20 Investment Adviser Regulation (Series 65) Practice Questions & Answers

1. 1. A financial planner prepares comprehensive written plans that include specific recommendations to buy or sell particular mutual funds and stocks. He charges a flat $2,500 planning fee, holds no client assets, and places no trades — clients take the plans to their own brokerage firms. Under the Uniform Securities Act, this planner:

   • A.meets the definition of an investment adviser, because he advises on securities, does so as a business, and is compensated for it✓ Answer
   • B.is not an investment adviser, because he does not effect any securities transactions for clients
   • C.is not an investment adviser, because a flat fee is not compensation for advice
   • D.is not an investment adviser, because he never takes possession of client funds or securities

   The definition turns on the three-prong 'ABC' test: Advice about securities, as part of a Business, for Compensation. All three prongs are satisfied here, and neither executing transactions nor holding assets is an element of the definition — those facts are extraneous.

   Source: Uniform Securities Act §401(f); Investment Advisers Act of 1940 §202(a)(11)Report a problem with this question

2. 2. A CPA whose practice is preparing tax returns also offers clients ongoing advice on which securities to hold, billing a separate fee in addition to her tax-preparation charges. Under the Uniform Securities Act, the CPA:

   • A.must register as an investment adviser, because she receives special compensation for securities advice that is not solely incidental to her accounting practice✓ Answer
   • B.must register as a broker-dealer rather than as an investment adviser
   • C.is excluded, because portfolio advice is a natural extension of tax practice
   • D.is excluded, because accountants are named in the professional exclusion regardless of how they are paid

   The LATE exclusion (lawyers, accountants, teachers, engineers) applies only when the advice is solely incidental to the profession AND no special compensation is received for it. A separate fee for securities advice is special compensation, so the exclusion is lost.

   Source: Uniform Securities Act §401(f)(2); Investment Advisers Act §202(a)(11)(B)Report a problem with this question

3. 3. Which of the following publishers is most likely EXCLUDED from the definition of investment adviser?

   • A.A firm whose newsletter recommendations are tailored to each subscriber's stated portfolio
   • B.A weekly newspaper of general and regular circulation carrying impersonal market commentary based on publicly available information✓ Answer
   • C.A publisher that also manages some subscribers' accounts for an asset-based fee
   • D.A firm that emails buy and sell alerts to subscribers timed to specific market events

   The publisher's exclusion covers bona fide publications of general and regular circulation whose commentary is impersonal and not tailored to individual subscribers, as construed in Lowe v. SEC. Advice timed to market events or personalized to a subscriber's portfolio takes the publisher outside the exclusion.

   Source: Investment Advisers Act §202(a)(11)(D); Lowe v. SEC, 472 U.S. 181 (1985)Report a problem with this question

4. 4. A registered broker-dealer begins offering financial planning to retail customers and bills a separate planning fee in addition to the commissions charged on trades. Under the Investment Advisers Act, the broker-dealer:

   • A.must register with FINRA as an investment adviser
   • B.loses the broker-dealer exclusion for that activity, because it receives special compensation for advice✓ Answer
   • C.remains excluded, because it is already registered with the SEC as a broker-dealer
   • D.remains excluded, because financial planning advice is always solely incidental to brokerage

   A broker-dealer is excluded from the investment adviser definition only where the advice is solely incidental to its brokerage business AND it receives no special compensation for the advice. A separate advisory or planning fee is special compensation, so the exclusion no longer covers that activity. Registration, in any case, is with the SEC or the states — not FINRA.

   Source: Investment Advisers Act §202(a)(11)(C)Report a problem with this question

5. 5. Which individual at a state-registered investment adviser is NOT an investment adviser representative?

   • A.A person who solicits prospects to sign advisory agreements
   • B.A person who determines which securities recommendations the firm will make
   • C.A person whose only duties are scheduling appointments, mailing brochures, and updating the client database✓ Answer
   • D.A person who supervises the firm's advisory personnel

   An IAR is an individual who makes or determines recommendations, manages accounts, solicits or sells advisory services, or supervises those who do. Personnel performing purely clerical or ministerial functions are expressly excluded because they exercise no advisory judgment and do not solicit business.

