- Under SEC Rule 206(4)-2 and the NASAA model custody rules, which statement is TRUE regarding a state-registered investment adviser whose custody of client assets arises solely from deducting advisory fees directly from client accounts and who has obtained the client's written authorization and delivers the required invoices?
Answer: The adviser is exempt from the surprise examination requirement and from the minimum net worth and bonding requirements applicable to advisers with custody.
Under SEC Rule 206(4)-2 and the NASAA custody rules, an adviser whose only custody of client assets comes from directly deducting advisory fees is treated as having custody, but when the adviser has obtained written client authorization and delivers the required invoices, it is exempt from the surprise examination requirement. Under the NASAA minimum financial requirements, custody arising solely from direct fee deduction with those safeguards is also exempt from the minimum net worth and bonding requirements. The statement that the adviser is exempt from the surprise examination but must still maintain the $35,000 minimum net worth is wrong because the fee-deduction exemption covers the net worth requirement as well as the surprise exam. The statement that the adviser must still undergo a surprise examination and maintain the $35,000 minimum net worth is wrong on both counts, because the required safeguards have been met. The statement that the adviser is not considered to have custody is wrong because fee-deduction custody is custody; the adviser simply qualifies for the specified exemptions.
- Under NASAA minimum financial requirements, which statement regarding the net worth required of a state-registered investment adviser is TRUE?
Answer: An adviser with custody of client funds must maintain at least $35,000 net worth, an adviser with discretion but no custody must maintain at least $10,000, and an adviser that receives more than $500 per client in fees six or more months in advance must maintain a positive net worth.
Under the NASAA minimum financial requirements, an adviser with custody must maintain $35,000 net worth; an adviser with discretionary authority but no custody must maintain $10,000; and an adviser that collects more than $500 per client in fees six or more months in advance must maintain a positive net worth. The option that sets discretion at $35,000 substitutes the custody figure. The option that sets custody at $10,000 swaps the custody and discretion thresholds. The option that requires $35,000 for prepaid fees treats the prepayment rule as the custody requirement instead of positive net worth.
A state-registered investment adviser organized as a partnership ceases operations and dissolves on March 31, 2025. The partnership agreement and the adviser's other organisational documents are held by the former managing partner. The adviser's fiscal year ends on December 31, and its client records contain entries made through the dissolution date.
Under NASAA recordkeeping rules, through which date must the former managing partner retain the adviser's organisational documents? Answer: March 31, 2028, because organisational documents must be kept for three years after the adviser ceases to exist.
Under NASAA recordkeeping rules, organisational documents must be retained until three years after the adviser ceases to exist. The partnership dissolved on March 31, 2025, so the documents must be kept through March 31, 2028. The five-year period applies to the adviser's other records, not to organisational documents, and it runs from the end of the fiscal year of the last entry (December 31, 2030 here), not from the dissolution date. The three-year period for organisational documents runs from the date the firm ceases to exist, not from the end of the fiscal year.
A state-registered investment adviser has custody of client funds and a net worth of $31,000. The custody does not arise solely from the direct deduction of advisory fees.
Under NASAA rules, which of the following is correct? Answer: The adviser may post a surety bond of $5,000, which covers the net worth deficiency.
Under NASAA minimum financial requirements, a state-registered adviser with custody must maintain $35,000 net worth, and a surety bond may be used for a net worth deficiency rounded up to the nearest $5,000. Because the stem specifies that the custody is not solely from direct fee deduction, the custody net-worth requirement applies. The deficiency is $4,000 ($35,000 minus $31,000), so the required bond is $5,000. A $4,000 bond reflects the unrounded deficiency. A $35,000 bond is not required because the required bond is based on the shortfall. Bonding is available for custody as well as discretionary authority, so the option denying bonding for custody is wrong.
On a Thursday afternoon, a state-registered investment adviser with custody of client assets calculates its net worth and finds that it has fallen to $32,000. The adviser's net worth was $41,000 at the end of its most recent fiscal year.
Under NASAA rules, which of the following actions is the adviser required to take? Answer: Notify the Administrator by the close of the next business day and file a financial report by the close of the following business day.
Under NASAA minimum financial requirements, an adviser that falls below its required minimum must notify the Administrator by the close of business on the next business day and file a financial report by the close of business on the following business day. Because the adviser has custody, the minimum is $35,000, and $32,000 is below it. The five-business-day and 30-calendar-day deadlines are not the NASAA deadlines. Suspending custody or discretionary authority is not a required response to a net worth shortfall. Posting a $5,000 bond may replace the $3,000 deficiency (rounded up to the nearest $5,000), but the adviser must still notify the Administrator by the close of the next business day, not within 10 business days.
