NASAA Series 66 — All Questions

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

• a.Permitted without any disclosure, as long as the statement is truthful and the person giving it actually holds the opinion expressed
• b.Permitted only for promoters who are registered representatives of a broker-dealer, since unregistered persons may not give endorsements for pay
• c.Prohibited in every case, as under the former Rule 206(4)-1(a)(1) ban on client testimonials, which the 2020 amendments left in place
• d.Permitted only with required disclosures, including whether the promoter is a client and whether they were compensated, plus oversight and, where compensated, a written agreement✓

The amended marketing rule permits testimonials and endorsements if the adviser discloses clearly whether the person is a client and whether the person is compensated, along with the material conflicts and terms, oversees compliance, and has a written agreement with a compensated promoter. Exceptions apply, for example for de minimis compensation of $1,000 or less in 12 months. Truthfulness alone is not enough, the person need not be a registered representative, and the former blanket ban on testimonials was removed by the amendments, not kept.17 CFR 275.206(4)-1(b)

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

• a.Three years from the end of the fiscal year of the last entry, with the first year kept in an appropriate office of the adviser and the rest anywhere
• b.Six years from the end of the fiscal year of the last entry, all of it kept in the adviser's principal office or a branch office
• c.Five years from the end of the fiscal year of the last entry, the first two years in an appropriate office of the adviser✓
• d.Five years from the date each record is created, kept wherever the adviser finds it convenient

Rule 204-2(e)(1) requires the records to be kept for not less than five years from the end of the fiscal year in which the last entry was made, the first two years in an appropriate office of the adviser. Three years with one year on site, and six years in the principal office, are not what the rule says. Counting five years from the date a record is created, instead of from the end of the fiscal year of the last entry, misstates the start date, and the first two years must be in an appropriate office of the adviser.17 CFR 275.204-2(e)(1)

An agent of a broker-dealer lends money to a retail customer to help the customer meet a margin call. Under the NASAA model rule on dishonest or unethical practices, an agent's lending money to a customer is:

• a.Permitted when the loan is short-term and is repaid by the date on which the margin call must be met
• b.Permitted whenever the customer signs a written acknowledgment that memorializes the terms of the loan and the agent's firm approves it
• c.Permitted only where the agent earns no interest or fee on the money advanced
• d.A dishonest or unethical practice that can be grounds for denial, suspension, or revocation of the agent's registration✓

NASAA's model rule lists 'engaging in the practice of lending or borrowing money or securities from a customer' among the dishonest or unethical practices of agents, and it states no exception for short-term, documented, or interest-free loans. Such conduct can be grounds for denial, suspension, or revocation of registration, so a loan to cover a margin call is not excused by a brief repayment period, a signed acknowledgment, or the absence of interest.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents, s.2.a

An investment adviser representative decides only the price at which, or the time when, a client's order for a definite amount of a specified security is executed. Under NASAA Model Rule 102(a)(4)-1, this limited discretion:

• a.Requires written discretionary authority from the client before the first such trade, exactly as full discretion does, with no exception for price or time
• b.Requires written discretionary authority within ten business days after the first such trade, the same as it does for full discretion exercised under oral authority
• c.Does not require written discretionary authority, because the rule excepts discretion limited to price or time for a definite amount of a specified security✓
• d.Is allowed without written authority only for purchases of mutual fund shares, because the exception covers no other kind of security

NASAA Model Rule 102(a)(4)-1(b) makes it unethical to exercise discretion without written discretionary authority, but excepts discretion that relates solely to the price at which, or the time when, an order for a definite amount of a specified security is executed. So price-or-time discretion needs no written authority. The ten-business-day window is for full discretion that began under oral authority. Written authority before the first trade is the broker-dealer standard for full discretion. The exception is not limited to mutual funds.NASAA Model Rule 102(a)(4)-1(b)

A client gives an investment adviser oral authority to exercise full discretion over the account. Under NASAA Model Rule 102(a)(4)-1, the adviser must obtain the client's written discretionary authority:

• a.Before the first discretionary transaction is placed, because oral authority is never enough for an investment adviser, as it is not for a broker-dealer
• b.Within thirty calendar days after the account is opened, whether or not a discretionary transaction has yet been placed
• c.Within ten business days after the date of the first transaction placed under the oral discretionary authority✓
• d.Within ten business days after the account is opened, whether or not any discretionary transaction has yet been placed under oral authority

NASAA Model Rule 102(a)(4)-1(b) lets an investment adviser act on oral discretionary authority, but written authority must be in hand within ten business days after the first transaction placed under it. Requiring it before the first trade is the broker-dealer rule. A thirty-day deadline is not in the rule, and the ten days run from the first transaction, not from the date the account is opened.NASAA Model Rule 102(a)(4)-1(b)

