Apply Client Disclosure Standards - Series 65

1. What is the disclosure requirement for agency cross transactions?

   Written disclosure and client consent; comply with cross-trade conditions. Agency cross rules mandate safeguards to prevent unfair pricing or favoritism among clients in cross trades.

2. What must an adviser disclose about referral fees or solicitor arrangements?

   That compensation is paid, by whom, and the terms creating the conflict. Solicitor rules require revealing compensation to highlight incentives that could bias recommendations.

3. What must an adviser disclose about custody of client funds or securities, if applicable?

   That custody exists and the safeguards and procedures used. Custody rules protect client assets by mandating transparency on handling and protective measures against misuse.

4. What must an adviser do before borrowing money from a client?

   Obtain written client consent after full disclosure of the conflict. Fiduciary duty treats borrowing as a conflict requiring disclosure and consent to protect client interests from exploitation.

5. What must an adviser disclose about material disciplinary history to prospective and current clients?

   Material disciplinary events for the firm and relevant supervised persons. Form ADV requires revealing past violations to inform clients of risks associated with the adviser's compliance history.

6. Identify the issue: An adviser calls itself "fee-only" but receives $12b$-$1$ fees. What is required?

   Prohibited as stated; must disclose the compensation and not claim fee-only. Claiming fee-only while receiving commissions misleads on compensation structure, violating anti-fraud disclosure standards.

7. What must an adviser disclose about its methods of analysis and investment strategies?

   The strategies used and the material risks of those strategies. Brochure requirements ensure clients understand potential losses and suitability of strategies for their risk tolerance.

8. What is the general advertising rule for performance claims by an investment adviser?

   No untrue, misleading, or materially incomplete performance statements. Advertising rules under the Advisers Act demand accurate performance portrayal to prevent deception of prospective clients.

9. What is the disclosure requirement for principal transactions between an adviser and a client?

   Written disclosure and client consent before each principal trade. Principal trades pose self-dealing risks, so per-trade consent after disclosure ensures client protection under SEC rules.

10. What must be disclosed when an adviser uses discretion over a client account?

    The scope of discretionary authority and how it will be exercised. Disclosure clarifies the extent of authority to prevent unauthorized actions and align with client expectations.

11. What must an adviser disclose when recommending a broker-dealer for execution (best execution context)?

    Any economic benefit received and conflicts affecting broker selection. Best execution obligations require revealing benefits that could influence broker choice, promoting client-centric decisions.

12. What must an adviser disclose when recommending a security in which the adviser has a financial interest?

    The financial interest and the conflict, clearly and in advance. Advance disclosure mitigates conflicts where adviser's interests may not align with client's under fiduciary standards.

13. What must an investment adviser disclose to a client about all material conflicts of interest?

    Full and fair disclosure of all material conflicts, in writing as needed. Fiduciary duty requires advisers to fully inform clients of potential biases to ensure informed decisions and avoid self-dealing.

14. What is the prohibited representation regarding government approval of an investment adviser?

    Claiming registration means the government endorses the adviser. Anti-fraud rules prohibit implying government endorsement to avoid misleading clients about adviser quality or oversight.

15. What is required disclosure when an adviser recommends proprietary products or affiliated funds?

    Disclose affiliation, proprietary nature, and the related conflicts. Affiliation disclosures address inherent conflicts in recommending in-house products over potentially better alternatives.

16. Identify the prohibited statement: "We are SEC approved to manage your money." What is the issue?

    Prohibited: implies government endorsement or approval. Such statements violate prohibitions on false implications of SEC approval, misleading clients on regulatory meaning.

17. What brochure supplement must be delivered when a specific supervised person provides advisory services?

    Form ADV Part $2B$ (brochure supplement). Part 2B details individual adviser backgrounds, ensuring clients know qualifications and disciplinary history of service providers.

18. What is required when an adviser uses testimonials or endorsements in marketing (modern SEC rule concept)?

    Disclose material terms, compensation, and conflicts; avoid misleading use. The Marketing Rule allows testimonials with disclosures to prevent misleading promotions and reveal paid endorsements.

19. Identify the violation: "Guaranteed $10\%$ annual return with no risk." What standard is breached?

    Misleading advertisement; cannot guarantee returns or claim no risk. Guarantees imply certainty not possible in investments, breaching prohibitions on false or misleading advertising claims.

20. What must an adviser disclose about soft-dollar benefits received from broker-dealers?

    The arrangement, benefits received, and resulting conflict of interest. Disclosure of soft-dollar arrangements addresses conflicts from third-party benefits influencing best execution duties.

21. Which performance presentation practice is prohibited: cherry-picking only profitable recommendations?

    Prohibited: presenting only profitable recommendations is misleading. Cherry-picking distorts actual performance, violating rules against misleading advertisements by omitting unprofitable results.

22. What must an adviser do before lending money to a client (outside ordinary bank lending)?

    Provide full disclosure and obtain written client consent. Lending creates conflicts of interest, necessitating disclosure and consent to ensure arms-length transactions.

23. Which document is the primary written disclosure brochure delivered by SEC-registered advisers?

    Form ADV Part $2A$ (the brochure). SEC rules mandate delivery of Part 2A to provide comprehensive firm-level disclosures on services, fees, and conflicts.

24. What is required when a material change occurs in an adviser's disclosure brochure?

    Promptly deliver an updated brochure or a summary of material changes. Regulatory requirements ensure clients receive timely updates to maintain accurate information for ongoing informed consent.

25. What is the minimum disclosure standard for an adviser's compensation arrangement with a client?

    Disclose all material facts about fees, billing method, and who pays. Transparency in compensation prevents misunderstandings and ensures clients understand costs under anti-fraud provisions of the Advisers Act.

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