   Source: Uniform Securities Act §401(g); SEC Rule 203A-3(a)Report a problem with this question

6. 6. An investment adviser with $30 million in assets under management has a single client: a registered investment company. This adviser:

   • A.must register with the SEC, because advisers to registered investment companies register federally regardless of assets under management✓ Answer
   • B.must register in every state where the fund has shareholders
   • C.may choose between SEC and state registration based on its assets under management
   • D.is exempt from all registration because it has only one client

   Assets-under-management thresholds are not the only route to federal registration. An adviser to an investment company registered under the Investment Company Act of 1940 is required to register with the SEC and is therefore a federal covered adviser, even though its AUM would otherwise place it under state jurisdiction.

   Source: Investment Advisers Act §203A(a)(1)(B); SEC Rule 203A-2Report a problem with this question

7. 7. A federal covered investment adviser opens an office in a state. Under NSMIA and the Uniform Securities Act, the state Administrator may:

   • A.take no action of any kind with respect to that adviser
   • B.require a notice filing consisting of the adviser's Form ADV and a filing fee, while retaining authority to bring an antifraud action✓ Answer
   • C.require the adviser to register in the state and satisfy the state's minimum net worth requirement
   • D.impose books-and-records requirements stricter than those of the SEC

   NSMIA preempted state registration of federal covered advisers, but states may still require notice filings with a copy of the Form ADV and a fee, and they expressly retain antifraud jurisdiction over any adviser doing business in the state. What states may not do is impose registration, net worth, or recordkeeping requirements beyond the federal ones.

   Source: Investment Advisers Act §203A(b) (NSMIA); Uniform Securities Act §307Report a problem with this question

8. 8. An adviser registered in State A maintains no place of business in State B. Over the past 12 months it has had four individual (non-institutional) clients residing in State B and has also advised two insurance companies domiciled there. In State B, the adviser:

   • A.is exempt from registration, because it has no place of business there and has had no more than five non-institutional clients in the preceding 12 months✓ Answer
   • B.must register, because it has more than three clients in that state
   • C.must register, because advising any resident of a state triggers registration there
   • D.must register, because the insurance companies count toward the client limit

   The de minimis exemption relieves an adviser with no place of business in the state from registering if it has had no more than five non-institutional clients there during the preceding 12 months. Institutional clients such as insurance companies do not count toward that number, so the two insurers are extraneous to the analysis.

   Source: Uniform Securities Act §201(c) (de minimis); Investment Advisers Act §222(d)Report a problem with this question

9. 9. Which component of Form ADV discloses the educational background, business experience, disciplinary history, and supervision of the specific individual who will provide advice to a particular client?

   • A.Form ADV-E, filed in connection with a surprise examination
   • B.Part 1A, the check-the-box regulatory schedule
   • C.Part 2A, the firm brochure
   • D.Part 2B, the brochure supplement✓ Answer

   Part 1A collects regulatory data about the firm for the regulators, Part 2A is the narrative firm brochure, and Part 2B — the brochure supplement — is the client-facing document about the individual supervised persons who actually advise that client, including their education, experience, discipline and who supervises them.

   Source: SEC Rule 204-3; Form ADV Part 2B General InstructionsReport a problem with this question

10. 10. Form ADV Part 3 (Form CRS) is best described as:

    • A.an annual audited financial statement filed with the state Administrator
    • B.a form used to report the results of a surprise custody examination
    • C.a short, standardized, plain-English relationship summary delivered to retail investors covering services, fees, conflicts, standard of conduct, and disciplinary history✓ Answer
    • D.the adviser's detailed narrative brochure describing its advisory business and fee schedule in full

    Form CRS is a length-limited, standardized relationship summary designed for retail investors, and it must be delivered to them at or before the adviser recommends or enters into an advisory relationship. Its purpose is comparability across firms, which is why its format and 'conversation starter' questions are prescribed; the detailed narrative disclosure remains in Part 2A.

