- Under the Uniform Securities Act, which of the following state-registered advisers has custody of client assets?
Answer: An adviser that is authorized by a client to withdraw funds from the client's custodial account and transfer them to an account in the adviser's name to facilitate securities purchases.
Under the NASAA custody rule, which parallels SEC Rule 206(4)-2, custody means holding client funds or securities, directly or indirectly, or having authority to obtain possession of them, including authority to withdraw funds from a client's custodial account. The adviser authorized to transfer client funds into an account in the adviser's own name has custody. An adviser that merely invoices the client and has no authority to debit, withdraw, or otherwise obtain client funds or securities does not have custody. Funds received inadvertently and returned within three business days are not custody, so returning the check within two business days is not custody. Executing a trade only after the client approves the specific security and quantity does not give the adviser authority over client funds or securities.
A client of a state-registered investment adviser erroneously mails a check for $40,000 made payable to the adviser rather than to the qualified custodian that maintains her account. The adviser endorses the check and deposits it into the client's account at the qualified custodian two business days after receiving it.
Under NASAA rules, which statement is correct? Answer: The adviser had custody of the check because the exception requires returning it to the sender within three business days, not depositing it.
Governing authority: the NASAA custody rule, which parallels SEC Rule 206(4)-2. Funds received inadvertently are not custody only if the adviser returns them to the sender within three business days. Depositing the check into the client's account is not a return to the sender, so the exception does not apply and the adviser had custody of the client's funds from receipt. The option that treats the deposit as satisfying the exception and the option that treats inadvertent receipt alone as sufficient both misstate the condition; the option fixing custody from the moment of deposit is wrong because possession of the client's check is custody from receipt.
An IAR of a state-registered investment adviser recommends that a client buy a corporate bond from the adviser's own inventory. Before the trade, the IAR describes the transaction and the bond's terms to the client by telephone, and the client orally approves the purchase. The IAR executes the trade and then sends the client a written confirmation disclosing that the adviser acted as principal.
Under the Uniform Securities Act, which statement is correct? Answer: The trade violates the Act because the required written disclosure was not delivered to the client before completion of the transaction.
Governing authority: Uniform Securities Act § 102. An investment adviser may not effect a principal transaction with a client unless it makes written disclosure to the client before completion of the transaction and obtains the client's consent. The IAR disclosed the trade orally and sent written disclosure only after execution, so the trade violates the Act. The option treating the client's oral approval plus a post-trade written confirmation as sufficient ignores both the writing and the timing requirements; the option treating the telephone disclosure as sufficient ignores the writing requirement; and the option calling principal trades absolutely prohibited is wrong because the Act permits them when the required written disclosure and consent are obtained.
- Under the Uniform Securities Act, a state-registered adviser with custody that falls below the required minimum net worth must take which of the following actions?
Answer: Notify the Administrator by the close of the next business day after the deficiency 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 net worth must notify the Administrator by the close of the next business day and file a financial report by the close of the following business day. Immediate notice is not required, nor is a five-business-day filing window. The adviser is not automatically required to stop operations. A bond used to cover a deficiency is set at the deficiency rounded up, not down, to the nearest $5,000.
A state-registered investment adviser that recently became registered has no custody and bills all fees quarterly in arrears. A client has signed a written agreement granting the adviser full discretionary authority to buy and sell securities in the client's account without prior approval. The client has not yet deposited funds, and no trade has been placed under the agreement.
Which statement about the adviser's financial requirement is correct? Answer: The adviser must maintain $10,000 net worth because the signed grant of discretionary authority triggers the requirement even before it is exercised.
Governing authority: the NASAA minimum financial requirements rule. The $10,000 net worth requirement applies to an adviser that has discretionary authority over a client's account, and the signed agreement grants that authority even though the account is unfunded and no trade has been placed; the rule turns on the existence of the authority, not its exercise. The options conditioning the requirement on a funded account or an executed trade misread that element. The $35,000 figure applies to custody, which requires holding client assets or having authority to withdraw them, not merely trading authority.
