- A federal covered investment adviser plans to post on its website a video testimonial from a current client who volunteered the statement and will receive no compensation. Which statement correctly describes the adviser's obligations with respect to the testimonial?
Answer: The adviser must clearly and prominently disclose that the person is a client, but no written agreement is required because the client is unpaid, and non-payment need not be disclosed.
Under SEC Rule 206(4)-1, testimonials are permitted when the advertisement clearly and prominently discloses the person's status as a client, any compensation paid, and material conflicts. An unpaid testimonial is exempt from the written-agreement and reasonable-basis conditions, and there is no duty to disclose that no compensation was paid. The statement requiring a written agreement misapplies the paid-promoter agreement requirement. The statement requiring disclosure that no compensation was paid adds a duty the rule does not impose. The statement that no disclosure is needed omits the required client-status disclosure.
- Under the Uniform Securities Act, which of the following statements regarding the requirements for investment advisory contracts is true?
Answer: The contract must be in writing and must provide that the adviser will notify the client, within a reasonable time, of any change in the membership of the adviser's partnership.
USA § 102. The Uniform Securities Act makes it unlawful to enter into, extend, or renew an advisory contract unless it is in writing and provides that the adviser will not assign the contract without the client's consent and will notify the client within a reasonable time of any change in the membership of the adviser's partnership. The correct statement matches the partnership-notice requirement. The statement requiring the client's prior written consent to any partnership membership change is wrong because the statute requires notice of membership changes, while consent is the requirement for assignments. The statement that institutional clients may contract orally is wrong because the Act contains no exclusion from the writing requirement for contracts with advisers, broker-dealers, banks or insurers. The statement requiring the Administrator's consent to an assignment is wrong because the client's consent is the statutory requirement, and the 30-day advance-notice feature is not part of the rule.
- A registered representative of a broker-dealer meets with a prospective retail customer who is consolidating retirement accounts. The customer is an experienced investor with substantial investment knowledge. During the meeting, the representative recommends that the customer open an IRA at the firm and invest in a diversified portfolio of the firm's recommended mutual funds. The customer agrees. The representative says the Form CRS will be included with the account-opening documents delivered next week. Which statement is correct regarding the representative's obligation?
Answer: The Form CRS must be provided before or at the time of the recommendation, so delivery with the account-opening documents next week is untimely and violates the rule.
Under Exchange Act Rule 17a-14 (the Form CRS rule), a broker-dealer must deliver Form CRS to a retail investor before or at the time of the earliest of a recommendation of an account type, a securities transaction or an investment strategy, the placing of an order, or the opening of an account. The representative recommended the IRA and the mutual fund portfolio during the meeting, so the Form CRS was due at or before that recommendation; delivery with the account-opening documents next week is late. The statement that delivery at account opening is timely misreads "earliest of": the recommendation had already occurred. The statement that the customer is not yet a retail customer and that a strategy recommendation does not trigger delivery is wrong on both counts: a prospective customer who receives a recommendation is a retail investor regardless of experience, and a recommended investment strategy triggers delivery. The statement that Form CRS is an annual delivery document is also wrong.
- Under the Uniform Securities Act, which of the following statements regarding an investment adviser's references to its registration is true?
Answer: An adviser may accurately state that its registration is in effect, provided the statement does not imply that the Administrator has passed upon the merits of the adviser's services or endorsed the adviser.
USA § 405. Registration and notice filings are not findings by the Administrator that filed documents are true, complete, and not misleading, and an adviser may not represent that the Administrator has recommended, endorsed, or approved the adviser or passed upon the merits of its services. An accurate statement that registration is in effect is permissible so long as it does not imply approval or endorsement. The statement that the Administrator examined the application and certified the adviser's qualifications is wrong because registration becomes effective by operation of law at noon of the 30th day after filing, absent a denial order or pending proceeding, and the Administrator does not issue a certificate approving the adviser. The statement that a federal covered adviser's notice filing makes it state-registered is wrong because a federal covered adviser does not register with the state; it files a notice and pays a fee. The statement that the Administrator reviewed the Form ADV and found it accurate is wrong because implying that the Administrator vetted or approved the adviser's disclosure documents is exactly what § 405 prohibits, and the investment-loss disclaimer does not cure the misrepresentation.