    Source: SEC Rule 204-5; Form CRS General Instructions (Form ADV Part 3)Report a problem with this question

11. 11. Under the NASAA model brochure rule adopted by the states, a state-registered investment adviser must deliver its brochure to a prospective client:

    • A.at least 48 hours before entering into the advisory contract, or at the time of entering into it if the client may terminate without penalty within five business days✓ Answer
    • B.only within 120 days of the adviser's fiscal year end and at no other time
    • C.within 48 hours after the advisory contract is signed
    • D.only upon the client's written request

    The NASAA model rule preserves the '48 hours or five-day free look' structure: advance delivery gives the client time to evaluate the adviser before committing, and the five-business-day penalty-free termination right is the substitute when the brochure arrives only at signing.

    Source: NASAA Model Rule 203(b)-1 (brochure rule)Report a problem with this question

12. 12. Under the Investment Advisers Act, an SEC-registered adviser must deliver its brochure to a new advisory client:

    • A.within five business days after the contract is signed
    • B.at least 48 hours before entering into the advisory contract
    • C.only if the client prepays fees more than six months in advance
    • D.no later than the time the client enters into the advisory contract✓ Answer

    This is the classic state-versus-federal split. The SEC removed the 48-hour requirement when it adopted the narrative brochure format, so a federally registered adviser need only deliver the brochure before or at the time of entering the contract; the 48-hour/five-day alternative survives only under the NASAA state model rule.

    Source: SEC Rule 204-3(b) under the Investment Advisers Act (as amended 2010)Report a problem with this question

13. 13. An investment adviser decides which securities to buy and sell in a client's account without prior approval and, under the advisory agreement, deducts its quarterly fee directly from that account held at an independent broker-dealer. The adviser:

    • A.has discretion but can never have custody, because fee deduction is expressly excluded from the definition of custody
    • B.has neither custody nor discretion, because an unaffiliated third party holds the assets
    • C.has custody because of the direct fee deduction, and also has discretionary authority✓ Answer
    • D.has custody solely because it exercises discretionary authority

    Custody means holding client funds or securities or having any authority to obtain possession of them — including the authority to withdraw fees directly from the account, which is why direct fee deduction is treated as custody subject to safeguards. Discretion is the separate authority to decide the security, the amount, and whether to buy or sell; the two can and often do exist together.

    Source: SEC Rule 206(4)-2(d)(2); NASAA Model Rule 102(e)(1)-1Report a problem with this question

14. 14. An investment adviser that has custody of client funds and securities must generally:

    • A.maintain the assets with a qualified custodian, ensure clients receive account statements at least quarterly, and undergo an annual surprise examination by an independent public accountant✓ Answer
    • B.obtain a fidelity bond, which substitutes for any custodian or examination requirement
    • C.hold the assets registered in the adviser's own name for administrative convenience
    • D.send clients account statements at least once every calendar year

    The custody rule is built on independent verification: a qualified custodian holds the assets, the client receives statements at least quarterly so misappropriation would be visible, and an unannounced annual examination by an independent accountant tests that the assets actually exist. Commingling assets into the adviser's own name is a prohibited practice, not a permitted convenience.

    Source: SEC Rule 206(4)-2; NASAA Model Rule 102(e)(1)-1Report a problem with this question

15. 15. Under the Uniform Securities Act, an investment advisory contract must provide that:

    • A.the adviser's compensation will be based on a share of capital appreciation in the account
    • B.no assignment of the contract may be made without the client's consent✓ Answer
    • C.the client waives any right of action against the adviser for negligence
    • D.the adviser may assign the contract upon 30 days' prior written notice to the client

    Because advisory services are personal in nature, the contract must prohibit assignment without client consent — a client chooses a particular adviser and cannot be transferred to another without agreeing. Performance-based compensation is restricted rather than required, and hedge clauses purporting to waive claims are misleading and prohibited.

    Source: Uniform Securities Act §502(c); Investment Advisers Act §205(a)(2)Report a problem with this question

16. 16. An adviser proposes to charge a client a fee equal to 20% of the capital gains realized in the account. This arrangement is:

    • A.permitted for any client who signs a written waiver acknowledging the arrangement
    • B.permitted only if the adviser also refunds fees when the account declines in value
    • C.always prohibited, with no exception under any circumstance
    • D.permitted only if the client meets the qualified client standard under the SEC's rule, or is otherwise eligible, such as a qualified purchaser or a knowledgeable employee✓ Answer

    Compensation based on a share of capital gains or capital appreciation is generally prohibited because it gives the adviser an incentive to take excessive risk with the client's money. The rule creates a narrow exception for clients sophisticated and well-capitalized enough to bear that risk — the qualified client asset or net worth test, qualified purchasers, and knowledgeable employees. A client's written waiver cannot create eligibility, and a fee based on a percentage of assets averaged over a definite period is not a performance fee at all.

