NASAA Series 66 — All Questions

An independent public accountant completes an adviser's annual surprise examination on September 15, 2026, and no material discrepancy is found. By what date must the accountant file the Form ADV-E certificate with the Commission?

• a.September 16, 2026
• b.December 14, 2026
• c.March 15, 2027
• d.January 13, 2027✓

The written agreement must require the accountant to file the certificate on Form ADV-E within 120 days of the time chosen for the examination. Counting 120 days from September 15 gives January 13, 2027. December 14 counts only 90 days. March 15 counts six months, which is not the period in the rule. September 16 is the next day, which resembles the one-business-day notice that applies to discrepancies and not the certificate filing.17 CFR 275.206(4)-2(a)(4)

During a surprise examination of an adviser, the independent accountant finds a material discrepancy in the client assets. What must the accountant do under the SEC custody rule?

• a.Report it to the adviser, which then must notify the Commission within four business days
• b.Notify the Commission within one business day of the finding, by email or fax✓
• c.Describe it in the Form ADV-E certificate filed within 120 days, with no earlier notice
• d.Notify affected clients within 30 days, with a copy of the notice sent to the Administrator

The accountant's engagement must require notice to the Commission within one business day of finding a material discrepancy, by facsimile or electronic mail followed by first class mail. Waiting for the Form ADV-E certificate, which is due within 120 days, defers notice far too long. The rule does not route the discrepancy through client notices. Four business days is the period for the accountant to file Form ADV-E after resigning or being dismissed, not for reporting a discrepancy.17 CFR 275.206(4)-2(a)(4)(ii)

A qualified custodian holds a client's assets, and the adviser also sends the client account statements. Which statement must the adviser's notice to the client contain?

• a.A statement urging the client to compare the custodian's statements with any received from the adviser✓
• b.The client's consent to the adviser holding the securities in its own name if the custodian fails
• c.A guarantee that the adviser will indemnify the client against any loss incurred at the custodian
• d.A copy of the custodian's latest audited financial statements, delivered together with the adviser's brochure

When the adviser sends the client account statements, the notice about the custodian must include a statement urging the client to compare the custodian's statements with those from the adviser. The rule does not require an indemnity or a consent allowing the adviser to hold the securities itself, which would itself be custody. Delivery of the custodian's audited financial statements is not part of the notice.17 CFR 275.206(4)-2(a)(2), (a)(3)

An adviser to a limited partnership wants to avoid the surprise examination for the partnership's assets by relying on the audit provision of the SEC custody rule. Which condition must be met?

• a.Audited statements go to all limited partners within 120 days of the fiscal year-end✓
• b.Audited statements go to the limited partners within 180 days of the fiscal year-end
• c.Audited statements go to all limited partners within 90 days after the audit report is signed
• d.Audited statements are filed with the SEC no later than 60 days after the fiscal year-end

The pooled-vehicle exception applies if the partnership is audited at least annually by an independent public accountant that is registered with and inspected by the PCAOB, and the audited statements go to all limited partners within 120 days of the end of the fiscal year. The rule does not require filing the statements with the SEC. Ninety days from the audit report and 180 days from year-end are not the periods set in the rule.17 CFR 275.206(4)-2(b)(4)

A state-registered adviser receives a client's check made payable to an unrelated third party and keeps the records the rule requires. Within what time must the adviser forward the check so that receiving it is not custody under NASAA Model Rule 102(e)(1)-1?

• a.Within thirty days of receipt
• b.Within three business days✓
• c.Within one business day of receipt
• d.Within five business days of receipt

NASAA Model Rule 102(e)(1)-1 provides that receiving a client's check payable to a third party is not custody if the adviser forwards it to the third party within three business days of receipt and keeps the records required by Rule 203(a)-2(a)(22). A one-business-day deadline is stricter than the rule requires, while five business days and thirty days are longer than it allows.NASAA Model Rule 102(e)(1)-1, definition of custody (B)

A client's adult daughter telephones an IAR and asks to buy a stock in her father's account. Under NASAA's unethical practices rule, the IAR may follow her instruction only if:

• a.the daughter says she is a relative of the client and the adviser records her call in the client file
• b.the client has given the adviser written authorization allowing the daughter to place trades✓
• c.the adviser notifies the Administrator of the arrangement within thirty days of the trade
• d.the client confirms each trade orally within ten business days after it has been placed

Accepting trading instructions from a third party without written authorization from the client is an unethical practice under the NASAA rule. Family ties and a file note do not supply the client's authorization. Ten business days is the period for obtaining written discretionary authority after an oral grant, and it does not apply to third parties. The rule does not require notice to the Administrator.NASAA Model Rule 102(a)(4)-1(e)

An adviser aggregates a buy order for three client accounts, with shares allocated pro rata under a written allocation statement made before the order. The order fills as 1,000 shares at $20.00 and 2,000 shares at $20.20. What average price should each client receive per share, rounded to the cent?