- Under the rules governing state-registered advisers with custody, all of the following are required EXCEPT:
Answer: Receiving duplicate statements from the custodian and personally forwarding them to the client on a quarterly basis without relying on the custodian's delivery.
Under SEC Rule 206(4)-2 and NASAA custody rules, a qualified custodian must hold client assets in a separate account or in an adviser account as agent or trustee containing only client assets; the adviser must notify the client of the custodian's name, address and the manner in which the assets are held; and the adviser must have a reasonable basis to believe the custodian sends statements at least quarterly. The rules do not require the adviser to receive duplicate statements and forward them to the client; direct delivery by the custodian is sufficient.
A state-registered investment adviser has discretionary authority over clients' accounts. It does not have custody of client funds or securities for net worth purposes. It directly deducts quarterly advisory fees, billed in arrears, from accounts maintained at a qualified custodian; each client authorizes the deduction in writing, invoices are sent to the custodian, and the custodian sends quarterly statements. One client has also prepaid $600 of advisory fees for services to be provided over the next six months.
Under NASAA rules, what minimum net worth must this adviser maintain? Answer: The adviser must maintain a minimum net worth of $10,000
Governing authority: the NASAA minimum financial requirements rule for state-registered investment advisers. Because the fee-deduction arrangement described satisfies the custody-rule safeguards, it is not treated as custody for the net worth requirement; the adviser therefore has discretionary authority without custody, which requires a $10,000 minimum net worth. The client's $600 prepayment for services six months in advance triggers the separate positive-net-worth requirement, but the $10,000 discretionary-authority requirement is the controlling minimum because it is higher. The $35,000 option would apply only to an adviser with custody that is not excepted; the positive-net-worth option reflects the prepayment rule but ignores the discretionary-authority tier; and the no-minimum option ignores both the discretionary authority and the prepayment.
- Under the Uniform Securities Act, which of the following statements regarding the Administrator's authority to require an investment adviser to post a bond is true?
Answer: The Administrator may require a bond of an investment adviser with custody or discretionary authority over client accounts, but not if the net capital or minimum financial requirement imposed exceeds the bond amount.
Under the Uniform Securities Act, the Administrator may require a bond of a broker-dealer, agent, or investment adviser with custody or discretionary authority over client funds or securities, but may not impose a bond when the net capital or minimum financial requirement imposed exceeds the bond amount. The Administrator's authority is not limited to advisers with custody, so a bond may be required of an adviser with only discretionary authority. The $35,000 figure is a minimum-net-worth threshold, not a fixed bond amount, and meeting a minimum net worth requirement does not by itself remove the Administrator's bonding authority. A positive net worth likewise does not automatically exempt an adviser from a bond requirement.
- A state-registered adviser's only connection to custody is directly deducting its advisory fees from client accounts. Which of the following statements is true?
Answer: The adviser is exempt from the surprise examination, the $35,000 net worth requirement, and the bond requirement, provided the required custodial safeguards are met.
Under SEC Rule 206(4)-2 and NASAA custody rules, custody arising solely from direct fee deduction is exempt from the surprise examination, the $35,000 net worth requirement, and the bonding requirement, provided the required safeguards are met, including a reasonable basis to believe the custodian sends quarterly statements. A surprise exam is not required for this form of fee deduction. There is no $35,000 bond requirement for such an adviser, and no client waiver is needed; the exemption applies when the conditions are satisfied.
- Which of the following is true regarding a state-registered adviser that has discretionary authority over client accounts but does not have custody?
Answer: The adviser must maintain a net worth of at least $10,000 and may be required to post a bond because of its discretionary authority over client accounts.
Under NASAA minimum financial requirements, an adviser with discretionary authority but no custody must maintain net worth of at least $10,000, and the Administrator may require a bond. The $35,000 threshold applies to custody, not to discretion alone. An adviser with discretion is not exempt from net worth requirements. Positive net worth is the standard for prepayment of more than $500 per client for at least six months, which is a separate requirement, not an alternative to the $10,000 discretion standard.
