NASAA Series 65 — All Questions

Under the Uniform Securities Act (1956), the Administrator has jurisdiction over an offer to sell a security when the offer:

• a.Reaches the state only through a radio or television program that originates outside the state
• b.Originates in the state, is directed into the state, or is accepted in the state✓
• c.Is never subject to state jurisdiction if the issuer is located out of state
• d.Is published in a bona fide out-of-state newspaper of general, regular, and paid circulation that is distributed in the state

An offer is made in the state, and the Act applies, when the offer originates from the state or is directed to the state and received there; an offer to buy can also be accepted in the state. A radio or television program that originates outside the state, and an out-of-state newspaper of general, regular, and paid circulation, do not make an offer in the state. The issuer's location does not remove an offer that is directed into the state.Uniform Securities Act (1956) Section 414

Under the Uniform Securities Act (1956), an isolated nonissuer transaction is:

• a.A transaction that is exempt only when the customer's order was unsolicited
• b.An exempt transaction involving infrequent, isolated trades not made by the issuer✓
• c.A limited sale of new shares by the issuer to a few investors
• d.A transaction that is exempt from the antifraud provisions as well as from registration

An isolated nonissuer transaction, meaning an infrequent secondary trade that does not benefit the issuer, is exempt from registration. The unsolicited-order exemption is a separate exemption, a sale by the issuer is not a nonissuer transaction, and no exemption in the Act removes a transaction from the antifraud provisions.Uniform Securities Act (1956) Section 402(b)(1)

An advisory contract with a retail client contains a provision stating that the adviser is not liable for any client losses except in cases of gross negligence. Such a provision is generally:

• a.A misleading hedge clause that may violate the antifraud provisions✓
• b.Acceptable whenever the client initials the paragraph at account opening
• c.Valid if the clause is fully described in Form ADV Part 2A
• d.An enforceable limitation permitted for all state-registered advisers

Section 215(a) of the Advisers Act voids any provision binding a person to waive compliance with the Act. In its 2019 fiduciary interpretation the SEC withdrew the Heitman no-action letter and said there are few if any circumstances in which a hedge clause in an agreement with a retail client is consistent with the antifraud provisions, even if the agreement says the client keeps its non-waivable rights. A client's initials do not cure the problem, disclosure of the clause in Form ADV does not make it valid, and state registration does not create an exception.Investment Advisers Act ss.206(1)-(2), 215(a); SEC Release IA-5248 (2019)

An investment adviser inadvertently receives client funds in the mail, such as a check made payable to the client. Under the SEC custody rule, the adviser avoids being deemed to have custody by:

• a.Holding it until the client's next quarterly review meeting, then returning it to the sender
• b.Forwarding it to the client's custodian within ten business days of receiving it
• c.Returning it to the sender promptly, and in any case within three business days of receipt✓
• d.Depositing it in a client-titled bank account over which the adviser has signing authority

Custody includes possessing client funds or securities, unless the adviser receives them inadvertently and returns them to the sender promptly, and in any case within three business days of receiving them. Holding the check until a quarterly meeting blows through that deadline, and forwarding it to a custodian on a ten-business-day schedule uses both the wrong recipient and the wrong period. Depositing it in an account the adviser can sign on is itself custody, because the adviser then has authority over the client's money.17 CFR 275.206(4)-2(d)(2)(i)

Under the Uniform Securities Act (1956), the Administrator may examine the books and records of a registered investment adviser:

• a.Only after giving the firm thirty days' written notice of the examination
• b.Only with a subpoena issued by a court of proper jurisdiction
• c.At any reasonable time, within or outside the state, without prior notice✓
• d.Only when a written customer complaint has been filed against the firm

Section 203(d) makes the required records subject, at any time or from time to time, to reasonable periodic, special, or other examinations by the Administrator's representatives, within or outside the state, as the Administrator deems necessary or appropriate in the public interest or for the protection of investors. The Act sets no advance-notice period, does not make a subpoena or court order a precondition for examining records, and does not require a customer complaint first.Uniform Securities Act (1956) s.203(d)