An investment adviser directs client brokerage to a firm that charges higher commissions in exchange for soft-dollar benefits that do not qualify for the Section 28(e) research safe harbor. Under fiduciary principles this is:

• a.Acceptable if the adviser discloses the arrangement on Form ADV, since disclosure alone brings any soft-dollar benefit within the Section 28(e) safe harbor
• b.Acceptable if the higher commission is still within the range other broker-dealers charge, because best execution looks only at the commission rate and not the total cost
• c.Permitted if the benefits are used only for the adviser's overhead, such as rent and salaries, because overhead indirectly benefits the clients who pay the commissions
• d.A potential breach of the duty of best execution and loyalty, because paying up for benefits outside the Section 28(e) safe harbor is not protected✓

Section 28(e) of the Exchange Act protects an adviser from claims of breach for paying more than the lowest commission only when the brokerage and research services qualify and the adviser determines in good faith that the commission is reasonable. Benefits outside the safe harbor lose that protection, so paying higher commissions for them can breach the duties of best execution and loyalty. Disclosure does not bring a non-qualifying benefit within the safe harbor. Best execution looks at the total cost and quality of execution, not only the commission rate. Overhead such as rent and salaries is not research or brokerage that qualifies.Securities Exchange Act of 1934 §28(e) (15 U.S.C. 78bb(e))

An adviser deducts advisory fees directly from client accounts held at a qualified custodian. Under the NASAA model custody rule, to avoid the independent verification (surprise examination) requirement the adviser typically must:

• a.Hold the client's written authorization to deduct fees, concurrently send the custodian and the client itemized fee statements, and notify the Administrator on Form ADV✓
• b.Send the client an itemized fee statement once a year, with no invoice to the custodian and no notice to the Administrator
• c.Post a surety bond equal to the fees it deducts and file the bond with the Administrator in place of sending invoices
• d.Deduct each fee only after the client signs the invoice, then send the custodian a copy within 30 days

The fee-deduction relief in the NASAA model custody rule applies when the adviser has custody solely because it can deduct its fee. The adviser must hold the client's written authorization to deduct fees. Each time it deducts a fee, it must at the same time send the custodian a statement of the fee and send the client a statement itemizing the formula, the assets under management and the period. The adviser must also notify the Administrator on Form ADV that it uses these safeguards. An annual statement, a surety bond, or a client signature on each invoice is not the test.

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

• a.Acceptable, because the client's discretionary authority passes automatically to the client's heirs at death
• b.Proper, because a written grant of discretionary authority is a permanent delegation that continues in force until the client expressly revokes it in writing
• c.Permitted until the executor or estate formally notifies the adviser of the death in writing
• d.Improper — discretionary authority and the advisory relationship generally terminate on the client's death, and continued trading is unauthorized✓

Discretionary authority is delegated by the client personally, and under general agency principles it generally ends when the client dies, as does the advisory relationship. Trades placed afterward are placed without authority, which NASAA Model Rule 102(a)(4)-1(d) lists as an unethical practice. The authority does not pass to the heirs, it is not permanent, and an adviser that already knows of the death cannot wait for formal written notice; it should stop trading and await instructions from the estate's legal representative.NASAA Model Rule 102(a)(4)-1(d)

Under FINRA Rule 3210, a person associated with a member firm who wants to open a securities account at another broker-dealer must generally:

• a.Obtain the state securities Administrator's advance written consent before opening the account, and file a copy of that consent with the employing member
• b.Notify the employing member within 30 days after opening the account, and tell the executing firm of the association only if the executing firm asks
• c.Notify the employing member in writing within five business days after the account is opened, with no consent needed
• d.Obtain the employing member's prior written consent, and notify the executing firm in writing of the association before opening the account✓

FINRA Rule 3210 requires an associated person to get the employing member's prior written consent before opening an account in which securities transactions can be effected and in which he or she has a beneficial interest, and to notify the executing firm in writing of the association before opening it. The executing firm must send duplicate confirmations and statements to the employer on written request. State Administrators play no consent role. A 30-day notice window applies only to accounts that already existed when the person joined the firm. After-the-fact notice with no consent does not satisfy the rule.FINRA Rule 3210(a)-(c)

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

• a.The custody rule's requirement that a qualified custodian hold client assets and send account statements directly to each client at least quarterly
• b.The fiduciary duty to treat clients fairly and to disclose conflicts, since undisclosed benefits can bias allocation and breach loyalty✓
• c.The anti-assignment requirement in Section 205, under which the client must consent before an advisory contract is transferred
• d.The performance-fee prohibition in Section 205(a)(1), under which only qualified clients may be charged a share of capital gains

An adviser's fiduciary duty under Section 206 requires loyalty and fair treatment of clients, and an undisclosed gift that leads the adviser to favor one client in allocations is an undisclosed conflict that breaches that duty. The custody rule is about holding client assets with a qualified custodian. The anti-assignment provision concerns who may take over an advisory contract. The performance-fee prohibition concerns how an adviser may charge. None of those addresses biased allocation.