• a.$20.20
• b.$20.00
• c.$20.10
• d.$20.13✓

Each client receives the average price of the whole fill, weighted by shares: 1,000 times $20.00 plus 2,000 times $20.20 is $60,400, which divided by 3,000 shares is $20.133, or $20.13. The simple average of the two prices is $20.10, which ignores the different sizes of the fills. Giving all clients $20.20 uses the last fill, and $20.00 uses the first, so either would favor some accounts over others.SEC no-action practice on aggregation; Advisers Act Section 206

An adviser routes every client order to the broker with the lowest posted commission, although trades there often fill at worse prices than elsewhere. Under the SEC's fiduciary interpretation, this practice:

• a.satisfies best execution if the routing practice is disclosed in the adviser's Form ADV Part 2A
• b.can fail the best execution duty, which looks at the total cost or proceeds, not commission alone✓
• c.satisfies best execution, because the commission is the only trading cost within the adviser's control
• d.fails best execution only if the broker with the lowest commission is affiliated with the adviser

An adviser that selects brokers must seek the best overall execution in the circumstances, considering total cost or proceeds and not just the commission. Routing to the cheapest commission while accepting worse prices can breach that duty. Price is a cost the adviser can influence by choosing where to trade. Disclosure of a routing practice does not by itself satisfy best execution, and the duty applies whether or not the broker is affiliated.IA-5248 (duty of care, best execution)

An adviser buys shares in a single omnibus order without naming accounts. After the stock rises that afternoon, it assigns the profitable lots to its own account and the later, unprofitable lots to clients. Under Section 206, this practice is:

• a.lawful when the allocation is entered in the firm's books and records on the same day it is made
• b.lawful because Form ADV discloses that the adviser may also trade in its own account alongside clients
• c.lawful as long as every client account receives at least some of the shares purchased in the order
• d.cherry-picking, a fraud, since accounts must be fixed before the order and allocation must be fair✓

Assigning trades after the results are known, so that the adviser keeps the gains and clients take the losses, is cherry-picking and a fraud on clients under Section 206. Fair allocation requires accounts or an allocation method to be fixed before the order is placed. Recording the allocation the same day does not cure the unfairness, disclosure of principal trading does not permit favoring the adviser's own account, and giving clients some shares does not make the split fair.Investment Advisers Act Section 206(1), (2)

An adviser wants to sell shares from its own inventory to an advisory client. What must the adviser do under Section 206(3)?

• a.Obtain the client's consent after the trade is confirmed, within ten business days of the trade date itself
• b.Disclose its capacity on the trade confirmation that is sent to the client after settlement
• c.Rely on a general consent in the advisory contract that covers all future principal trades
• d.Disclose in writing its capacity and obtain the client's consent before the transaction is completed✓

When an adviser acts as principal for its own account in a transaction with a client, it must disclose its capacity in writing and obtain the client's consent before completion of the transaction. A confirmation sent after settlement comes too late, and consent after the fact does not satisfy the section. A blanket consent in the advisory agreement given in advance of any specific trade does not meet the requirement, which is transaction by transaction.Investment Advisers Act Section 206(3)

A client instructs an adviser in writing to place all trades through a broker the client chose. What should the adviser disclose to the client about this directed brokerage arrangement?

• a.That the arrangement is allowed only if the Administrator approves it in writing before any trade is placed
• b.That the arrangement may limit the adviser's ability to negotiate commissions or aggregate orders, raising costs✓
• c.That the client's choice of broker guarantees best execution on every trade the adviser places for it
• d.That the adviser takes over the chosen broker's own compliance and supervisory obligations as well

When a client directs brokerage, the adviser should disclose that it may be unable to achieve the most favorable execution, may be unable to aggregate orders or negotiate commissions, and that the client may pay higher costs. The client's choice does not guarantee best execution. The adviser does not assume the broker's regulatory obligations. Clients may direct brokerage, and no regulator approval is required.SEC Form ADV Part 2A, Item 12 (directed brokerage)

A trustee holds a small position in a volatile growth stock inside a diversified trust portfolio, and a beneficiary says the stock is too risky for a trust. How does the Uniform Prudent Investor Act evaluate the decision?

• a.By requiring each asset to be conservative enough to stand alone, without regard to the rest of the portfolio
• b.By judging the holding within the whole portfolio and its objectives, since no investment is imprudent alone✓
• c.By letting the objecting beneficiary decide whether the stock stays in the trust or is sold at once
• d.By treating any volatile stock as imprudent for a trust, because it carries more risk than bonds or cash

The Act replaces asset-by-asset review with a portfolio standard: decisions about individual assets are considered in the context of the trust portfolio as a whole and an overall strategy suited to the trust, and no specific investment is imprudent or prudent taken alone. A volatile holding can be appropriate as part of a diversified portfolio. A beneficiary's objection does not control the trustee's decision.Uniform Prudent Investor Act Section 2(b), 2(e)

A trust's assets are 80% in the stock of a company the settlor founded, and the trust instrument says nothing about retaining it. The trustee keeps the whole position without analysis. What does the Uniform Prudent Investor Act require?