A state-registered investment adviser plans to hold client assets in a single account at a qualified custodian titled in the adviser's name as agent for its clients. The adviser also wants to deposit $5,000 of its own funds into the account to cover anticipated transfer fees.
Which statement about the proposed arrangement is correct? Answer: The arrangement violates the custody rule because an agency account may hold only client assets and may not include the adviser's own funds.
Governing authority: the NASAA custody rule and SEC Rule 206(4)-2. A qualified custodian may hold client assets either in separate accounts under each client's name or in an account in the adviser's name as agent or trustee, provided that the account contains only client assets. Depositing the adviser's own $5,000 into the agency account commingles adviser assets with client assets and violates the rule. The option approving the arrangement with disclosure ignores the categorical prohibition on commingling; the option requiring separate client-name accounts overlooks the permissible agent-or-trustee account; and client consent cannot override the custody rule.
A state-registered investment adviser with custody of client funds has net worth of $28,000. The state's minimum financial requirement for an adviser with custody is $35,000 net worth. State rules allow a surety bond to replace a net worth deficiency.
If the adviser elects to satisfy the deficiency with a surety bond, what is the minimum bond it must post? Answer: $10,000
Governing authority: the NASAA minimum financial requirements rule, which permits a surety bond to replace a net worth deficiency. The adviser's deficiency is $35,000 - $28,000 = $7,000, and the rule rounds the deficiency up to the nearest $5,000, so the minimum acceptable bond is $10,000. The $7,000 option omits the required rounding; the $5,000 option rounds the deficiency down rather than up; and the $35,000 option treats the bond as replacing the entire net worth requirement instead of only the shortfall.
- Which of the following actions by a state-registered adviser constitutes the exercise of discretion over a client's account?
Answer: Reallocating a client's portfolio by selling one exchange-traded fund and buying another to maintain a target allocation, without consulting the client, under a written discretionary agreement.
Discretion exists when the adviser can determine which securities to buy or sell and in what quantity without prior client approval. Reallocating a portfolio under a written discretionary agreement is a clear exercise of discretion. Choosing the time or price of an order after the client has approved the security and amount is not discretion; selecting the executing broker-dealer is not discretion over the investment; and executing a sale only after oral client approval is not discretion.
An IAR of a state-registered investment adviser keeps a client's physical stock certificates in the adviser's office safe for safekeeping. The adviser's only other contact with client assets is the direct deduction of advisory fees from client accounts, which is authorized in writing with invoices sent to the qualified custodian. The custodian sends account statements quarterly.
Under NASAA rules, which statement about the adviser's obligations is correct? Answer: Because the adviser also holds client certificates, an independent CPA must conduct a surprise examination once each calendar year.
Governing authority: the NASAA custody rule. The surprise-examination exception applies only when custody arises solely from direct fee deduction with written authorization and the required invoices. Because the adviser also physically holds a client's certificates, its custody is not solely fee-deduction custody, so the full custody rule applies, including a surprise examination by an independent CPA at least once each calendar year. The option claiming the exception applies ignores the certificates; the option conditioning the examination on discretionary authority is wrong because custody, not discretion, triggers the requirement; and the option excusing the arrangement because the client requested safekeeping is wrong because client consent does not create an exception.
A state-registered investment adviser with custody of client funds has its surprise examination completed by an independent CPA on December 15, 2026. The adviser schedules its next surprise examination for January 15, 2028.
Which statement about the schedule is correct? Answer: The schedule violates the custody rule because the adviser must have a surprise examination at least once each calendar year, and none is scheduled for 2027.
Governing authority: the NASAA custody rule. An adviser with custody must have a surprise examination at least once each calendar year. With an examination in December 2026 and the next one scheduled for January 2028, no examination is scheduled for calendar year 2027, so the schedule violates the rule. The option applying a rolling 12-month standard is wrong; the rule is measured by calendar years, so examinations about 13 months apart, for example in January 2026 and February 2027, would be permissible. A December 2026 examination cannot satisfy the 2027 requirement, and the rule provides no grace period.