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

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

Trading on material nonpublic information is prohibited no matter how the information was obtained, so the agent had no defense for acting on a tip and did not merely commit a suitability violation. The conduct is fraud under the Act's general antifraud provision (1956 Act s.101; 2002 Act s.501), and broker-dealers must maintain written policies to prevent misuse of material nonpublic information (Exchange Act s.15(g)). The client being the source rather than the firm creates no exception.Exchange Act s.15(g) (15 U.S.C. 78o(g)); Uniform Securities Act (1956) s.101 / (2002) s.501

An investment adviser wants to register a client's securities in the adviser's own name as the owner, 'for convenience.' Under the SEC custody rule, holding client securities this way is:

• a.Acceptable, provided the adviser sends the client an annual statement listing the securities held in its name
• b.A custody problem raising misappropriation risk: client securities must be held by a qualified custodian, in the client's name or in the adviser's name only as agent or trustee for its clients✓
• c.Permitted for an SEC-registered adviser but not for a state-registered adviser
• d.Acceptable if the client gives written consent, because the client may waive the qualified-custodian requirement

Rule 206(4)-2(a)(1) requires a qualified custodian to maintain client securities either in a separate account for each client under that client's name, or in accounts holding only clients' assets under the adviser's name as agent or trustee. Registering the securities in the adviser's own name as owner fits neither, and it exposes the clients to misappropriation and to the adviser's creditors. An annual statement does not fix that, the rule does not turn on how the adviser is registered, and the client cannot waive the requirement.17 CFR 275.206(4)-2(a)(1)

An adviser's employee overhears material nonpublic information in an elevator and the firm has no written policies to prevent its misuse. Under the Investment Advisers Act, the firm's failure most directly violates:

• a.The custody rule, Rule 206(4)-2, which requires client assets to be held by a qualified custodian and verified by an independent accountant's surprise examination
• b.The performance-fee prohibition in Section 205(a)(1), which bars fees based on a share of capital gains unless the client is a qualified client
• c.The civil-liability and rescission provisions found in the Uniform Securities Act, which let a buyer recover the purchase price whenever a security was sold in violation of the Act
• d.Section 204A of the Investment Advisers Act, requiring written policies reasonably designed to prevent the misuse of material nonpublic information by the firm✓

Section 204A requires an adviser to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, so a firm without such policies violates it even if no one has traded. The custody rule and the performance-fee rule address other subjects entirely. The civil-liability provisions of the Uniform Securities Act are a state remedy for buyers of securities sold in violation of that Act; they are not the federal policy requirement and are not triggered by an overheard remark.Investment Advisers Act of 1940 §204A

A state-registered investment adviser with $40 million in assets under management permanently moves its principal office and place of business to a different state. Under the Advisers Act's federal/state division, the adviser generally must:

• a.Register with the securities regulator of the new state, because that is now the state of its principal office and place of business✓
• b.Remain registered only with the original state, because its registration stays with the state where it first registered
• c.Automatically become a federal covered adviser the moment it relocates across the state line
• d.Keep its original state registration and file only a notice filing in the new state, as federal covered advisers do

Under Advisers Act s.203A(a)(1), a small adviser is regulated by the state in which it maintains its principal office and place of business, so after the move it must register in the new state. Its old registration does not follow it, a notice filing is for federal covered advisers rather than state-registered ones, and relocating across a state line does not by itself make an adviser a federal covered adviser.Advisers Act s.203A(a)(1) (15 U.S.C. 80b-3a)

An investment adviser representative leaves a state-registered adviser. Under the Uniform Securities Act of 2002, the duty to file the notice of termination with the Administrator falls first on:

• a.The state securities Administrator, who must withdraw the registration on learning of the departure, with no filing by anyone else
• b.The departing representative alone, who must file within 30 days, with no filing required of the firm
• c.The employing investment adviser, which must promptly file the notice, and the representative may file it if the firm fails to✓
• d.The representative's new employer alone, which files once the representative begins the next job