- A state-registered investment adviser's proposed client agreement contains the following acknowledgement for the client to sign: "The client acknowledges that the state Administrator has reviewed the adviser's registration application and fee schedule and has determined that the adviser's services are suitable for the client." Under the Uniform Securities Act, which statement is correct?
Answer: The acknowledgement is unlawful because it represents that the Administrator approved the adviser's services; registration is not a finding that the filings are true or that the merits have been passed upon.
Under Uniform Securities Act § 405, registration does not constitute a finding by the Administrator that any filed document is true, complete, and not misleading, and does not mean the Administrator has passed upon the merits of the adviser; representing otherwise is unlawful. The acknowledgement states that the Administrator reviewed the application and fee schedule and determined the services suitable, which is precisely the prohibited approval representation. The statement that the Administrator's review of registration materials makes the acknowledgement permissible ignores the difference between review and approval. The statement that a general disclaimer cures the acknowledgement is wrong because the affirmative representation remains false. The statement that the prohibition applies only to advertising is wrong because § 405 reaches representations in any communication, including a signed client agreement.
- In February 2026, a federal covered investment adviser prepares an advertisement showing its flagship composite's 1-, 5-, and 10-year annualized returns, net of fees, for the periods ended December 31, 2024. The adviser selected the 2024 year-end because the 2025 performance figures are still being audited. Which statement is correct regarding the advertisement?
Answer: The advertisement is unlawful because the required performance periods must end no earlier than the most recent calendar year-end, which for an advertisement in February 2026 is December 31, 2025.
Under SEC Rule 206(4)-1, an advertisement that presents performance must show the 1-, 5-, and 10-year periods (or the portfolio's life) ending no earlier than the most recent calendar year-end. For an advertisement in February 2026, the periods must end on or after December 31, 2025, so the periods ended December 31, 2024 are stale, and the pending audit does not create an exception. The statement that the advertisement is permitted because it presents net performance for identified periods omits the year-end requirement. The statement allowing any date within 12 months of the advertisement invents a lookback the rule does not contain. The statement that net performance may be shown only in the brochure misstates the rule: net performance may be presented alone, while gross performance must be accompanied by net performance at least as prominent.
- An IAR of a state-registered investment adviser emails a prospective client the firm's current brochure at 9:00 a.m. on Monday. At 2:00 p.m. that same day, the client signs the advisory agreement, which states that the client may terminate the agreement without penalty within five business days of signing. The client also signs a separate written waiver of the 48-hour brochure review period. Under NASAA rules, was the brochure delivered in a timely manner?
Answer: Yes, because the agreement gives the client the right to terminate without penalty within five business days, so the earlier delivery satisfied the rule even though it was fewer than 48 hours before signing.
Under the NASAA brochure rule applicable to state-registered advisers, the brochure must be delivered at least 48 hours before contracting, or at the time of contracting if the client has the right to terminate without penalty within five business days. Here the brochure was delivered earlier on the day of signing and the agreement contained the required five-business-day termination right, so the delivery was timely. The statements that the 48-hour requirement is absolute ignore the rule's alternative path. The waiver is not a valid substitute for the termination right; the NASAA rule does not provide a waiver mechanism, and the termination right is what made the delivery timely.
- Under the Uniform Securities Act, which of the following statements regarding an investment adviser's securities transactions with or for client accounts is true?
Answer: An adviser that acts as principal for its own account in a transaction with a client must disclose in writing, before the transaction is completed, that it is acting as principal and must obtain the client's consent to the transaction.
USA § 102 (the state-law counterpart of Investment Advisers Act § 206(3)). An adviser that acts as principal for its own account in a transaction with a client must disclose in writing, before completion of the transaction, that it is acting as principal and must obtain the client's consent. Agency cross trades, in which the adviser acts as broker for the client and for another person, are subject to the same written-disclosure-before-completion and consent requirement. The correct statement states the principal-trade rule. The statement permitting disclosure in a confirmation sent after the trade is wrong because the disclosure must precede completion. The statement allowing a cross trade with oral consent and a later confirmation is wrong because cross trades also require written disclosure before completion and the client's consent. The statement that principal trading is always prohibited is wrong: principal transactions are not per se unlawful; they are permitted when the required disclosure and consent are obtained, and a standing contractual authorization does not replace the per-transaction disclosure requirement.