• a.Diversify only if a beneficiary asks in writing for the position to be reduced, and not before then
• b.Keep the position, because the settlor chose it and a trustee may not depart from the choices the settlor made
• c.Sell the position down to a fixed percentage of the trust's value within one year of the new trustee taking over
• d.Diversify unless the trustee finds special circumstances make non-diversifying better serve the trust✓

A trustee must diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying. Silence in the instrument does not authorize retaining a concentration. The Act sets no fixed percentage or deadline for selling down, and diversification is a trustee duty that does not wait for a beneficiary's demand.Uniform Prudent Investor Act Section 3

A trustee wants to hand day-to-day investment management of a large trust to an outside investment manager. What does the Uniform Prudent Investor Act require for the trustee to be protected from liability for the manager's decisions?

• a.That the manager be a registered broker-dealer, since only a broker may exercise trustee discretion
• b.That the trustee not delegate at all, because investment functions are personal to the trustee and may not pass
• c.Reasonable care in choosing the manager, setting the terms of the delegation, and periodically reviewing its actions✓
• d.Nothing beyond the delegation itself, since a trustee is released from every duty once it delegates to an expert

The Act allows a trustee to delegate investment and management functions that a prudent trustee could properly delegate, and the trustee is not liable for the agent's decisions if the trustee uses reasonable care, skill and caution in selecting the agent, in establishing the scope and terms of the delegation, and in periodically reviewing the agent's actions. Delegation does not end the trustee's duties. The Act does not prohibit delegation or require a broker-dealer.Uniform Prudent Investor Act Section 9

A successor trustee accepts a trust that holds concentrated and outdated investments. What does the Uniform Prudent Investor Act require of the new trustee?

• a.Within 30 days, sell every holding that would not meet the Act's standards for a prudent portfolio
• b.Within a reasonable time, review the assets and decide what to keep or sell, to comply with the Act✓
• c.Review the assets only if a beneficiary objects in writing to the prior trustee's investment decisions
• d.Keep the prior trustee's investment choices, which are binding on any successor trustee for the trust

A trustee must, within a reasonable time after accepting the trusteeship or receiving trust assets, review the assets and make and implement decisions about retaining or disposing of them so that the portfolio complies with the Act. The Act gives a reasonable time, not a fixed 30-day deadline for liquidation. The review is the trustee's own duty and does not depend on a beneficiary's objection, and a successor is not bound by the predecessor's choices.Uniform Prudent Investor Act Section 4

A broker-dealer's compliance officer reviews a customer who made a series of transfers that have no apparent business purpose and no explanation. Together they involve $4,600. Is a mandatory suspicious activity report required?

• a.Yes, because any pattern of transfers that totals more than $3,000 must be reported to FinCEN within 30 days
• b.No, because a report is required only when the transactions exceed the $10,000 currency reporting threshold
• c.No, because the transactions aggregate less than $5,000, although the firm may file a voluntary report✓
• d.Yes, because a transaction with no apparent lawful purpose must be reported whatever the amount involved

A broker-dealer must file a SAR when a transaction conducted through it involves or aggregates at least $5,000 and the firm knows, suspects or has reason to suspect one of the listed concerns, such as no apparent lawful purpose. At $4,600 the mandatory duty does not arise, but the rule lets a firm file a report it believes is relevant even when none is required. The reporting duty has no exception for activity that has no apparent purpose, so the amount still matters. A $3,000 trigger does not appear in the broker-dealer rule. The $10,000 figure belongs to currency transaction reports, which are a separate filing.31 CFR 1023.320(a)(2)

On Monday, July 12, 2027, a broker-dealer first detects facts that may require a SAR but has identified no suspect. Assuming the firm uses all the time the rule allows to identify a suspect, what is the latest filing date?

• a.August 11, 2027, 30 calendar days after the detection date, with no further delay allowed
• b.September 10, 2027, the 60th calendar day after the initial detection of the facts✓
• c.October 10, 2027, which is 90 calendar days after the date of the initial detection
• d.August 26, 2027, 45 calendar days after the date on which the firm first detected the facts

A SAR is due no later than 30 calendar days after initial detection of the facts. If no suspect has been identified, the firm may delay filing for an additional 30 calendar days, but in no case more than 60 calendar days after initial detection. Sixty days from July 12 is September 10. August 11 is the ordinary 30-day deadline, which applies once a suspect is known. The rule contains no 45-day period, and 90 days would exceed the 60-day outer limit.31 CFR 1023.320(b)(3)

A broker-dealer is served with a civil subpoena from a customer's former business partner that asks for any SAR the firm has filed on the customer. What must the firm do?

• a.Confirm to the requester only that a SAR exists, then refuse to release the report itself without a court order
• b.Produce the SAR after redacting the customer's account numbers, since a subpoena is a legal demand for it
• c.Produce the SAR but withhold the supporting documentation, which is the only confidential portion of the filing
• d.Decline to produce it or reveal whether one exists, cite the regulation, and notify FinCEN of the request✓

A SAR and any information that would reveal its existence are confidential. A firm that is subpoenaed or otherwise asked for one must decline to produce it or the information, cite the regulation and the statute, and notify FinCEN of the request and its response. A subpoena from a private party does not override that bar, and redaction does not cure it. Supporting documentation is treated as filed with the SAR, so it is not a separate, producible item. Even confirming that a SAR exists would reveal its existence.31 CFR 1023.320(e)(1)(i)

A customer who is a U.S. person asks a broker-dealer to open an individual account. Under the customer identification program rule, what identifying information must the firm obtain, at a minimum, before opening the account?