Section 408(a) of the Uniform Securities Act of 2002 requires the employing investment adviser to promptly file a notice of termination when a registered investment adviser representative leaves, and lets the representative file it if the firm has not. The Administrator does not act without a filing. The departing representative is a back-up filer, not the primary one, so the duty cannot rest on that person alone. A new employer's later filing concerns the transfer of registration, not the termination notice from the old firm.Uniform Securities Act (2002) §408(a); NASAA Model Rule USA 2002 408(a)-1

A customer places a genuine order to buy a security and, later the same day, a genuine order to sell it, and the broker-dealer executes both at prevailing market prices. Compared with 'painting the tape,' the broker-dealer's activity is:

• a.Unlawful, because opposite orders in the same security on the same day are treated as matched orders under the antifraud provisions
• b.Lawful only if the Administrator has approved the pairing of the orders in advance
• c.Lawful, because each order reflects a bona fide transaction, unlike matched orders entered to create a false appearance of active trading✓
• d.Lawful only for large institutional customers, because retail round-trip trades are presumed to be manipulative

What the antifraud provisions prohibit is sham activity: wash trades with no change in beneficial ownership, or matched orders entered to create a false or misleading appearance of active trading (NASAA BD rule s.1.p). A customer's genuine purchase and sale, executed at market prices for the customer's own purposes, is a bona fide transaction. Opposite orders on the same day are not presumed to be matched, no advance approval is required, and the lawfulness does not depend on whether the customer is institutional or retail.NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents, s.1.p(1)-(3)

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

• a.Permissible, because the agent's duty ends once the recommendation is suitable, and describing risks is the issuer's job alone
• b.A material omission — suitability does not excuse omitting a material fact needed to keep statements from being misleading✓
• c.Excused if the client has signed an account agreement acknowledging that securities can lose value
• d.Acceptable if the customer is an experienced investor, since sophisticated customers are presumed to know every issuer-specific risk

Section 101(2) of the Uniform Securities Act makes it unlawful to omit to state a material fact necessary to make the statements made not misleading. A suitable recommendation is a separate requirement, so it does not cure an omission of a known material risk. The issuer's duty to describe risks does not remove the agent's own duty. A general acknowledgment that securities can lose value is not disclosure of the specific risk. Experience does not make a customer aware of a risk the agent knows and has not mentioned.Uniform Securities Act (1956) §101(2)

Under the Investment Advisers Act custody rule (Rule 206(4)-2), when an adviser has custody of client funds or securities, the core safeguard against misappropriation is:

• a.Using a qualified custodian and delivering independent account statements to the client, so client assets are segregated and independently verifiable✓
• b.Posting a fidelity bond for the full value of the assets in place of using a custodian
• c.Holding client assets in an omnibus account in the adviser's name and sending its own statements
• d.Filing a Form ADV Part 2A brochure that describes the adviser's custody practices

Rule 206(4)-2 makes it a fraudulent practice to have custody of client funds or securities unless a qualified custodian holds them in the client's own account or in an account for the adviser's clients only, the custodian sends account statements at least quarterly, and an independent accountant verifies the assets by surprise examination (with limited exceptions). A fidelity bond does not substitute for a custodian. An omnibus account in the adviser's own name with self-issued statements removes the independent check. A brochure describing custody practices informs clients but does not protect the assets.17 CFR 275.206(4)-2

An SEC-registered adviser has a new disciplinary event in March but waits to report it until its next annual Form ADV update. Under the Investment Advisers Act, the adviser:

• a.Complied, because the annual updating amendment is the only filing that Form ADV requires
• b.Violated its duty: Form ADV must be amended promptly when disciplinary information becomes inaccurate, not just once a year✓
• c.Complied, as long as it told affected clients about the event orally, because only client notice is required between annual updates
• d.Missed a quarterly deadline: Form ADV must be amended within 30 days after the end of each quarter in which any change occurs

Rule 204-1 requires an annual updating amendment within 90 days after fiscal year end, and more frequent amendments when the Form ADV instructions require them. Those instructions require a prompt other-than-annual amendment when the disciplinary answers in Part 1A (Item 11) become inaccurate in any way, so waiting for the annual update is a violation. The annual update is not the only filing, telling clients orally does not replace amending the form, and there is no quarterly amendment deadline.17 CFR 275.204-1

An issuer relying on Rule 506(b) of Regulation D to raise capital may sell to how many non-accredited purchasers in an offering?