A state-registered investment adviser has discretionary authority over client accounts but does not hold client funds or securities. The adviser bills each client $600 semiannually in advance. The adviser's net worth is $8,000.
Under NASAA minimum financial requirements, which of the following is correct? Answer: The adviser fails the minimum financial requirements because its net worth is below the $10,000 required of an adviser with discretionary authority.
Under NASAA minimum financial requirements, an adviser with discretionary authority but no custody must maintain $10,000 net worth, and an adviser that collects more than $500 per client six or more months in advance must maintain positive net worth. Both requirements apply here: the $8,000 net worth satisfies the positive net worth test for the prepaid fees but falls below the $10,000 discretion requirement. The statements that positive net worth alone suffices ignore the discretion requirement. The $35,000 threshold applies to custody, not to prepaid fees.
A state-registered investment adviser maintains its principal office in State A and a branch office in State B. An IAR at the State B branch wants to keep the working files for the clients she services at the branch. The adviser also plans to send records older than two years to a commercial storage facility.
Under NASAA recordkeeping rules, which of the following is correct? Answer: Records must be kept at the principal office for the first two years; they may then be moved, but the five-year retention period still applies.
Under NASAA recordkeeping rules, the first two years of an adviser's records must be maintained at the principal office; after that, they may be moved to another location, but the five-year retention period continues to apply. Keeping all records at the principal office for five years overstates the location requirement. Keeping records at the branch for the first two years is not permitted under the NASAA principal-office rule, regardless of IAR supervision. The SEC's appropriate-office standard governs federal covered advisers, not state-registered advisers under NASAA rules.
- Under the NASAA recordkeeping rules, which statement regarding a state-registered investment adviser's organizational documents, such as its articles of incorporation and partnership agreement, is TRUE?
Answer: The adviser must retain its organizational documents for 3 years after the adviser's business ends.
Under the NASAA recordkeeping rules, organizational documents are retained until 3 years after the adviser's business ends. The option that retains the documents for 5 years after the business ends applies the general books-and-records period to organizational documents. The option that runs 3 years from the end of the fiscal year in which the business ends has the correct period but the wrong starting point; the organizational-documents period runs from the date the business ends, not from fiscal year-end. The option that runs 5 years from the end of the fiscal year in which the business ends states the general recordkeeping rule, which does not govern organizational documents.
- Under NASAA minimum financial requirements, which statement regarding bonding for a state-registered investment adviser is TRUE?
Answer: An adviser that falls below its minimum net worth may post a bond for the shortfall rounded up to the nearest $5,000.
Under the NASAA minimum financial requirements, an adviser that falls below its minimum net worth may satisfy the shortfall by posting a bond equal to the deficiency rounded up to the nearest $5,000, not a fixed $35,000 and not the full minimum net worth figure. The statement that an adviser with custody must post a $35,000 bond in addition to maintaining the minimum net worth misstates the bond as a fixed amount and adds it on top of the net worth requirement. The statement that the bond equals the full minimum net worth amount ignores that the bond covers only the shortfall. The statement that an adviser with discretion but no custody must post a $10,000 bond if its net worth is below $35,000 confuses the $10,000 net worth threshold with a bonding requirement.
A state-registered investment adviser's client terminates her advisory relationship on April 15, 2025. The adviser's fiscal year ends on June 30. The client's file contains the advisory contract, the adviser's written recommendations, and transaction records; the adviser made its last entry in the file on the termination date.
Under NASAA recordkeeping rules, through which date must the adviser retain the client's file? Answer: June 30, 2030, because records must be kept for five years from the end of the fiscal year in which the last entry was made.
Under NASAA recordkeeping rules, an adviser must retain required records for five years from the end of the fiscal year in which the last entry was made, with the first two years maintained at the principal office. The account closed on April 15, 2025, and the adviser's fiscal year ended June 30, 2025, so the file must be retained through June 30, 2030. Counting five years from the entry date itself, or from the calendar year end, misidentifies the start of the retention period. The three-year period is the broker-dealer retention rule for most records, not the adviser rule.
An investment adviser is registered in State A, where it has its principal office and place of business, and it complies with State A's books-and-records, net capital, and bonding requirements. The adviser also maintains a branch office in State B, serves advisory clients there, and is registered as an investment adviser in State B. State B proposes to require the adviser to maintain additional records at the branch and to post a bond, requirements that are stricter than State A's.
