A state-registered investment adviser proposes to charge a new client, an individual, a performance-based fee. The contract will be signed on September 15, 2026. The client will place $1.5 million of securities under the adviser's management immediately after signing the contract. The client's net worth, excluding the primary residence, is $2.6 million.
Under the Uniform Securities Act and applicable rules, may the adviser charge this fee? Answer: Yes, because the client meets the assets-under-management test for a qualified client.
Governing authority: Uniform Securities Act § 102, together with the qualified-client standard of SEC Rule 205-3. A performance-based fee may be charged only to a qualified client. For a contract entered into on or after June 29, 2026, an individual is a qualified client if, immediately after entering the contract, the client has at least $1.4 million under management with the adviser OR a net worth over $2.7 million, excluding the primary residence. The September 15, 2026 contract is under those thresholds. The client's $1.5 million transfer meets the assets-under-management test, so the fee is permitted even though the $2.6 million net worth falls short of the $2.7 million net worth test. The statement that the fee is prohibited because net worth is below the threshold treats the two tests as cumulative. The statement that state-registered advisers may never charge performance fees ignores the qualified-client exception. The statement that both tests are met is wrong because the net worth test is not satisfied.
An investment adviser registered under the Uniform Securities Act proposes a new written advisory contract for a 55-year-old client. The client has $1.2 million under management with the adviser and, excluding her primary residence, a net worth of $2.8 million. The current qualified client thresholds are $1.4 million under management or $2.7 million in net worth (excluding the primary residence). The proposed contract charges a performance fee of 15% of the account's net capital appreciation above a high-water mark and states that the adviser may assign the contract to another investment adviser upon 30 days' written notice to the client.
Under the Uniform Securities Act, which statement about the proposed contract is correct? Answer: The performance fee is permitted because the client is a qualified client, but the assignment provision is prohibited because the contract must not permit assignment without the client's consent.
Uniform Securities Act § 102 governs the terms of advisory contracts. A contract must be in writing, must provide that no assignment may be made without the client's consent, and may not charge a performance fee unless the client is a qualified client. The client is a qualified client because her $2.8 million net worth, excluding the primary residence, exceeds the $2.7 million threshold; her $1.2 million under management falls below the $1.4 million asset test, but meeting either test is sufficient. The performance fee is therefore permitted. The assignment clause is prohibited: giving the client 30 days' written notice is not the same as obtaining her consent, which § 102 requires before a contract may be assigned. The statement that the fee is permitted but the assignment clause is prohibited is correct. The claim that the fee is prohibited because the asset test is not met ignores the net worth test, and the claim that the assignment provision is permitted because the client receives 30 days' notice misreads the consent requirement. The claim that the assignment provision is permitted because the client receives written notice makes the same error. The claim that the client fails both qualified client tests overlooks the $2.8 million net worth; although that option correctly notes that consent is required for an assignment, the fee is not prohibited.
An IAR of a state-registered adviser meets with a prospective client who has not previously received the adviser's brochure. The client wants to sign the advisory contract at this meeting, and the IAR has the current brochure available.
Under applicable state rules, which action is permitted? Answer: Give the client the brochure and sign the contract if the client has the right to terminate without penalty within five business days.
Governing authority: NASAA brochure delivery rule for state-registered advisers. The rule is satisfied either by delivering the brochure at least 48 hours before contracting or by delivering it at the time of contracting if the contract gives the client the right to terminate without penalty within five business days. Because the client has not previously received the brochure, the IAR may give the brochure at the meeting and sign the contract only if that termination right is included. Requiring a 48-hour wait and stating that the rule permits no alternative ignores the second prong. Signing immediately without a termination right fails the condition of the second prong. A written acknowledgment of receipt, even with a waiver of the termination right, does not satisfy the rule's delivery requirement.
A state-registered investment adviser has written authorization from each client to deduct its quarterly management fee directly from the client's account at a qualified custodian. For each deduction, the adviser sends the custodian an invoice for the fee and sends the client an itemized invoice showing the fee and how it was calculated. The adviser has disclosed its custody on Form ADV and has no other authority over client assets.
Under the custody rules, which statement is correct? Answer: The adviser is exempt from the surprise examination, net worth, and bonding requirements because its custody comes solely from safeguarded fee deduction.