An insurance company authorized to do business in a state issues both fixed and variable annuity contracts. Under the Uniform Securities Act (1956):

• a.Both contracts are exempt securities because the insurer is authorized
• b.The fixed annuity is not a security, but the variable annuity is a nonexempt security✓
• c.Neither contract is a security, so state registration can never apply
• d.The variable annuity is an exempt security, but the fixed annuity is not

Section 401(l) excludes from the definition of security an insurance policy or annuity contract under which the insurer promises to pay a fixed sum, so the fixed annuity is outside the securities laws. A variable annuity pays according to the results of a segregated investment account, so it is a security, and the Section 402(a)(5) exemption for insurer-issued securities expressly does not reach it. The variable contract must therefore be registered or otherwise exempt, and its seller must be registered. The insurer's authorization to do business in the state does not make both contracts exempt, and the variable contract is not the exempt one.Uniform Securities Act (1956) s.401(l); s.402(a)(5)

Under the Uniform Securities Act (1956), a customer telephones an agent of a registered broker-dealer and, without any prompting from the firm, asks to buy a nonexempt, unregistered security in a nonissuer transaction. This trade is:

• a.Permitted only when the customer is an accredited investor
• b.An exempt transaction, because the customer's order was unsolicited✓
• c.An exempt security, because the buyer initiated the contact first
• d.Prohibited, because the security is not registered in that state

Unsolicited nonissuer transactions are exempt TRANSACTIONS under the Uniform Securities Act, so the registration requirement does not attach even though the security itself is not registered or exempt. The Administrator may require the customer to sign an acknowledgment that the order was unsolicited. Note the vocabulary trap: the exemption attaches to the transaction, never to the security.Uniform Securities Act (1956) s.402(b)(3)

An investment adviser has custody of client assets. The qualified custodian holding the assets must send account statements to the clients:

• a.At least quarterly✓
• b.Only when the adviser requests it
• c.At least monthly
• d.Once each year with the tax forms

The custody rule requires statements from the qualified custodian at least quarterly, identifying the assets and any transactions. Delivery cannot depend on the adviser, there is no monthly mandate in the rule, and an annual mailing is too infrequent.17 CFR 275.206(4)-2

Besides statements sent to clients, an adviser with custody of client assets generally must also have an independent public accountant:

• a.Approve every trade the adviser places before it is sent to the market
• b.Examine the assets without notice at least once each calendar year✓
• c.Audit the adviser's fee calculations every quarter and report to clients
• d.Certify the adviser's performance figures before each client mailing

The custody rule calls for a surprise examination by an independent public accountant at least once a calendar year, unless an exception applies. The test is verification of assets, not fee audits, performance certification or trade approval.17 CFR 275.206(4)-2

An adviser's books and records generally must be kept for:

• a.Five years from the date on which each record was first created
• b.Five years from the end of the fiscal year of the last entry✓
• c.Seven years, all of them at the adviser's principal office
• d.Three years after the client relationship ends, wherever kept

The record-keeping rule runs five years from the end of the fiscal year in which the last entry was made, and the first two years must be kept in an appropriate office of the adviser. Counting from creation or from the end of the client relationship changes the clock, and seven years is not the requirement.17 CFR 275.204-2(e)(1)

Under the SEC's brochure rule, a registered adviser must give a new client its Form ADV Part 2A brochure:

• a.Only when the client requests it in writing after signing
• b.Before or at the time the advisory contract is entered into✓
• c.Within 30 days after the advisory contract is signed by the client
• d.Within 120 days after the end of the client's first year

The brochure goes to a prospective client before or at the time the contract is signed. The 30-day period belongs to Form CRS requests. Delivery on request only would defeat disclosure. The 120-day deadline governs the annual update for existing clients, not new ones.17 CFR 275.204-3

An SEC-registered adviser's assets under management have grown to $105 million. Under the SEC's rules, the adviser:

• a.Must withdraw immediately, because assets are below the $110 million threshold
• b.Must move to state registration, because assets are below $125 million
• c.Must file an entirely new SEC registration for each fiscal year
• d.May remain SEC-registered unless assets fall below $90 million✓

The buffer lets an SEC adviser remain registered between $90 million and $110 million, with registration optional from $100 million. Withdrawing at $105 million is not required. A $125 million threshold does not exist, and annual re-registration is not needed.17 CFR 275.203A-1

Under the Uniform Securities Act, an adviser with no place of business in a state is exempt from registration there if, in the preceding 12 months, it advised how many resident clients?