• a.No more than 35, each of whom must be financially sophisticated✓
• b.No more than 100, provided each invests at least $50,000 in the offering
• c.No more than 10, provided the issuer has verified each one's finances
• d.None, because only accredited investors may buy in any Regulation D offering

Rule 506(b) allows an unlimited number of accredited investors and up to 35 non-accredited purchasers who, alone or with a purchaser representative, are sophisticated; general solicitation is not allowed. The issuer is not required to verify the finances of non-accredited purchasers, which is the 506(c) requirement for accredited ones. The 100-owner figure belongs to a fund exclusion, not Regulation D. The offering is not limited to accredited investors, so none is wrong.Regulation D Rule 506(b)

An issuer wants to advertise its private offering on social media. Which exemption permits general solicitation?

• a.Rule 506(c), if every purchaser is accredited and the issuer verifies it✓
• b.Section 4(a)(2), if the issuer limits its offers to sophisticated investors
• c.Rule 506(b), provided the issuer limits sales to 35 non-accredited purchasers
• d.Rule 144, provided the securities are held for at least six months

Rule 506(c) permits general solicitation if every purchaser is an accredited investor and the issuer verifies it. Rule 506(b) prohibits general solicitation. The statutory private-offering exemption in Section 4(a)(2) also does not allow advertising. Rule 144 is a resale safe harbor, not an offering exemption.Regulation D Rule 506(c)

Which individual qualifies as an accredited investor under Regulation D?

• a.An investor with a securities account balance of more than $500,000
• b.An investor with $1.2 million of net worth, including a $900,000 home
• c.An investor with $150,000 of income in each of the past two years
• d.An investor with $1.2 million of net worth, excluding the home✓

An individual qualifies by net worth over $1 million excluding the primary residence, or by income above $200,000 ($300,000 with a spouse) in each of the last two years with the same expected this year. Counting the home would push this investor under the net worth test. $150,000 is below the income test. An account balance alone is not a standard.Regulation D Rule 501(a)

An affiliate of a reporting company wants to sell control securities under Rule 144. What limits the amount that may be sold during any three-month period?

• a.The greater of 1% of shares outstanding or average weekly volume over four weeks✓
• b.The greater of 5% of the shares outstanding or the average monthly volume of the prior year
• c.The lesser of 1% of the shares outstanding or the average weekly volume over the last four weeks
• d.Ten percent of the shares the affiliate owns, regardless of the trading volume

For affiliates, Rule 144(e)(1) caps sales in any three-month period at the greatest of 1% of the outstanding shares of the class or the average weekly reported trading volume during the four calendar weeks before the notice of sale (a third measure, volume reported under a transaction reporting plan, works the same way). The limit is the higher figure, so a 'lesser of' test is the reverse of the rule. The 5% and monthly-volume figures are not in the rule, and the limit does not depend on a percentage of the seller's own holdings.17 CFR 230.144(e)(1)

A non-affiliate bought restricted stock of a company that files reports under the Exchange Act. After what minimum holding period may the stock generally be resold under Rule 144?

• a.Six months, subject to the current public information condition✓
• b.Two years, whether or not the issuer reports under the Exchange Act
• c.Three months, after which only the volume limitation applies to the sale
• d.One year, regardless of whether the company is a reporting company

For restricted securities of a reporting issuer, the Rule 144 holding period is six months; a non-affiliate is subject to a current-public-information condition from six months until one year, and free of conditions afterward. For a non-reporting issuer the holding period is one year. Three months is not a period under the rule, and the one-year period applies only to non-reporting companies. Two years is not a holding period under the current rule.Securities Act Rule 144

Under Regulation Best Interest, a broker-dealer recommending a security to a retail customer must act in the customer's best interest without placing its own interest ahead. Which set lists the four component obligations?

• a.Registration, disclosure, custody, and fee transparency
• b.Suitability, care, supervision, and compliance
• c.Disclosure, care, conflict of interest, and compliance✓
• d.Disclosure, loyalty, fair dealing, and recordkeeping

Reg BI requires a disclosure obligation, a care obligation, a conflict-of-interest obligation, and a compliance obligation. Suitability was the older standard that Reg BI raised. The other lists mix real topics such as recordkeeping and custody that are not the four components.SEC Regulation Best Interest

When must a registered investment adviser that serves retail investors deliver its Form CRS (relationship summary)?

• a.Only when the adviser recommends a product that carries a commission
• b.Only when the retail investor asks the adviser for a copy in writing
• c.Before or at the time the advisory contract is entered into✓
• d.Within 90 days after the end of the adviser's own fiscal year

Form CRS is a short plain-English summary given to retail investors, and for advisers it must be delivered no later than when the advisory contract is entered into. It is not request-only, and the 90-day window relates to the Form ADV annual amendment. It is not tied to commission products.Form CRS

An investment adviser wants to sell a security from its own account to an advisory client. What does the Advisers Act require?