• a.Name, date of birth, a residential or business street address, and a taxpayer identification number✓
• b.Name, street address, employer, and a statement of annual income and net worth to support suitability
• c.Name, date of birth, street address, and a photocopy of an unexpired government-issued photo identification
• d.Name, date of birth, mailing address, and a signed statement of the customer's investment objectives

The CIP rule requires the name, date of birth for an individual, an address, and an identification number, which for a U.S. person is a taxpayer identification number. The firm must also verify identity using documents, non-documentary methods or both, but a photocopy of an identity document is not part of the minimum information gathered. Employer, income and net worth are suitability and know-your-customer details, not CIP elements. Investment objectives belong in the new-account profile, and a mailing address alone would not satisfy the street-address requirement.31 CFR 1023.220(a)(2)(i)(A)

A broker-dealer opens an account for an LLC. Four individuals own it in these shares: Alvarez 40%, Brandt 30%, Cole 20% and Dunn 10%. The LLC is run day to day by a manager, Evans, who owns nothing. How many beneficial owners must the firm identify?

• a.Three: Alvarez and Brandt by ownership, plus Evans as the individual who controls the entity✓
• b.Four: all four individuals who own interests in the LLC, whatever the size of each share
• c.Five: the four owners and Evans, because the manager exercises significant control
• d.Two: Alvarez and Brandt, since only owners of 25% or more are beneficial owners

The beneficial owner definition has two prongs: each individual who owns 25% or more of the equity interests, and a single individual with significant responsibility to control, manage or direct the entity. Alvarez and Brandt meet the ownership prong, Cole and Dunn fall below 25%, and Evans meets the control prong. Counting only the owners omits the required control person. Naming everyone with any ownership goes beyond the rule, and the control prong calls for a single individual, not each person who has some influence.31 CFR 1010.230(b), (d)

An adviser's code of ethics must require each holdings report to include which of the following, in addition to the title, type and amount of each reportable security?

• a.The price the access person paid for each reportable security and the date on which it was acquired
• b.The name of any broker, dealer or bank that holds an account of securities for the access person✓
• c.The chief compliance officer's signed approval of each security the access person already holds
• d.The market value of each holding on the report date, taken from the most recent account statement

A holdings report must give the title and type of each reportable security, with ticker or CUSIP, number of shares and principal amount, the name of any broker, dealer or bank with which the access person maintains an account holding securities for the person's benefit, and the date of the report. Purchase price and acquisition date are details of transaction reports, market value is not required, and the rule contains no requirement that the chief compliance officer approve securities already held.17 CFR 275.204A-1(b)(1)(i)

An adviser requires its access persons to file annual holdings reports and collects them on December 16, 2027. What is the earliest date as of which the information in a report submitted that day may be current?

• a.November 1, 2027, which is 45 days before the submission date✓
• b.October 17, 2027, a full 60 days back from the date of filing
• c.November 16, 2027, counting back only 30 days from submission
• d.December 1, 2027, allowing information only 15 days old

Annual holdings reports are required at least once every 12 months, on a date the adviser selects, and the information must be current as of a date no more than 45 days before the report is submitted. Forty-five days before December 16 is November 1. November 16 and December 1 are fresher dates that would also be acceptable, but neither is the earliest allowed. October 17 is 60 days before submission, which is too stale.17 CFR 275.204A-1(b)(1)(ii)(B)

An access person bought and sold shares of a listed company during July and August and made no other trades in the quarter. When must the access person submit the transaction report covering those trades?

• a.No later than 45 days after the end of the quarter, matching the currency period for holdings reports
• b.No later than 30 days after the end of the calendar quarter, covering all transactions during the quarter✓
• c.No later than the date of the next annual holdings report, since that filing replaces the quarterly one
• d.No later than 10 days after each trade, since each purchase or sale must be reported on its own

Transaction reports are quarterly: each access person must submit one no later than 30 days after the end of each calendar quarter, covering at least all transactions in the quarter. They are not filed trade by trade, and 10 days is the deadline for the initial holdings report. The 45-day figure limits how stale holdings data may be, not when transaction reports are due. The annual holdings report is a separate filing and cannot stand in for the quarterly transaction report.17 CFR 275.204A-1(b)(2)(ii)

An access person's securities are held in a managed account run entirely by an independent third-party manager, and the access person has no direct or indirect influence or control over its trading. Must the adviser's code require reports on that account?

• a.No, but only if the manager is a registered adviser that certifies each year that the person gave no input
• b.Yes, but the code may limit the report to the annual holdings report and omit the quarterly transaction reports
• c.No, the code need not require reports on securities in accounts over which the person has no influence or control✓
• d.Yes, because the person has beneficial ownership of the securities, and ownership alone triggers reporting

The rule excuses a code from requiring reports on securities held in accounts over which the access person had no direct or indirect influence or control. The question is control, not ownership, so beneficial ownership alone does not trigger the duty to report. The exception applies to the reports as a whole, so it is not split between holdings and transaction reports, and it does not depend on any certification from the outside manager.17 CFR 275.204A-1(b)(3)(i)

For an adviser whose primary business is providing investment advice, how does the code of ethics rule treat the firm's directors, officers and partners?