• a.No more than fifteen
• b.No more than ten
• c.No more than five✓
• d.No more than three

The de minimis exemption in Section 403 covers an adviser without a place of business in the state that has no more than five resident clients in the preceding 12 months. Ten and fifteen exceed the cap. Three is below it, so it would exempt fewer advisers than the Act does.USA 2002 s.403(b)(2)

An investment adviser representative leaves a registered advisory firm and does not join another one. The representative's state registration:

• a.Stays effective through the end of the calendar year of departure
• b.Transfers to the representative's personal name and stays in effect
• c.Continues in effect until the state takes formal action to revoke it
• d.Is ineffective until the representative joins another adviser✓

Under Section 404(c), an IAR's registration lapses in effect while the person is not employed by or associated with a registered or notice-filed adviser. It does not run on calendar time, convert to a personal registration, or stay in force until revoked.USA 2002 s.404(c)

Under the SEC's interpretation of the adviser's fiduciary duty, a client's consent can:

• a.Remove the duty of care if the client is sophisticated
• b.Shape the scope of the relationship, but cannot waive the duty itself✓
• c.Remove only the duty of loyalty
• d.Waive the duty entirely when the client signs a hedge clause

The SEC states the fiduciary duty applies to the whole relationship and cannot be waived, though informed consent can set its scope. A clause purporting to waive the duty is not effective, and neither element of the duty can be dropped for sophisticated clients.SEC Release IA-5248

An adviser accepts oral discretionary instructions from a client to start trading. The adviser must obtain written discretionary authority within:

• a.Ten business days after the first transaction✓
• b.Five business days before the first transaction
• c.Thirty days after the account is opened
• d.One year after the first transaction

NASAA's rule on unethical business practices requires written authority within 10 business days after the first transaction made under oral authority. It does not require advance writing in every case, and 30 days or one year is too long.NASAA Model Rule 102(a)(4)-1(b)

An adviser's compensation will depend on which product a client chooses. The adviser must disclose the conflict in writing:

• a.After the client accepts the recommendation
• b.Only when the client asks
• c.Before any advice is given✓
• d.Within 30 days of the sale

NASAA's rule requires written disclosure of material conflicts before advice is rendered, so the client can weigh the incentive. Disclosure after the sale or on request would leave the client without that information when it matters.NASAA Model Rule 102(a)(4)-1(k)

An adviser wants to sell a security from its own inventory to a client. The adviser must:

• a.Disclose its principal role in writing and get consent before completion✓
• b.Disclose the role only after the trade settles, in the next quarterly report
• c.Obtain the client's verbal consent once a year to cover all later trades
• d.Skip disclosure whenever the price equals the prevailing market price on that day

A principal trade requires written disclosure of the capacity and the client's consent before completion of the transaction. Disclosure after settlement is too late, an annual verbal consent is not enough, and a fair price does not remove the requirement.Advisers Act s.206(3)

An adviser proposes a fee equal to 20% of the capital appreciation in a client's account. This fee is generally prohibited unless the client:

• a.Receives quarterly performance reports from the adviser
• b.Has kept the account open with the adviser for more than one year
• c.Signs a waiver releasing the adviser from any liability for losses
• d.Is a qualified client under the rule's asset or net worth tests✓

Section 205 bars fees based on capital gains or appreciation, with exceptions including qualified clients under Rule 205-3, whose dollar thresholds the SEC adjusts for inflation. A waiver cannot override the prohibition, and neither reports nor account age create an exception.Advisers Act s.205(a)

Under an adviser's code of ethics, an access person must submit transaction reports no later than how many days after the end of each calendar quarter?