• a.A written notice to the SEC that is filed within 30 days after the trade
• b.Written disclosure and client consent before the trade is completed✓
• c.Nothing, because the principal trade is permitted if the price is fair
• d.A verbal agreement of the client, confirmed at the end of the quarter

Section 206(3) makes it unlawful to act as principal with a client without disclosing the capacity in writing and getting the client's consent before completion of the transaction. A later notice to the SEC, delayed confirmation, or a fair price alone does not satisfy the requirement.Investment Advisers Act Section 206(3)

An advisory contract with a registered investment adviser must provide that it may not be assigned without:

• a.The consent of the clearing firm
• b.The written consent of the client✓
• c.The approval of the SEC staff
• d.Notice to the state Administrator

Section 205(a)(2) requires the contract to prohibit assignment without client consent, and a change of control of the adviser is treated as an assignment. Neither the SEC, a clearing firm, nor the Administrator must approve it.Investment Advisers Act Section 205(a)(2)

The Section 28(e) safe harbor allows an investment adviser that has investment discretion to pay a broker more than the lowest commission for research and brokerage services if the adviser:

• a.Uses the research only for the specific account that paid the commission
• b.Obtains each affected client's written consent before every transaction
• c.Determines in good faith that the commission is reasonable for the value received✓
• d.Discloses each commission rate to the SEC every quarter in a filing

Section 28(e) protects an adviser who makes a good-faith determination that the commissions are reasonable for the brokerage and research received, covering the whole of the client accounts. Per-trade consent, account-by-account use, and quarterly reports to the SEC are not conditions.Securities Exchange Act Section 28(e)

For a registered investment company, the Investment Company Act limits the proportion of the board that may be made up of interested persons to:

• a.No more than 40%
• b.No more than 25%
• c.No more than 60%✓
• d.No more than 75%

Section 10(a) provides that no more than 60% of the board may be interested persons, so at least 40% must be disinterested. The statement of 40% as the cap flips that ratio. The other numbers are not in the statute.Investment Company Act Section 10(a)

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who trades on material nonpublic information may face a civil penalty of up to:

• a.Three times the profit gained or loss avoided✓
• b.Twice the total commissions paid on the trades
• c.Five times the value of the securities that were purchased
• d.The amount of the profit gained, and nothing more

ITSFEA authorizes a civil penalty of up to three times the profit gained or loss avoided, in addition to criminal penalties, and extends liability to controlling persons. A penalty tied to commissions, one capped at the profit, or one based on the securities' value does not match the Act.Insider Trading and Securities Fraud Enforcement Act of 1988

A director buys 1,000 shares of her company at $20 and sells them four months later at $26. Under Section 16(b), what is the consequence?

• a.The profit is taxed as ordinary income but is otherwise unaffected
• b.The company can recover the entire $6,000 profit from that round trip✓
• c.Nothing, because 16(b) only applies to trades by the 10% owners
• d.The company can recover the profit only if she used inside information

Section 16(b) applies strict liability to officers, directors, and 10% holders: any short-swing profit from a purchase and sale within less than six months belongs to the company, whether or not inside information was used. Directors are covered by the rule. Tax treatment is separate from disgorgement.Securities Exchange Act Section 16(b)

A registered investment adviser with a December 31 fiscal year end must file its annual updating amendment to Form ADV within how many days after that date?

• a.180 days
• b.30 days
• c.90 days✓
• d.120 days

Rule 204-1 requires the annual updating amendment within 90 days after the end of the adviser's fiscal year. 30 days is shorter than the requirement, and 120 and 180 days are longer than the rule allows.Form ADV

According to the SEC's 2019 interpretation, an investment adviser's federal fiduciary duty to its clients consists of:

• a.A duty of care and a duty of loyalty to the client✓
• b.A duty of registration and a duty of recordkeeping
• c.A duty of best execution and a duty of confidentiality
• d.A duty of disclosure and a duty of suitability

The SEC interpretation describes the fiduciary duty as a duty of care, which includes the duty to provide advice in the client's best interest and to seek best execution, and a duty of loyalty, which requires placing the client's interest first. The other pairs list true topics but not the two components.Advisers Act fiduciary duty (SEC Release IA-5248)

Which of the following individuals is NOT an agent under the Uniform Securities Act?