    Source: Investment Advisers Act §205(a)(1) and Rule 205-3Report a problem with this question

17. 17. Under NASAA rules, a state-registered investment adviser must preserve its required books and records:

    • A.for three years, all of which must be kept in the principal office
    • B.for the life of the firm plus seven years after it ceases operations
    • C.for five years from the end of the fiscal year in which the last entry was made, with the first two years kept in the principal office and readily accessible✓ Answer
    • D.for five years, none of which need be maintained in the principal office

    The five-year retention period runs from the end of the fiscal year in which the last entry was made, and the two-year on-site requirement exists so that examiners can obtain the most recent records promptly during an inspection. A state may not impose recordkeeping obligations greater than those of the state where the adviser has its principal place of business.

    Source: NASAA Model Rule 203(a)-2 (books and records); SEC Rule 204-2(e)Report a problem with this question

18. 18. Under the SEC's Marketing Rule governing investment adviser advertising, an advertisement:

    • A.may never include testimonials or endorsements under any circumstances
    • B.may include client testimonials and third-party endorsements if it clearly and prominently discloses whether the person was compensated and any material conflicts of interest✓ Answer
    • C.need not disclose the criteria or assumptions underlying hypothetical performance
    • D.may present gross performance by itself as long as the adviser's fee schedule appears somewhere on its website

    The Marketing Rule replaced the old flat ban with a disclosure-and-oversight regime: testimonials and endorsements are allowed, but the audience must be told about compensation and conflicts so it can discount the praise accordingly. Performance advertising must show net performance with at least equal prominence to gross, and hypothetical performance requires policies, procedures, and disclosure of the underlying assumptions.

    Source: SEC Rule 206(4)-1 under the Investment Advisers Act (Marketing Rule)Report a problem with this question

19. 19. An adviser directs client brokerage to a firm that charges higher commissions in exchange for products and services. Which item falls INSIDE the Section 28(e) soft-dollar safe harbor?

    • A.Payment of the adviser's office rent and furniture
    • B.Salaries of the adviser's marketing and administrative staff
    • C.Third-party research reports and analytical software that assist the adviser in making investment decisions✓ Answer
    • D.Travel and entertainment expenses for the adviser's personnel

    The safe harbor protects only brokerage and research services that provide lawful and appropriate assistance in the investment decision-making process, since the client's commission dollars are being spent for the client's benefit. Overhead items such as rent, furniture, salaries, travel and entertainment benefit the adviser's own business and fall outside; soft-dollar arrangements must also be disclosed to clients.

    Source: Securities Exchange Act of 1934 §28(e); SEC Interpretive Release 34-54165 (2006)Report a problem with this question

20. 20. Which statement about wrap fee programs and solicitor (promoter) arrangements is correct?

    • A.A wrap fee is a single bundled charge, not based directly on transactions, covering advisory services plus execution and related services, and the program sponsor must deliver a wrap fee program brochure✓ Answer
    • B.Sponsors of wrap fee programs are exempt from delivering any disclosure brochure to program clients
    • C.A solicitor who is paid to refer advisory clients need not disclose the arrangement, because the adviser already discloses its fees
    • D.A wrap fee is assessed separately for each transaction executed in the account

    A wrap fee bundles advice, execution and related services into one charge that is not tied to transaction activity, which creates its own conflict — the sponsor keeps more of the fee the less it trades — so a specialized wrap fee program brochure (Form ADV Part 2A, Appendix 1) must be delivered in place of the standard brochure. Compensated solicitors or promoters must separately disclose the arrangement and its conflict to the prospective client.

    Source: Form ADV Part 2A, Appendix 1 (Wrap Fee Program Brochure); SEC Rules 204-3 and 206(4)-1Report a problem with this question

Practice questions based on the NASAA content outlines and the Uniform Securities Act. Not affiliated with NASAA or FINRA, and not investment or legal advice. About NASAA exams →