• a.10 days
• b.60 days
• c.30 days✓
• d.45 days

The code of ethics rule requires quarterly transaction reports within 30 days after the quarter ends. The 10-day figure is for the initial holdings report, and 45 days is the currency requirement for the information in it. The 60-day period is not used.17 CFR 275.204A-1

An adviser's advertisement shows a model portfolio's gross performance. The adviser must also show:

• a.Net performance with equal prominence✓
• b.Net performance in a footnote
• c.Performance of an unrelated index only
• d.The adviser's best-year results

The marketing rule requires that gross performance be accompanied by net performance, presented with at least equal prominence and over the same period. An index alone does not meet that, a footnote is not equally prominent, and best-year results are the opposite of balanced.17 CFR 275.206(4)-1

A client signs an advisory contract. Which clause must it contain?

• a.A fixed term of at least three years before the client may cancel
• b.A requirement that the client prepay a full year of fees up front
• c.A guarantee that the account will earn a minimum annual return
• d.A bar on assigning the contract without the client's consent✓

Section 205(a)(2) requires an advisory contract to provide that no assignment occurs without the client's consent. A guaranteed return is itself improper, and neither a minimum term nor prepaid fees is mandated.Advisers Act s.205(a)(2)

Under NASAA's model rule, a state-registered adviser's written advisory contract must disclose, among other items:

• a.The amount of prepaid fee returned if the contract ends before the term✓
• b.The adviser's expected annual rate of return on the account
• c.A list of the other clients that the adviser serves
• d.The client's net worth and income during the previous year

The model rule requires the contract to state the services, term, fee and fee formula, the amount of prepaid fee to be returned on termination or non-performance, whether the adviser has discretion, and that the contract cannot be assigned without consent. Expected returns would be a forbidden guarantee, and client lists and client finances are not contract terms.NASAA Model Rule 102(a)(4)-1(p)

An investment adviser's duty regarding material nonpublic information is to:

• a.Establish, maintain and enforce written policies reasonably designed to prevent its misuse✓
• b.Report each instance of such information to FINRA within 10 days
• c.Refuse to employ anyone who has previously had access to it
• d.Pass it to every client at the moment the adviser receives it

Section 204A requires written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, and NASAA's model rule treats a failure to do so as unethical. There is no FINRA reporting requirement of that kind, no bar on hiring, and passing inside information to clients would itself be misuse.Advisers Act s.204A

Under the Advisers Act, which description fits an investment adviser?

• a.A person who trades securities only for the person's own account
• b.A person who advises close friends about securities without any pay
• c.A person who, for compensation, is in the business of advising others about securities✓
• d.A person who sells securities to the public and gets no special pay for advice

The definition combines advice about securities, a business of giving it, and compensation. Trading only for oneself involves no advice to others, free informal advice involves no compensation or business, and a broker-dealer whose advice is solely incidental and paid no special compensation is excluded.15 USC 80b-2(a)(11)

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

• a.Within five business days after the first trade is placed
• b.Within 30 days after the advisory contract is signed
• c.Before or at the time the advisory contract is entered into✓
• d.Only when the client asks for a copy in writing

Rule 204-3 requires delivery of the brochure before or at the time the adviser enters into the advisory contract, so the client has it when committing. A 30-day or five-day window after signing is too late to inform the decision. Delivery is not triggered by a client request.Advisers Act Rule 204-3

An adviser's fiscal year ended December 31, and its brochure changed materially during the year. By when must it send each client an updated brochure or a summary of material changes?

• a.30 days after fiscal year-end
• b.120 days after fiscal year-end✓
• c.90 days after fiscal year-end
• d.60 days after fiscal year-end

Rule 204-3 requires annual delivery within 120 days after the end of the adviser's fiscal year when there have been material changes. The 90-day figure is the deadline for filing the annual updating amendment to Form ADV, not the client delivery deadline. The 30- and 60-day periods are not part of the rule.Advisers Act Rule 204-3

Within how many days after the end of its fiscal year must an investment adviser file its annual updating amendment to Form ADV?