Governing authority: the NASAA custody rule (Model Rule 102(e)(1)-1) and the NASAA minimum financial requirements rule (Model Rule 202(d)-1). An adviser authorized to deduct fees from client accounts has custody. Under the custody rule, an adviser whose custody arises solely from fee deduction need not undergo a surprise examination if it has written client authorization, sends the custodian an invoice for each deduction, and sends the client an itemized invoice for each deduction. Under the minimum financial requirements rule, custody arising solely from fee deduction with those safeguards is also exempt from the $35,000 custody net worth requirement and from bonding. All of the safeguards are met here. The surprise-examination statement ignores the fee-deduction exception. The $35,000 net worth or bond statement ignores the exemption for fee-deduction custody. The no-custody statement is wrong because the authority to withdraw fees is custody even though a qualified custodian holds the assets; the exception removes requirements, not custody.
- Under NASAA rules applicable to state-registered investment advisers, which of the following statements about delivery of the disclosure brochure to a new client is true?
Answer: If the brochure is delivered when the client signs the new advisory contract, the client may terminate the contract without penalty within five business days.
The NASAA model rule for state-registered advisers allows the brochure to be delivered either at least 48 hours before contracting or at the time of contracting, with a client right to terminate without penalty within five business days. The statement that 48-hour delivery is required in all cases and that a signed acknowledgment must be obtained is wrong: at-signing delivery with the termination right is an alternative, and no signed acknowledgment is required. Delivery at signing without a termination right would not satisfy the rule, and there is no seven-day post-contracting delivery option, even with a written waiver.
In January, a state-registered adviser sent each client a written offer stating that a copy of the adviser's current brochure would be mailed upon request. On March 1, a client sent the adviser a written request for the brochure. The adviser mailed the brochure on March 15.
Under applicable state rules, has the adviser satisfied the brochure delivery requirement? Answer: No, because the brochure should have been mailed within seven days of the client's request.
Governing authority: NASAA brochure delivery rule. A state-registered adviser satisfies the annual delivery requirement by delivering the brochure or sending a written offer to deliver it, and the adviser must mail the brochure within seven days of receiving a client's written request. The January written offer satisfied the annual requirement, but the March 15 mailing came 14 days after the March 1 written request, so the adviser violated the seven-day response requirement. The statement that the brochure was mailed promptly is wrong because the rule fixes a seven-day deadline. The statement that only actual delivery to every client satisfies the annual requirement ignores the written-offer alternative. The statement that delivery at any time during the year satisfies the annual requirement misstates the rule, which requires delivery or a written offer.
- Under the Uniform Securities Act, which of the following statements is true regarding a provision in a brokerage customer agreement that waives the customer's rights under the Act?
Answer: The waiver is void because a customer may not waive compliance with the Act or with any rule or order adopted under it.
Uniform Securities Act § 410 makes void any condition, stipulation, or provision binding a person acquiring a security to waive compliance with the Act or with any rule or order under it. The waiver is void even if the customer initials the agreement and has the signature notarized. It is void as to all remedies, so it cannot be limited to rescission claims. It is also void despite the customer being an accredited investor or institutional buyer. Those three alternatives misstate the absolute nature of the statutory prohibition.
- Under the Uniform Securities Act, which of the following statements regarding the form of an investment advisory contract between a state-registered investment adviser and its client is true?
Answer: The contract must be in writing; an oral contract violates the Act even when the client is sophisticated and the advice is suitable.
Uniform Securities Act § 102 requires a state-registered investment adviser's advisory contracts to be in writing. Delivering a brochure does not cure an oral contract, the writing requirement is not limited to discretionary or custodial relationships, and internal memoranda cannot satisfy the requirement. An oral advisory contract is a violation even if the client is sophisticated and the advice itself is suitable.
A state-registered investment adviser is owned by a single shareholder. The shareholder sells all of the firm's outstanding stock to a financial services company. The adviser's client contracts state that the adviser may assign the agreement upon written notice and that client consent is not required.
Under the Uniform Securities Act, which statement is correct? Answer: The stock sale is an assignment, and each client's consent is required; the contract provision waiving consent is ineffective.
Governing authority: Uniform Securities Act § 102. An assignment includes any direct or indirect transfer of a controlling block of the adviser's voting securities, so a sale of 100% of the firm's stock is an assignment of the advisory contracts. The Act requires advisory contracts to provide that they may not be assigned without the client's consent, and under § 410(i) a contract provision waiving compliance with the Act is void, so the clause allowing assignment on notice alone has no effect and each client's consent is required. The statement that the stock sale is not an assignment ignores the indirect-transfer language. The statement that the Administrator's approval is required substitutes the Administrator for the client's consent, which the Act does not do. The statement that clients are deemed to consent unless they object within 30 days is wrong because the Act contains no deemed-consent rule; it requires the client's consent.
- Under the Uniform Securities Act, which of the following statements regarding assignment of an investment advisory contract is true?