• a.An individual who represents a broker-dealer in effecting securities transactions
• b.An individual who represents an issuer in offering its own non-exempt stock
• c.An individual representing an issuer solely in sales of exempt securities✓
• d.An individual who solicits mutual fund share purchases for a broker-dealer

The act's definition of agent excludes an individual who represents an issuer only in effecting transactions in exempt securities or in exempt transactions. A representative of a broker-dealer is an agent. An individual who represents an issuer in offering non-exempt stock is also an agent, since the exclusion does not reach non-exempt securities. Soliciting mutual fund purchases for a broker-dealer is agent activity as well.Uniform Securities Act Section 401(b)

An investment adviser has $150 million in assets under management and is not otherwise exempt. It must register with:

• a.FINRA, because advisers must be member firms
• b.the SEC, with only a notice filing and fee at the state level✓
• c.the SEC and the state, each through a full registration
• d.the state securities administrator, because the SEC registers only advisers above $1 billion

Advisers with at least $110 million in assets under management register with the SEC, and the states may require only notice filings and fees; advisers with $100 to $110 million may choose. Full dual registration is not required for SEC-registered advisers. States register advisers below the federal threshold. FINRA oversees broker-dealers and their registered representatives, not investment advisers.Investment Advisers Act of 1940 Section 203A; 17 CFR 275.203A-1

An investment adviser with $85 million in assets under management, which does not advise registered investment companies, would generally register with:

• a.both the SEC and the state, as a safeguard
• b.the state securities administrator, not the SEC✓
• c.FINRA, which registers advisers of this size
• d.the SEC, since $85 million is a substantial amount

Below $100 million in assets under management an adviser is generally regulated by the states and not eligible for SEC registration. The SEC route opens at $100 million and becomes mandatory at $110 million. Registering with both is not required. FINRA does not register investment advisers.Investment Advisers Act of 1940 Section 203A; 17 CFR 275.203A-1

Under the Uniform Securities Act, a municipal bond issued by a state agency is an example of:

• a.an instrument outside the securities laws altogether
• b.a non-exempt security that needs state registration
• c.an exempt security, so registration is not needed✓
• d.an exempt transaction, so registration is not needed

Securities issued by a state or its political subdivisions are exempt securities and need not be registered. An exempt transaction is a type of sale, not a type of security. Municipal bonds are securities and remain subject to the antifraud provisions. They are not outside the securities laws.Uniform Securities Act Section 402(a)

A resale of stock between two existing shareholders, with no involvement by the issuer and made in an isolated transaction, is an example of:

• a.an exempt security, so no registration is needed
• b.a non-exempt transaction that must be registered first
• c.an exempt transaction, so no registration is needed✓
• d.a sale outside the act, so the antifraud rules do not apply

An isolated non-issuer transaction is one of the exempt transactions, so the registration requirement does not apply to it. The stock itself is not an exempt security, because the exemption turns on how it is sold, not on what it is. Registration is not required for the sale. The antifraud provisions still apply, so the sale is not outside the act.Uniform Securities Act Section 402(b)(1)

The Administrator may deny, suspend or revoke an agent's registration if the agent was convicted of which of the following?

• a.A felony conviction fifteen years ago, unrelated to securities
• b.A civil suit settled with no admission of wrongdoing
• c.A felony conviction eight years ago, unrelated to securities✓
• d.A misdemeanor conviction for a traffic offense three years ago

The act allows action on a conviction within the past ten years of any felony or of a misdemeanor involving securities or the securities business. A felony fifteen years ago falls outside the ten-year period. A traffic misdemeanor is neither a securities offense nor a felony. A civil settlement without admission is not a conviction.Uniform Securities Act Section 204(a)(2)(C)

An investment adviser also earns commissions on client transactions. The adviser must:

• a.disclose the conflict fully so the client can give informed consent✓
• b.disclose the conflict only if the client asks about it directly
• c.rely on the client's general awareness that conflicts exist in the industry
• d.avoid earning commissions, since commissions are never permitted

As a fiduciary, the adviser must give full and fair disclosure of the conflict so the client can make an informed decision. The adviser is not barred from earning commissions if disclosed. Disclosure cannot wait for the client to ask. General awareness of industry conflicts is not disclosure.Investment Advisers Act of 1940 Section 206

Which fee arrangement is generally prohibited for an adviser's client who does not qualify as a qualified client?

• a.A fee based on a share of the account's gains✓
• b.A flat annual fee that the client pays quarterly
• c.An hourly fee charged for financial planning advice
• d.A fee equal to a percentage of assets under management

Section 205 generally bans performance-based fees, which are tied to capital gains or appreciation in the account, unless the client is a qualified client. Asset-based fees, hourly fees and flat fees are all permitted. This question does not depend on any net-worth or assets-under-management dollar figure.Investment Advisers Act of 1940 Section 205

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

• a.Before or at the time of entering into the contract✓
• b.Within 30 days after the client's account is opened
• c.Only if the client requests it in writing first
• d.Within 120 days after the end of the adviser's fiscal year

The brochure rule requires delivery before or at the time the adviser enters into the advisory contract. The 120-day deadline governs the annual update delivered to existing clients. A 30-day window after account opening would let the adviser act before disclosure. Delivery on request only is not permitted; the adviser must deliver it.17 CFR 275.204-3(b)(1)

Which offer would the state Administrator's jurisdiction under the Uniform Securities Act reach?