• a.It excludes them, because owners and executives are not supervised persons of the adviser's own firm
• b.It treats them as access persons only when they hold titles with supervisory authority over portfolio managers
• c.It presumes that each of them is an access person, whether or not the person trades for clients✓
• d.It treats them as access persons only when they personally manage a client account or place client trades

When providing investment advice is the adviser's primary business, all of its directors, officers and partners are presumed to be access persons, so their holdings and transactions are reported and reviewed like those of the analysts. The presumption does not turn on supervising portfolio managers or on trading client accounts. Executives are not excluded; the presumption exists because they typically see client trading and recommendations.17 CFR 275.204A-1(e)(1)(ii)

An access person's only securities purchases in a quarter were made through a dividend reinvestment plan on a predetermined schedule. Must these appear on the quarterly transaction report the adviser's code requires?

• a.No, transactions under an automatic investment plan, which includes a dividend reinvestment plan, need not be reported✓
• b.Yes, because reinvested dividends buy shares and every purchase of a reportable security must be reported
• c.Yes, because the plan exception removes the holdings report requirement but leaves the transaction report in place
• d.Yes, because the automatic investment plan exception covers purchases of open-end fund shares but not stocks

The code need not require a transaction report for trades effected under an automatic investment plan, which the rule defines as regular, periodic purchases or withdrawals under a predetermined schedule and allocation, and which expressly includes a dividend reinvestment plan. Open-end funds have their own exclusion from the definition of reportable security, but that is a separate rule and does not limit the plan exception. The exception is directed at the transaction reports, not at the holdings reports.17 CFR 275.204A-1(b)(3)(ii), (e)(2)

An access person lists four holdings for the annual holdings report. Which one is a reportable security that must appear on the report?

• a.Shares of a money market fund held in the access person's brokerage account as a cash sweep
• b.Shares of an open-end fund that the adviser and its affiliates do not advise or underwrite
• c.Shares of a mutual fund for which the adviser serves as the investment adviser, a reportable fund✓
• d.Treasury bills purchased at a government auction and held to maturity in the access person's account

Reportable securities exclude direct U.S. government obligations, short-term high-quality debt, money market fund shares, and shares of open-end funds other than reportable funds. A fund the adviser advises is a reportable fund, so its shares are reportable. Treasury bills, money market shares and unaffiliated open-end fund shares each fall within an exclusion.17 CFR 275.204A-1(e)(10)

Under the NASAA unethical-practices rule for investment advisers, from which of these clients may an adviser borrow money without committing an unethical practice?

• a.A client who is an accredited investor and signs a written waiver of the borrowing prohibition
• b.A client who is a close friend of the adviser and receives an independent attorney's review
• c.A bank client that is a financial institution engaged in the business of loaning funds✓
• d.A long-standing client who signs a promissory note and agrees to the terms in writing

An adviser may not borrow money or securities from a client unless the client is a broker-dealer, an affiliate of the adviser, or a financial institution engaged in the business of loaning funds. A bank lending as its business fits that exception. A signed note, a waiver, a client's wealth or friendship, or a lawyer's review does not change the answer, because the rule looks at the type of client rather than at consent or paperwork.NASAA Model Rule 102(a)(4)-1(f)

An individual investment adviser representative lends a client $8,000 for a home down payment, secured by the client's advisory account. The IAR is not a financial institution, and the client is not an affiliate of the adviser. How does the rule treat this loan?

• a.It is an unethical practice, since only a lending institution or an affiliated client falls within the exception✓
• b.It is permitted, because the loan is secured by assets that the IAR already manages for the client
• c.It is permitted if the IAR discloses the loan on Part 2B of the Form ADV and charges interest
• d.It is permitted, because the rule limits borrowing from clients and says nothing about lending

The rule bars loaning money to a client unless the adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the adviser. Neither exception applies. Securing the loan with the client's account does not help; it adds a conflict of interest. Disclosure in a brochure supplement does not cure a prohibited act, and the rule contains separate provisions for both borrowing and lending.NASAA Model Rule 102(a)(4)-1(g)

Which adviser conduct would violate the NASAA unethical-practices rule on reports given to clients?

• a.Giving a client a published research report from a well-known firm to support a recommendation
• b.Ordering a credit report from an outside vendor as part of providing the client's planning services
• c.Delivering an outside firm's custom analysis to a client without saying someone else prepared it✓
• d.Using statistical analyses published by a data provider when preparing a recommendation for a client

Providing a report or recommendation prepared by someone other than the adviser, without disclosing that fact, is an unethical practice. The rule excepts published research reports and statistical analyses, and a report the adviser orders in the normal course of providing service. A custom analysis passed off as the adviser's own work is neither. The three excepted items are everyday, non-deceptive inputs to advice.NASAA Model Rule 102(a)(4)-1(i)

Which disclosure of a client's holdings would NOT be an unethical practice under the NASAA rule on client confidentiality?