• a.90 days✓
• b.120 days
• c.45 days
• d.60 days

The annual updating amendment is due within 90 days after the fiscal year-end. The 120-day period is the client brochure delivery deadline. The 45- and 60-day periods are not Form ADV deadlines.Form ADV

Under the Advisers Act books and records rule, how long must a registered adviser retain its required records?

• a.Seven years, with the first three kept at an appropriate adviser office
• b.Three years, the first one on site at the adviser's main office
• c.Five years, every one of them kept on site at the adviser
• d.Five years, the first two in an appropriate office of the adviser✓

Rule 204-2(e) requires retention for 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. The other retention periods are not in the rule. Only the first two years must be kept in an office of the adviser, so the remaining years can be kept elsewhere.Advisers Act Rule 204-2

An SEC-registered adviser has custody of client funds. Which examination does the custody rule require?

• a.A quarterly review by the adviser's chief compliance officer
• b.A semiannual verification by the qualified custodian's auditor
• c.An annual announced audit by the SEC staff
• d.An annual surprise examination by an independent public accountant✓

Rule 206(4)-2 requires an adviser with custody to undergo a surprise examination by an independent public accountant at least once each calendar year, in addition to having a qualified custodian send quarterly account statements to clients. The adviser's own compliance officer is not independent. The SEC does not conduct annual announced audits of each adviser. The qualified custodian's auditor is not the adviser's examiner.Advisers Act Rule 206(4)-2

An investment adviser's executive makes a political contribution above the de minimis amount to a state official who can influence the choice of advisers for a public pension plan. For how long is the adviser barred from receiving compensation for advisory services to that government entity?

• a.Five years
• b.Three years
• c.One year
• d.Two years✓

The pay-to-play rule imposes a two-year time-out on compensation from the government entity after a covered contribution. One year is shorter than the rule requires. Three and five years are longer than the rule requires.Advisers Act Rule 206(4)-5

Under the pay-to-play rule, an investment adviser representative may contribute up to what amount per election to an official for whom he is entitled to vote without triggering the two-year time-out?

• a.$150
• b.$500
• c.$1,000
• d.$350✓

The de minimis exception allows $350 per election to an official for whom the contributor can vote. The $150 limit applies to an official for whom the contributor cannot vote. The $500 and $1,000 figures are not rule thresholds, and $1,000 is the Marketing Rule's limit for endorsement compensation.Advisers Act Rule 206(4)-5

Under an adviser's code of ethics, within how many days of becoming an access person must the individual submit an initial holdings report?

• a.10 days✓
• b.30 days
• c.45 days
• d.60 days

Rule 204A-1 requires an initial holdings report no later than 10 days after a person becomes an access person, with information current as of a date no more than 45 days earlier. Thirty days is the deadline for quarterly transaction reports after quarter-end. Forty-five days is the allowed age of the information. The 60-day period is not in the rule.Advisers Act Rule 204A-1

Under the Marketing Rule, an adviser pays a promoter for a client endorsement. The compensation is treated as de minimis if it totals no more than

• a.$1,000 during the preceding 12 months✓
• b.$5,000 during the preceding 12 months
• c.$500 during the preceding 12 months
• d.$1,000 during the preceding five years

Rule 206(4)-1 defines de minimis compensation as $1,000 or less (or equivalent non-cash compensation) during the preceding 12 months, and such an endorsement is exempt from the written agreement and disqualification requirements. The other amounts and periods are not in the rule.Advisers Act Rule 206(4)-1

An SEC-registered adviser may generally charge a performance-based fee to which client?

• a.Any client who has been with the adviser for five years
• b.A qualified client✓
• c.Any client who is an accredited investor
• d.Any client who gives written consent

Section 205(a)(1) prohibits performance fees except for qualified clients, as defined in Rule 205-3 by asset and net worth tests. Client consent does not overcome the prohibition. Accredited investor status uses different tests and does not automatically make a client a qualified client. Length of the relationship is not a criterion.Advisers Act Section 205

An adviser's advisory contract may not be assigned without which of the following?