• a.A call from an out-of-state broker-dealer to a resident at home✓
• b.A sale between two residents of another state completed there
• c.A broadcast from a radio station located in another state
• d.An ad in a newspaper published and circulated mainly in another state

An offer is made in the state when it is directed into the state and received there, as with a call to a resident at home. A bona fide newspaper published outside the state and circulating mainly there is excluded, as are broadcasts that originate outside the state. A sale between residents of another state, completed there, has no connection to the state.Uniform Securities Act Section 414

A purchaser who buys a security in violation of the Uniform Securities Act's registration or antifraud provisions may recover:

• a.the price paid, but only if the seller acted with intent to defraud
• b.only the administrative fines the state collects from the seller
• c.the price paid, plus interest, costs and attorneys' fees, less income✓
• d.triple the amount of the actual loss as punitive damages

The statutory remedy is rescission-like: consideration paid, interest, costs and attorneys' fees, reduced by income received on the security. The act does not provide treble damages. Liability for registration violations does not depend on proof of intent to defraud. Fines go to the state, and the purchaser has a private right of action beyond them.Uniform Securities Act Section 410(a)

Under the SEC custody rule, an adviser that has custody of client funds or securities must generally:

• a.keep them with a qualified custodian such as a bank or broker-dealer✓
• b.hold them in a pooled account titled in the adviser's own name
• c.have a state securities examiner conduct an annual surprise examination
• d.send clients statements at least annually, prepared by the adviser

The custody rule requires client assets to be held by a qualified custodian, which sends account statements at least quarterly, and requires an annual surprise examination by an independent public accountant. Annual statements fall short of the quarterly minimum. The surprise examination is by an independent public accountant, not a state examiner. Holding client assets in the adviser's own account would defeat the rule's purpose.17 CFR 275.206(4)-2

Registration by coordination under the Uniform Securities Act is available to an issuer that:

• a.sells only securities that the act exempts from registration
• b.has registered the same offering with the SEC under the 1933 Act✓
• c.wants the state Administrator to review the merits of the offering
• d.makes only isolated resales between existing shareholders of its stock

Coordination is for offerings registered federally; the state registration generally becomes effective automatically when the federal one does. Merit review of the offering belongs to registration by qualification. Exempt securities and isolated transactions require no registration at all.Uniform Securities Act Section 303

Which action would most clearly breach an investment adviser's fiduciary duty?

• a.charging a disclosed market-rate fee based on assets managed
• b.recommending an affiliate's fund without disclosing the relationship✓
• c.recommending a diversified portfolio and reviewing it with the client each year
• d.declining a client whose needs are outside the adviser's expertise

Failing to disclose a conflict, such as an affiliation with the recommended fund, breaches the duty of loyalty and full disclosure. A diversified portfolio with annual review is consistent with the duty. Declining a client outside one's expertise is prudent. A market-rate asset-based fee that is disclosed is permitted.Investment Advisers Act of 1940 Section 206

Which of the following is excluded from the definition of a security under the Uniform Securities Act?

• a.An annuity contract under which an insurer promises to pay a fixed sum✓
• b.A share of an open-end investment company that redeems on demand
• c.A variable annuity contract whose owner bears the investment risk
• d.An interest in a limited partnership that invests in real estate

The act's definition excludes insurance and annuity contracts under which the insurer promises to pay a fixed sum, because the insurer bears the investment risk. A variable annuity shifts the investment risk to the owner and is a security. A limited partnership interest is an investment contract and a security. Mutual fund shares are securities.Uniform Securities Act Section 401(m)

An SEC-registered adviser has a fiscal year ending September 30. By what date must it file its annual updating amendment to Form ADV?

• a.November 29 (60 days)
• b.January 28 (120 days)
• c.December 29 (90 days)✓
• d.December 31 (year end)

Rule 204-1 requires the annual updating amendment within 90 days of the adviser's fiscal year end. October has 31 days and November has 30, so day 90 after September 30 is December 29. January 28 is day 120, which is the outer limit for sending clients a brochure or summary of material changes, not the SEC filing date. November 29 is only day 60 and is not a deadline in the rule. December 31 matters for state registrations, which expire on that date, but the SEC amendment follows the adviser's own fiscal year.17 CFR 275.204-1(a)(1)(i)