• a.Providing the holdings to the state Administrator in response to a valid subpoena that requires them✓
• b.Telling a client's accountant about the holdings after the client mentioned it would be helpful someday
• c.Giving a prospect a well-known client's holdings to show experience with similar investors
• d.Describing a named client's holdings at an industry conference as an example of the adviser's process

An adviser may not disclose the identity, affairs or investments of a client unless required by law or consented to by the client. A response to a valid subpoena from the Administrator is required by law. Using a named client as a marketing example, or sharing holdings because a client said it might be useful, falls short of actual consent. Neither is a legal requirement, and a vague remark does not amount to permission.NASAA Model Rule 102(a)(4)-1(n)

An adviser charges a client an advisory fee and will also earn a commission through an affiliated broker-dealer if the client follows the recommended product. When must the adviser disclose this conflict, and in what form?

• a.In writing, delivered with the first trade confirmation, so the client sees the actual commission
• b.Orally at the first meeting, if the adviser notes the client's acknowledgment in the file within ten business days
• c.In writing, before any advice is given, and covering both the advisory fee and the commission✓
• d.In writing, but only when the commission is larger than the advisory fee the client is paying

The adviser must disclose in writing, before any advice is rendered, any material conflict that could impair unbiased advice, including compensation in addition to the client's fee and charging an advisory fee when a commission will be received. Oral disclosure is not enough, and the ten-business-day period applies to written discretionary authority, not to conflict disclosure. A trade confirmation arrives after the advice has been acted on. The size of the commission relative to the fee does not limit the duty.NASAA Model Rule 102(a)(4)-1(k)

A two-person state-registered adviser has never written down any policy on material nonpublic information, and no one at the firm has traded on inside information. Has the adviser violated the NASAA unethical-practices rule?

• a.Yes, since failing to maintain written policies against misuse of that information is itself unethical✓
• b.No, because advisers with two employees are exempt from the policy requirement of Section 204A
• c.Yes, but only if a client lost money because the adviser had not put the policies in writing
• d.No, because a violation requires proof that someone at the firm actually traded on that information

The rule lists as an unethical practice the failure to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, as Section 204A of the Advisers Act requires. The violation is the missing policy, and it does not depend on a trade or on client loss. The rule has no exemption for small firms.NASAA Model Rule 102(a)(4)-1(q)

A 58-year-old client of a broker-dealer is subject to the state's Adult Protective Services statute. An agent reasonably believes someone may have taken advantage of the client financially. What does the NASAA Model Act require of the agent?

• a.Prompt notice to Adult Protective Services and the state securities commissioner✓
• b.Notice only to the securities commissioner, because the client is under the age of 65
• c.Notice only to the firm's compliance department, which then decides whether to refer the matter
• d.Notice to the client's trusted contact, who then decides whether to notify the authorities

A person subject to the state's Adult Protective Services statute is an eligible adult, whatever the age, so the 58-year-old qualifies. When a qualified individual reasonably believes exploitation may have occurred, has been attempted, or is being attempted, the individual must promptly notify both Adult Protective Services and the commissioner of securities. Internal escalation is not the report the Model Act requires. Age 65 is one of two routes to eligible-adult status, not a precondition. Telling a trusted contact is permitted in some cases, but it does not replace the mandatory notice.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, Section 3

A 79-year-old client named her son as the person to contact about suspected financial exploitation. The agent now suspects that the son is the one taking the client's money. May the agent notify the son?

• a.Yes, since the client chose him in advance and the designation gives the agent authority to contact him
• b.Yes, but only after the agent has first reported the suspicion to the securities commissioner
• c.No, because the Model Act bars any use of a designated contact without a court order
• d.No, because disclosure may not be made to a designated person who is suspected of the exploitation✓

A qualified individual may notify a third party the eligible adult previously designated, but not one suspected of the exploitation or of abusing the eligible adult. The designation does not override that limit. The Section 3 report to the agencies is still required. The Model Act does not require a court order to contact a designated person, and it allows the contact when the person is not under suspicion.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, Section 5

A broker-dealer delays a disbursement from an eligible adult's account under the NASAA Model Act. Within how many business days after the requested disbursement must it give notice of the delay, and when must it report its internal review results?

• a.Notice within five business days, and review results to the agencies within fifteen business days
• b.Notice within seven business days, and review results to the agencies within two business days
• c.Notice within two business days, and review results to the agencies within twenty-five business days
• d.Notice within two business days, and review results to the agencies within seven business days✓

The firm must give written notice of the delay and the reason to all parties authorized on the account, unless one is suspected of exploitation, and notify the agencies, immediately but in no event more than two business days after the requested disbursement. It must continue its internal review and report the results to the agencies within seven business days. The fifteen- and twenty-five-day figures relate to how long the delay may last, not to these reports.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, Section 7

A broker-dealer first delayed a disbursement from an eligible adult's account under the NASAA Model Act, and Adult Protective Services then asked the firm to extend the delay. Absent a court order, what is the longest the delay can run from the day it began?