• a.The client's consent✓
• b.Notice filed with the SEC
• c.The state administrator's approval
• d.The adviser's chief compliance officer's approval

Section 205(a)(2) requires an advisory contract to provide that it cannot be assigned without the client's consent, which includes a transfer of a controlling block of the adviser. Regulators do not approve assignments, and the CCO's approval is an internal matter that does not bind the client.Advisers Act Section 205

A supervised person of an SEC-registered adviser serves 100 clients. Eight are natural persons who are not qualified clients, and the rest are institutions. Is he an investment adviser representative for state registration purposes?

• a.Yes, because he works for an adviser registered with the SEC
• b.No, because retail clients are not more than 10% of his clients✓
• c.Yes, because he has more than five retail clients
• d.No, because employees of an SEC-registered adviser are always exempt

Under Rule 203A-3, a supervised person is an investment adviser representative only if he has more than five natural-person clients who are not qualified clients and those clients are more than 10% of his clients. Eight of 100 is 8%, so he fails the second part. Having more than five retail clients is necessary but not sufficient. An SEC-registered employer does not make the person an IAR, and the exemption turns on his client mix, not on the employer.Rule 203A-3

Under the Uniform Securities Act (1956), an investment adviser with no place of business in a state is excluded from the definition of investment adviser there if it has had no more than how many non-institutional clients there during the preceding 12 months?

• a.Fifteen
• b.Five✓
• c.Ten
• d.Three

Section 401(f)(6)(B) excludes an adviser with no place of business in the state that has not directed business communications into the state to more than five clients other than institutions in any 12 consecutive months. Three is stricter than the rule. Ten and fifteen exceed the limit.Uniform Securities Act (1956) s.401(f)(6)(B)

Under the Uniform Securities Act, an offer made to no more than how many persons in the state during any 12 consecutive months is exempt from registration, if other conditions are met?

• a.Fifteen
• b.Ten✓
• c.Five
• d.Thirty-five

Section 402(b)(9) exempts offers directed to not more than ten persons in the state in any 12 consecutive months, other than institutional buyers, if the seller reasonably believes the buyers are purchasing for investment and no commission is paid for soliciting. Five is the adviser client count, fifteen is not a statutory limit, and thirty-five is a Rule 506(b) figure.Uniform Securities Act Section 402

Under the Uniform Securities Act, a person who willfully violates the Act is subject to what criminal penalty?

• a.A fine of up to $5,000 and imprisonment of up to one year, both required
• b.A fine of up to $10,000, imprisonment of up to five years, or both
• c.A fine of up to $5,000, imprisonment of up to three years, or both✓
• d.A fine of up to $1,000, imprisonment of up to six months, or both

Section 409 of the 1956 Act provides for a fine of up to $5,000, imprisonment of up to three years, or both. The higher figures and the lower figures do not match the Act, and the penalty is not a mandatory combination of both.Uniform Securities Act Section 409

A broker-dealer files its registration application and the administrator takes no action and issues no denial order. When does the registration become effective?

• a.At noon on the 10th day after the application is filed
• b.Immediately when the application is filed
• c.Only after the administrator issues an order granting it
• d.At noon on the 30th day after the application is filed✓

Under the 1956 Uniform Securities Act, Section 202(a), if no denial order is in effect and no proceeding is pending under Section 204, registration becomes effective at noon on the 30th day after the application is filed, though the administrator can set an earlier date or defer it. (The 2002 Act, Section 406(c), uses the 45th day.) Registration is not automatic on filing, 10 days is not the statutory period, and an affirmative order is not required.Uniform Securities Act (1956) Section 202(a); cf. Uniform Securities Act (2002) Section 406(c)

An estate-planning attorney tells a client to sell a block of stock to fund a trust and charges only the ordinary legal fee. Under the Uniform Securities Act, the attorney is:

• a.An investment adviser, because the advice named a specific security
• b.An investment adviser, because the advice was given for compensation
• c.Excluded, because the advice was solely incidental to practicing law✓
• d.An investment adviser representative, because the client is an individual

A lawyer, accountant, engineer or teacher is excluded when advisory services are solely incidental to the practice of the profession and carry no special compensation. Naming a security or being paid does not by itself create adviser status, and the representative label applies only to people working for a registered adviser.Uniform Securities Act Section 401

A state securities administrator's authority over a federal covered investment adviser includes which of the following?