Under the Investment Advisers Act of 1940 and the Uniform Securities Act, which of the following is correct? Answer: State B may not impose books-and-records, net capital, or bonding requirements on the adviser that are stricter than those of State A, the adviser's home state.
Investment Advisers Act of 1940 § 222 (home-state rule). A state other than the adviser's home state may not impose books-and-records, net capital, or bonding requirements stricter than those of the state where the adviser has its principal place of business, provided the adviser is registered in that home state and complies with its requirements. The adviser is registered in State A and complies with State A's rules, so State B's stricter proposals are invalid. The statement that State B may impose the requirements because the adviser does business and is registered there ignores that the limit applies to exactly such a non-home state. The statements that records are governed exclusively by the home state or that bonding is governed exclusively by federal law are both wrong: § 222 covers all three categories alike, and State A's own requirements continue to bind the adviser; what State B may not do is add stricter ones.
- Under the Investment Advisers Act, which statement regarding a state's power to impose books-and-records, net capital, and bonding requirements on an investment adviser is TRUE?
Answer: A non-home state may not impose stricter books-and-records, net capital, or bonding rules on an adviser that complies with its home state's requirements.
Under the home-state supremacy doctrine in Investment Advisers Act § 222, a non-home state may not impose books-and-records, net capital, or bonding requirements that are stricter than the home state's when the adviser complies with its home state's requirements. The option that allows stricter net capital rules misstates the scope of the supremacy, which covers net capital as well as the other two categories. The option that allows stricter books-and-records rules also carves out a covered category. The option that permits stricter rules on all three categories when applied equally to in-state advisers defeats the supremacy entirely; equal application does not overcome the protection for out-of-state advisers that comply with their home state.
- Under the NASAA recordkeeping rules, which statement regarding the retention of books and records by a state-registered investment adviser is TRUE?
Answer: An adviser must maintain its required books and records for 5 years from the end of the fiscal year in which the last entry was made, with the first 2 years kept in the adviser's principal office.
Under the NASAA recordkeeping rules (NASAA recordkeeping Model Rule 203(a)-2), a state-registered investment adviser must keep its books and records for 5 years from the end of the fiscal year in which the last entry was made, with the first 2 years maintained in the adviser's principal office. The option that runs the period from the date of the last entry misstates the starting point; the 5-year period begins at fiscal year-end, not at the entry date. The option that places the first 2 years in "an appropriate office" states the SEC standard for federal covered advisers, not the NASAA principal-office rule. The option that uses a 3-year period substitutes the organizational-documents retention period for the general books-and-records period.
- Under NASAA rules, which statement regarding a state-registered investment adviser that falls below its applicable minimum net worth is TRUE?
Answer: The adviser must notify the Administrator by the close of the next business day and file a financial report by the following business day.
Under the NASAA minimum financial requirements, an adviser that falls below its minimum net worth must notify the Administrator by the close of business on the next business day and file a financial report by the close of the following business day. The option with 3- and 10-business-day deadlines uses invented periods. The option requiring same-day notice and a freeze on new clients adds a prohibition on accepting new clients that the rule does not impose. The option requiring a report within 5 business days and notification of clients within 10 business days is wrong on both the deadline and the recipient; the notification goes to the Administrator, not to clients.
A state-registered investment adviser has no discretionary authority over client accounts and bills its clients quarterly in arrears. Its net worth is $12,000. A client mistakenly mails a stock certificate registered in the client's name to the adviser's office instead of to the client's broker-dealer. The adviser returns the certificate to the client two business days after receiving it.
Under NASAA rules, which statement is correct? Answer: The adviser does not have custody because it returned the inadvertently received certificate within three business days, so the $35,000 minimum does not apply.
NASAA custody and minimum financial requirements model rules (consistent with SEC Rule 206(4)-2). Client funds or securities received inadvertently and returned to the sender within three business days are not custody. The adviser returned the certificate two business days after receiving it, so it never had custody, and the $35,000 net worth minimum that applies to advisers with custody does not apply; its $12,000 net worth is not deficient for that reason. The statement that receipt alone created custody and a $35,000 requirement ignores the inadvertent-receipt exception. The statement that custody lasted until the return and triggered next-business-day notice applies the deficiency-notice rule to a requirement that never arose. The statement that the exception depends on the client's written authorization borrows the written-authorization condition from the direct fee-deduction arrangement, which is a different rule.