• a.Fifteen business days, because an agency request cannot lengthen the delay
• b.Ten business days, because the delay ends once the firm's internal review is complete
• c.Thirty business days, because an agency request adds that time to the original period
• d.Twenty-five business days after the firm first delayed the disbursement✓

A delay expires on the sooner of the firm's determination that the disbursement will not result in exploitation, or fifteen business days after the delay began. If either agency requests an extension, the delay can run to no more than twenty-five business days after it began, unless an agency or a court ends it sooner. A court can also extend the delay or order other relief.NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation, Section 7(2)

Which statement about immunity under the federal Senior Safe Act is accurate?

• a.It reaches any employee who reports suspected exploitation of a vulnerable adult of any age, even without training
• b.It reaches a firm that delays a disbursement, if it notifies the securities commissioner within two business days
• c.It reaches trained employees who report exploitation of people 65 or older, but not a delay of disbursement✓
• d.It reaches vulnerable adults protected under state Adult Protective Services laws, whatever their age

The Senior Safe Act provides immunity for reporting suspected exploitation only when employees have received the required training. It applies to individuals 65 or older, so it does not cover younger vulnerable adults protected under state Adult Protective Services laws. It also does not provide immunity for delaying a disbursement. That gap is one reason the NASAA Model Act supplies its own immunity provisions.Senior Safe Act (as described in the NASAA Model Act commentary)

On Monday, January 4, 2027, a broker-dealer becomes aware that unauthorized access to customer information has occurred. Assuming no delay is granted by the Attorney General, what is the latest date on which affected individuals must be notified under Regulation S-P?

• a.January 7, 2027, which is 72 hours after the firm learns of the incident
• b.February 18, 2027, which is 45 days after the firm discovers the breach
• c.February 3, 2027, which is 30 days after the firm becomes aware of the intrusion✓
• d.March 5, 2027, a full 60 days after the firm first has knowledge of it

A covered institution must notify affected individuals as soon as practicable, but not later than 30 days after becoming aware that unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred. Thirty days from January 4 is February 3. The 72-hour figure applies to a service provider's notice to the covered institution, not to the firm's notice to customers. The rule has no 45- or 60-day deadline.17 CFR 248.30(a)(4)(iii)

A broker-dealer's cloud vendor has a security breach in a customer information system it maintains for the firm. What do the firm's policies under Regulation S-P have to require, and who remains responsible for notifying the affected customers?

• a.Vendor notice within 30 days of becoming aware, and the vendor takes over the duty to notify customers
• b.Vendor notice within 10 business days of becoming aware, while the broker-dealer answers for informing customers
• c.Vendor notice within 72 hours of becoming aware, but responsibility for telling customers shifts to the vendor
• d.Vendor notice within 72 hours of becoming aware, with the broker-dealer still owing customers the notice✓

The firm's policies must be reasonably designed to ensure that service providers notify it as soon as possible, and no later than 72 hours after becoming aware of a breach resulting in unauthorized access to a customer information system they maintain. The firm may contract with the vendor to send the customer notices, but the obligation to ensure that affected individuals are notified stays with the covered institution. The vendor's notice deadline is not 30 days or ten business days.17 CFR 248.30(a)(5)

Under Regulation S-ID, which list describes what the written Identity Theft Prevention Program of a broker-dealer that offers covered accounts must be designed to do?

• a.Identify identity-theft risks in customer accounts, close any affected account, and file a SAR within 30 days
• b.Identify relevant red flags, detect them, respond appropriately, and update the program periodically✓
• c.Detect red flags, notify the SEC within 72 hours, restore the affected accounts, and certify the program annually
• d.Verify each customer's identity, record the verification, retain the record, and report any red flags to FinCEN

A program must include reasonable policies and procedures to identify relevant red flags for the covered accounts and incorporate them, detect those red flags, respond appropriately to prevent and mitigate identity theft, and update the program periodically to reflect changing risks. Verification, recordkeeping and reporting to FinCEN belong to the customer identification and SAR rules. No 72-hour notice to the SEC is called for, and the rule does not require closing every affected account or a SAR in each case.17 CFR 248.201(d)(2)

Which of these must a state-registered adviser's business continuity and succession plan provide for under the NASAA model rule?

• a.An annual review of the plan by an independent accountant, who certifies it to the state Administrator
• b.A duplicate set of every client's account at a second custodian, to be used if the first custodian fails
• c.Alternate means of communicating with clients, key personnel, vendors, custodians and regulators✓
• d.A second office leased and staffed permanently, so that service continues from either location at any time

The model rule sets five minimum elements: protection, backup and recovery of books and records; alternate means of communications with customers, key personnel, employees, vendors, service providers including custodians, and regulators; office relocation after a loss of the principal place of business; assigning duties to qualified persons if key personnel die or become unavailable; and minimizing service disruption and client harm. A standing second office, a certified review and duplicate accounts are not among them. The rule asks for relocation procedures, not a permanent backup office.NASAA Model Rule 203(a)-1A, element 2

A sole-proprietor, state-registered adviser works from one office and has 30 clients. She says that she needs no written business continuity plan because there are no employees to assign duties to. Is she right under the NASAA model rule?