- Which of the following statements regarding advertising by a state-registered investment adviser is true?
Answer: An advertisement that presents the adviser's past performance must be able to substantiate every performance claim and must present the strategy's material risks so that the advertisement is fair and balanced.
NASAA's Unethical Business Practices of Investment Advisers Model Rule (advertising provisions), which under both the prior and amended versions prohibits untrue or misleading statements and unsubstantiated material claims and requires benefits to be presented fairly and in balance with material risks. It also prohibits stating or implying that the Administrator approved or reviewed the adviser's performance. The correct statement reflects the substantiation and fair-and-balanced requirements. The statement presenting one strategy's results as 'the results clients have achieved' is misleading when most client assets were in other strategies and is an unsubstantiated claim. The statement permitting a guarantee that an account will not lose more than 10% is wrong because performance guarantees are prohibited outright; prominent disclosure does not make a guarantee lawful. The statement that the Administrator reviewed the adviser's advertising and found the performance claims accurate is wrong because representing Administrator review or approval of performance or advertising is unlawful under the advertising rule.
- A state-registered investment adviser sells a subscription newsletter that provides only impersonal market commentary and does not address any subscriber's individual situation. The annual subscription fee is $150. A new subscriber pays online and begins receiving the newsletter. The adviser did not deliver its Form ADV Part 2 brochure to the subscriber before or at the time of subscription. When the adviser updates its brochure at fiscal year-end, it sends neither the updated brochure nor an offer to deliver it, citing the $150 fee. Under NASAA rules, which statement is correct?
Answer: The adviser violated the rule by not delivering the brochure at the time of subscription, but the $150 fee exempts the adviser from making the annual delivery or offer.
Under the NASAA brochure rule, a state-registered adviser must deliver the brochure at least 48 hours before contracting or at contracting with the five-business-day termination right, and the $200 exception for impersonal advice applies only to the annual delivery-or-offer requirement, not to the initial delivery. Because the adviser did not deliver the brochure before or at the time of subscription, it violated the initial-delivery requirement, but it was not required to send the annual offer because the $150 fee is below $200. The statement that subscriptions under $200 are exempt from both the initial and annual requirements overstates the exception; the statement permitting electronic delivery within 30 days invents a deadline the rule does not contain; and the statement that no initial brochure was required but the annual offer was required reverses the two requirements.
- Which of the following statements regarding delivery of the Form ADV Part 2A brochure by a state-registered investment adviser is true?
Answer: The brochure may be delivered at contracting if the client may terminate without penalty within five business days, and the annual brochure must be delivered or offered in writing, and mailed within seven days of any request.
Governing authority: NASAA's state-adviser brochure rule. A state-registered adviser must deliver its Form ADV Part 2A brochure at least 48 hours before entering into an advisory contract, or at the time of contracting if the client has the right to terminate without penalty within five business days. The adviser must also deliver, or offer in writing to deliver, an updated brochure annually, and must mail the brochure within seven days of a client's request. The statement that the brochure may be delivered at contracting with a five-business-day termination right, and that the annual brochure must be delivered or offered in writing and mailed within seven days of any request, correctly states the rule. The statement requiring delivery at least 48 hours before signing in all cases and annual delivery with no written-offer alternative is wrong because the rule permits delivery at contracting with the five-business-day termination right and permits a written offer to deliver in lieu of annual delivery. The statement requiring delivery before or at contracting and a written summary of material changes within 120 days describes the SEC-registered adviser's delivery regime, not the NASAA rule governing a state-registered adviser. The statement requiring a termination right of exactly 48 hours misstates the required window, which is five business days.
- A federal covered investment adviser enters into a portfolio-management agreement with a new client. Before the client signs, the adviser provides its Form ADV Part 2A brochure. The newly hired IAR assigned to the account has no disciplinary history and begins managing the account on the day the agreement is signed. She does not provide her Form ADV Part 2B brochure supplement to the client until the first quarterly portfolio review, about three weeks after the agreement is signed. Under SEC rules, which statement is correct?
Answer: The adviser must deliver the IAR's Part 2B supplement before or when she begins providing advisory services, so the delivery at the quarterly review was untimely.
