20,000 and ignores growth. About $12,159 is the answer for deposits made at the start of each year. Multiplying $300,000 by 6% gives $18,000, a single year's interest, which is not a deposit schedule.

A retiree needs $72,000 a year in today's dollars. Social Security will cover $30,000 of that. Using a 4% initial withdrawal rate, what portfolio is needed, in today's dollars?

• a.$1,050,000✓
• b.$840,000
• c.$1,800,000
• d.$750,000

The portfolio must fund only the $42,000 gap (72,000 - 30,000), and 42,000 / 0.04 = $1,050,000. The $1,800,000 figure capitalizes the full $72,000 and ignores Social Security. The $840,000 figure divides the gap by 5% rather than 4%. The $750,000 figure capitalizes the Social Security income instead of the shortfall.

A child will start college in 10 years. The first year costs $50,000 in today's dollars, and college costs are expected to rise 5% a year. What will the first year cost then?

• a.About $77,566
• b.About $75,000
• c.About $52,500
• d.About $81,445✓

Compounding gives 50,000 x 1.05^10 = about $81,445. The $75,000 figure adds 5% simple interest for ten years. The $77,566 figure compounds for only nine years. The $52,500 figure applies a single year of inflation.

A client's essential living costs are $4,200 a month and her gross income is $5,600 a month. She wants an emergency fund equal to six months of essential costs and holds $15,000 in liquid savings. What is the shortfall?

• a.$10,200, the six-month target of $25,200 less savings✓
• b.$18,600, a target sized on gross income
• c.$12,600, a three-month cushion
• d.$25,200, the target with no credit for savings

The target is 6 x 4,200 = $25,200, and 25,200 - 15,000 = $10,200 is the shortfall. The $18,600 figure sizes the fund from gross income (6 x 5,600 = 33,600) rather than essential costs. The $25,200 figure ignores existing savings. The $12,600 figure is a three-month cushion.