• a.No, but a sole proprietor need only keep a plan that addresses records and does not require the other elements
• b.Yes, because sole proprietors are exempt, since the rule's elements all depend on other personnel
• c.No, every adviser needs a written plan, whose content is scaled to the firm's size, services and locations✓
• d.Yes, because the plan is required only of advisers that have custody of client funds or securities

The model rule requires every investment adviser to establish, implement and maintain written procedures for a business continuity and succession plan, based on the firm's size, type of services and number of locations. A sole proprietor is not exempt; her plan will be simpler, but it still must plan for her own death or incapacity. The rule's five minimum elements apply to all plans, and it is not limited to advisers with custody.NASAA Model Rule 203(a)-1A

A fire destroys a state-registered adviser's only office. No one is hurt, the books and records are safely backed up offsite, and the firm's email and phones run from hosted services. Which required plan element does the adviser most need to put into action?

• a.Assignment of duties to qualified responsible persons if key personnel die or become unavailable
• b.Protection, backup and recovery of the books and records that the adviser must keep
• c.Alternate means of communicating with customers, vendors, custodians and regulators
• d.Procedures for office relocation after a temporary or permanent loss of the principal place of business✓

The loss of the physical office calls for the relocation element: a plan for where and how the firm operates from a new location, whether the loss is temporary or permanent. The facts rule out the other elements, because staff are unharmed, the records are already backed up and recoverable, and the communication systems remain available.NASAA Model Rule 203(a)-1A, element 3

A private foundation reports $2,000,000 of net investment income for the year. What federal excise tax does it owe on that income under IRC Section 4940?

• a.$20,000
• b.$100,000
• c.$27,800✓
• d.$40,000

The excise tax on a private foundation's net investment income is a flat 1.39% for tax years beginning after December 20, 2019, so $2,000,000 x 1.39% = $27,800. The $40,000 answer uses the old 2% rate, $20,000 uses the old reduced 1% rate, and $100,000 applies the 5% minimum-payout percentage, which is a distribution requirement and not a tax rate.IRC Section 4940

A private foundation holds investment assets not used for its charitable activities with a net value of $8,000,000. About how much must it distribute in qualifying distributions this year to meet the minimum payout under IRC Section 4942?

• a.1.39% of that value, so about $111,200
• b.1% of that value, so about $80,000
• c.5% of that value, so roughly $400,000✓
• d.2% of that value, so about $160,000

The minimum investment return that drives the payout is 5% of the net value of assets not used directly for exempt purposes, so $8,000,000 x 5% = $400,000. The 1.39% figure is the excise tax rate on net investment income, 2% is the pre-2020 excise tax rate, and 1% was the former reduced excise rate; none of them sets the payout.IRC Section 4942

A client's adviser manages an irrevocable trust account. The grantor who funded the trust years ago phones in an order to sell a position and send the proceeds to the grantor's daughter, who is a beneficiary. Whose instruction does the adviser need before acting?

• a.The grantor's, because the grantor created and funded the trust years ago
• b.The daughter's, because she is the beneficiary receiving the money
• c.The drafting attorney's, because the attorney holds the original document
• d.The trustee's, exercised within the powers the trust agreement gives✓

Legal title and investment authority sit with the trustee, who must act under the trust instrument. Once an irrevocable trust is funded the grantor generally has no power to direct it, a beneficiary has an interest in the assets but not management authority, and the drafting attorney has no authority to instruct the account.

A client has died. The client's daughter, named executor in the will, asks the adviser to sell securities held in the client's individual account. What should the adviser obtain before accepting her instructions?

• a.A copy of the will signed by the daughter as the named executor
• b.The decedent's durable power of attorney naming the daughter as agent
• c.Letters testamentary issued by the probate court, with a death certificate✓
• d.A notarized affidavit from the daughter stating she is the sole heir

An executor's authority begins when the probate court appoints her and issues letters testamentary; the court document, with proof of death, shows she can act for the estate. A will alone does not prove court appointment, a power of attorney ends at the principal's death, and an heir's affidavit does not give anyone authority over an estate account.

A closely held C corporation wants to open an advisory account. Which document establishes which officers may give instructions on the corporation's behalf?

• a.A board resolution naming the authorized officers and their powers✓
• b.The articles of incorporation filed with the Secretary of State
• c.The corporation's EIN assignment letter from the IRS
• d.A certificate of good standing from the state of incorporation

The adviser relies on a corporate resolution adopted by the board that names the individuals who may act and the scope of their authority over the account. The articles and a good-standing certificate show the entity exists and is active, and the EIN letter shows its tax identification; none of them says who may act.

A manager-managed LLC with four members opens an account. The operating agreement names one member as the manager. A different member phones in a request to withdraw funds. Absent any other grant of authority, what should the adviser do?

• a.Accept it if the caller holds more than a 25% membership interest in the LLC
• b.Accept it, because each LLC member is a co-owner of the assets and may direct them
• c.Accept it once the caller signs a personal indemnity in the adviser's favor
• d.Decline, and take instructions only from the manager or others the agreement names✓

In a manager-managed LLC, authority to act for the entity comes from the operating agreement and rests with the manager, not with each member. Co-ownership of the LLC does not create agency, the size of a membership interest does not substitute for authority, and an indemnity from an unauthorized caller does not make the instruction valid.