• a.Requiring a notice filing and fees, and enforcing antifraud provisions✓
• b.No authority of any kind within the state
• c.Denying the adviser's SEC registration within the state
• d.Requiring full state registration and review of its business practices

Under NSMIA, states may require notice filings and fees from federal covered advisers and retain antifraud enforcement authority. They cannot require registration or impose their own books and records and capital requirements, and they cannot deny an SEC registration. They also retain the authority to require registration of representatives with a place of business in the state.NSMIA

An investment adviser with $60 million of regulatory assets under management and no exemption from registration generally registers with which regulator?

• a.The state securities administrator in its home state✓
• b.The SEC only
• c.Neither, because advisers under $100 million are exempt
• d.Both the SEC and each state where it has clients

Mid-sized advisers, with assets between $25 million and $100 million, are generally prohibited from SEC registration and register with the state, except for certain circumstances. An adviser at $60 million is below the SEC threshold. Dual registration is not required. Advisers under $100 million are not exempt from registration; they register with the state.SEC adviser registration

A large adviser is registered with the SEC. It may remain SEC-registered until its regulatory assets under management fall below what amount?

• a.$110 million
• b.$90 million✓
• c.$100 million
• d.$75 million

The buffer rule lets an SEC-registered adviser remain registered until assets fall below $90 million, while an adviser must register with the SEC once assets reach $110 million. The $100 million figure is the upper limit for mid-sized advisers. The $75 million figure is not a threshold.SEC adviser registration

An SEC-registered adviser requires clients to prepay fees six months in advance. Above what prepayment amount per client must the adviser include an audited balance sheet in its brochure?

• a.$1,000
• b.$2,500
• c.$500
• d.$1,200✓

Item 18 of Form ADV Part 2A requires a balance sheet if the adviser requires or solicits prepayment of more than $1,200 per client six or more months in advance. The $500, $1,000 and $2,500 figures are not the Item 18 threshold.Form ADV Part 2A

Under ERISA, a plan fiduciary who handles plan funds must be bonded for at least what percentage of the funds handled?

• a.10%✓
• b.5%
• c.15%
• d.25%

ERISA Section 412 requires a fidelity bond of at least 10% of the funds handled, with a $1,000 minimum and generally a $500,000 maximum per plan. Other percentages do not match the statute.ERISA Section 412

Which ERISA section requires a plan fiduciary to diversify plan investments unless it is clearly prudent not to do so?

• a.Section 404✓
• b.Section 409
• c.Section 412
• d.Section 406

ERISA Section 404 sets the prudent person and diversification duties. Section 406 prohibits certain transactions between the plan and parties in interest. Section 409 makes fiduciaries personally liable for breaches. Section 412 covers bonding.ERISA Section 404

To obtain relief from liability under ERISA Section 404(c) for participant investment choices, a plan must offer at least how many diversified investment alternatives with materially different risk and return characteristics?

• a.Two
• b.Five
• c.Ten
• d.Three✓

The Section 404(c) regulation requires at least three diversified alternatives with materially different risk and return characteristics, and participants must be able to give investment instructions at least quarterly. Two alternatives would not give a meaningful range, and five and ten are not regulatory requirements.ERISA Section 404(c)

Under the Section 28(e) safe harbor, which product may an adviser pay for with client commissions without breaching its fiduciary duty?

• a.Travel and entertainment for the adviser's staff
• b.Rent for the adviser's office space
• c.Computer hardware used for the adviser's administration
• d.A research report used in making investment decisions✓

The 28(e) safe harbor protects the use of client commissions for brokerage and research services that assist the adviser in its investment decision-making. Rent, administrative hardware and travel and entertainment are overhead and are outside the safe harbor.Exchange Act Section 28(e)