Under SEC Rule 204-3, an SEC-registered adviser delivers its brochure before or at the time it enters into the advisory contract (Rule 204-3(b)(1)), and delivers the brochure supplement for each supervised person who will provide advisory services to the client before or at the time that person begins providing advisory services to the client (Rule 204-3(b)(3)). The IAR began managing the account on the signing date, so her Part 2B supplement was due then; delivering it three weeks later was untimely. The statement that Part 2B is required only when the IAR has disciplinary disclosures is wrong; the supplement is required for each supervised person who provides services, regardless of disciplinary history. The statement that Part 2B is the IAR's own obligation is wrong because the delivery obligation belongs to the adviser. The statement that the supplement is required only when the IAR has discretionary authority is also wrong; it is required when the IAR provides advisory services, with or without discretion.
- An IAR of a state-registered investment adviser recommends that a client transfer $300,000 from a mutual fund into a separately managed account program sponsored by an unaffiliated firm. The arrangement is disclosed in the adviser's Form ADV Part 2 brochure, which the client received before the meeting. The client asks the IAR whether the adviser receives any compensation beyond the stated advisory fee. The IAR answers "no." In fact, the adviser receives a 0.25% annual platform fee from the program sponsor on assets in the program. Under the Uniform Securities Act, which statement is correct?
Answer: The IAR's answer is a violation because it misrepresents the adviser's compensation, and the brochure disclosure does not make the denial truthful.
Under Uniform Securities Act § 102(a), it is unlawful for an investment adviser or IAR to engage in any act, practice or course of business that operates or would operate as a fraud or deceit on a client, and the NASAA Unethical Business Practices of Investment Advisers Model Rule bars misrepresenting the adviser's fees or omitting material facts about them. Third-party compensation the adviser receives in connection with a recommendation is material, and the IAR's denial was flatly false. The statement that the disclosure in the Form ADV Part 2 brochure excuses the answer is wrong because a written disclosure does not make a later oral denial truthful. The statement that the fee is not a violation because the sponsor pays it ignores that the adviser receives the fee and that the client asked about the adviser's compensation. The statement requiring knowledge and intent to deceive is wrong because an act that operates as a fraud or deceit on a client violates § 102(a) without proof of intent to deceive.
- A federal covered investment adviser wants to include a testimonial from a current client in an advertisement. In return, the adviser will credit the client's account with $2,500 of advisory fees over the next 12 months. Under SEC rules, which of the following statements regarding the testimonial is true?
Answer: The adviser must have a reasonable basis for believing the testimonial complies with the rule and must have a written agreement with the client for the arrangement.
SEC Rule 206(4)-1 (the SEC Marketing Rule). Because the client is compensated for the testimonial, the adviser must disclose clearly and prominently that the person is a current client, that compensation is provided, and any material conflicts; must have a reasonable basis for believing the testimonial complies with the rule; and, because $2,500 in 12 months is above the $1,000 de minimis amount, must have a written agreement with the client. The statement that fee credits are not compensation is wrong because the rule reaches cash and non-cash compensation, and fee credits are compensation that must be disclosed. The statement requiring SEC pre-filing is wrong because the SEC does not pre-file, pre-approve or pre-clear adviser advertising. The statement permitting an undisclosed testimonial because the client's opinion is honest and unsolicited is wrong because the disclosure duties apply to any compensated testimonial, however genuine.
- A federal covered investment adviser's advertisement includes the gross performance of one of its separately managed account strategies. Under SEC rules, which of the following statements regarding the advertisement is true?
Answer: The advertisement must also present net performance at least as prominently as the gross performance, using the same time period and the same methodology for both figures.
SEC Rule 206(4)-1 (the SEC marketing rule). When an advertisement includes gross performance, it must also present net performance at least as prominently as the gross performance, for the same time period and using the same methodology. The correct statement states that requirement. The statement permitting gross performance with a footnote that fees are not reflected is wrong because a written disclaimer does not replace the required presentation of net performance. The statement allowing net performance for the latest calendar year alone while gross performance covers periods the adviser selects is wrong because net performance must be calculated for the same time period, and by the same methodology, as the gross performance. The statement requiring only the 10-year return is wrong because the rule requires the 1-, 5-, and 10-year periods (or the portfolio's life) ending no earlier than the most recent calendar year-end, and shorter periods may not be omitted.