Answer: If a change in control transfers the adviser's advisory contracts to a buyer, the adviser must obtain the client's consent before making the assignment.
Uniform Securities Act § 102 requires advisory contracts to provide that they may not be assigned without the client's consent. When a change of control transfers the contracts, the assignment cannot occur until that consent is obtained. The statement allowing assignment after 30 days' notice is wrong because notice is not a substitute for consent. The statement that a transfer of a controlling block is not an assignment is wrong because the Act defines assignment to include any direct or indirect transfer of a controlling block of the adviser's voting securities, whether or not the contracts stay in the original entity or the portfolio manager changes. Silence or continued fee payment after notice cannot be treated as the required consent.
An SEC-registered investment adviser meets with a new client. At the end of the meeting, the client signs the advisory agreement as the adviser hands the client a copy of the firm's current brochure.
Under applicable federal rules, has the adviser satisfied the brochure delivery requirement? Answer: Yes, because delivery before or at the time of contracting satisfies the SEC brochure rule.
Governing authority: SEC Rule 204-3. A federal covered adviser must deliver its current brochure before or at the time of entering into the advisory contract, so handing the brochure to the client as the agreement is signed satisfies the rule. The 48-hour delivery requirement and the five-business-day termination right are features of the NASAA rule for state-registered advisers and do not apply to an SEC-registered adviser. The statement that the brochure must be delivered before any advice is provided is wrong because delivery at the time of contracting is expressly permitted.
- Under NASAA rules applicable to state-registered investment advisers, which of the following statements is true regarding annual delivery of the disclosure brochure to existing clients?
Answer: Except for clients with impersonal advisory contracts under $200 per year, the adviser must deliver the brochure or offer it in writing and mail it within seven days of a request.
The NASAA model rule for state-registered advisers requires annual delivery of the disclosure brochure or a written offer to deliver it, and the brochure must be mailed within seven days after the client requests it; clients with impersonal advisory contracts under $200 per year are excepted from the annual offer requirement. The first-class-mail/30-day option is wrong because NASAA does not require first-class mail or impose a 30-day post-year-end deadline. There is no $500,000-or-discretionary-account threshold. Posting the brochure on a website and placing a link in an account statement, without delivering the brochure or making the required written offer, does not satisfy the annual requirement.
- Under the Uniform Securities Act, which of the following statements about a state-registered investment adviser acting as principal in a transaction with an advisory client is true?
Answer: The adviser must, before completing the transaction, disclose in writing that it is acting as principal and obtain the client's consent to the transaction.
Uniform Securities Act § 102 requires that an investment adviser acting as principal in a transaction with an advisory client make written disclosure before completing the transaction and obtain the client's consent to the transaction. Disclosure in a later account statement is too late, and silence or failure to object is not consent. A standing consent signed with the advisory contract does not satisfy the disclosure-and-consent requirement for the particular transaction, and there is no exchange-listing exception. Principal transactions are therefore not absolutely prohibited; they are permitted when timely written disclosure and client consent are obtained.
- Which of the following statements regarding a change in the membership of an investment adviser that is a partnership is true?
Answer: The advisory contract must require the adviser to notify clients of the change, and the notice must be given within a reasonable time after the change.
Uniform Securities Act § 102 requires a partnership adviser's advisory contract to include a written provision obligating the adviser to notify clients of any change in partnership membership within a reasonable time after the change. A membership change is not automatically an assignment requiring each client's advance consent, so the statement that any such change requires consent is wrong. The 60-day advance-notice requirement is not part of the rule, and no portfolio-manager or fee-schedule exception eliminates the notice obligation.
A federal covered adviser (SEC-registered) offers a subscription newsletter that provides only impersonal investment advice. Subscribers pay $300 per year and receive no advice based on their individual circumstances. The adviser does not deliver a brochure to subscribers.
Under applicable federal rules, which statement is correct? Answer: The adviser need not deliver a brochure because the advice is impersonal and the annual fee is below the SEC's exemption threshold.
Governing authority: SEC Rule 204-3. The SEC brochure rule exempts an adviser that renders only impersonal investment advice and charges less than $500 per year per client. The newsletter subscribers pay $300 per year and receive no individualized advice, so no brochure is required. The statement that a brochure must be delivered to each subscriber ignores the exemption. The statement that the exemption applies regardless of the fee drops the $500 cap. The statement that the adviser must deliver the brochure annually or send a written offer describes the NASAA annual requirement for state-registered advisers; under the SEC rule, annual delivery is tied to material changes, and the impersonal-advice exemption removes the brochure requirement here.
