NASAA Series 66 Uniform Combined State Law Examination flashcards

Investment advisers and their representatives must have a reasonable basis for believing that a recommendation is suitable for a client based on the client's financial situation, investment objectives, and risk tolerance.

• Requires understanding the client's profile.
• Requires understanding the investment product.
• Recommendations must align with the client's best interest.

Memory trick: IARs are like personal tailors; they must fit the investment to the client, not the other way around.

Investment advisers and their representatives must protect the non-public personal information of their clients and not disclose it to third parties without explicit client consent, unless required by law.

• Applies to all non-public personal information.
• Requires explicit client consent for disclosure.
• Exceptions exist for legal or regulatory requirements.

Memory trick: IARs must act like trustworthy confidantes, keeping secrets and advising wisely.

Reasonable basis suitability requires an agent to have a reasonable basis to believe that a recommendation is suitable for at least some investors, based on adequate due diligence.

• This is the first component of a two-part suitability obligation.
• It focuses on the investment product itself, not the individual client.
• Requires independent research and analysis, not just relying on rumors.

Memory trick: First, 'Know Your Product'; then, 'Know Your Client'.

The offering or sale of securities to the public without having them properly registered with the appropriate state or federal regulatory authorities, or without qualifying for a valid exemption.

• Generally illegal under securities laws.
• Often characterized by promises of high, guaranteed returns.
• Lacks transparency and legitimate contact information.

Memory trick: If it's too good to be true and not registered, it's probably a no-go.

Firms must establish and enforce written supervisory procedures for all client communications to ensure compliance with regulations and ethical standards.

• Includes policies for pre-approval, review, and retention of communications.
• Even accurate information must follow established procedures.
• Violation of internal procedures can lead to disciplinary action.

Memory trick: Keep a 'watchful eye' on all communications, following the firm's rulebook.

Under the Uniform Securities Act (USA), the State Administrator has broad investigative powers, including the authority to subpoena witnesses, compel testimony, and require the production of documents to determine if a violation of the Act has occurred.

• Initiated by complaints or suspicion.
• Power to demand information (subpoena).
• Power to compel testimony.
• Purpose is fact-finding, not immediate punishment.

Memory trick: Administrator's crown gives power to seek, not just speak.

An IAR may engage in preliminary activities, such as an initial meeting to provide general information, in a state where they are not registered, without triggering immediate registration requirements, provided no specific advice is given or contracts signed.

• Applies to IARs, not IAs.
• Limited to preliminary activities.
• No specific advice or solicitation allowed.
• Distinguished from the IA's 'de minimis' exemption for client numbers.

Memory trick: Don't transact, just chat, or the state will react!

The state Administrator has broad authority to inspect and examine the books and records of any registered person or firm, including client records, at any reasonable time.

• This power is inherent to the Administrator's oversight role.
• It does not require a court order or client consent.
• Helps ensure compliance with the Uniform Securities Act and protect investors.

Memory trick: The 'Admin Eye' sees all records, anytime, to protect investors.

Under the Uniform Securities Act, an Investment Adviser (IA) must register in any state where it has a 'place of business,' which includes any office where the IA regularly conducts business, regardless of client contact or solicitation.

• A physical office, even for administrative tasks, is a 'place of business'.
• The de minimis exemption (fewer than 6 clients) does NOT apply if an IA has a place of business in the state.
• Registration is required even if no clients are in that state.

Memory trick: If an IA plants a flag (office) in a state, it needs that state's permission slip.

Investment advisers must promptly amend their Form ADV to disclose material changes, including disciplinary events, charges, and changes to ownership or business practices.

• Applies to charges, not just convictions.
• Prompt means as soon as reasonably possible.
• Failure to amend can result in disciplinary action.

Memory trick: When big trouble or change happens, the IA's book (Form ADV) needs an instant update.

An IAR must only provide advice and services within their areas of competence and professional scope, primarily related to securities and financial planning.

• Fiduciary duty requires IARs to act with competence and integrity.
• Advising on matters outside their expertise can lead to ethical breaches or liability.
• It is important to clearly communicate the limits of an IAR's services to clients.

Memory trick: Stick to your lane; don't swerve into others' expertise.

Performance-based fees for investment advisers are generally prohibited due to conflicts of interest, but an exception exists for 'qualified clients' who meet specific financial thresholds (net worth or AUM), provided the IA makes full disclosures.

• General prohibition due to conflicts.
• Exception for 'qualified clients'.
• Qualified client thresholds: specific net worth or AUM.
• Full disclosure of fee structure and risks is mandatory.

Memory trick: Performance pay? Only if wealthy, and info you convey.

Advertising that omits material facts, presents unbalanced information, or uses exaggerated claims is considered fraudulent and unethical under the Uniform Securities Act.

• All communications must be fair and balanced.
• Past performance must always be accompanied by a prominent disclaimer that it's not indicative of future results.
• Risks must be disclosed clearly and conspicuously, not just benefits.

Memory trick: Don't 'sell the sizzle' without the 'risk warning' steak.

An agent must have a reasonable basis to believe that a recommendation is suitable for a client, considering their investment profile, objectives, and risk tolerance.

• Requires 'reasonable diligence' to understand the client's profile.
• Recommendations must align with objectives, risk tolerance, and financial situation.
• Adequate disclosure of risks is part of ensuring suitability.

Memory trick: Fit the investment to the investor, like a tailored suit.

State Administrators have broad powers to enforce the Uniform Securities Act, including issuing cease and desist orders, imposing civil penalties (fines), requiring restitution, and revoking or suspending registrations.

• Can issue cease and desist orders to stop illegal activity.
• Can impose civil fines for violations.
• Can order restitution to compensate defrauded clients.
• Can deny, suspend, or revoke registrations.

Memory trick: The Administrator isn't just a traffic cop; they can fine, make you pay back, and take away your license.

Broker-dealers must supervise all communications with the public, with mass communications (advertisements/sales literature) generally requiring pre-approval by a principal, while individualized correspondence may permit post-review.

• Classification depends on audience size and content.
• Mass communications (e.g., to >25 retail clients) usually need pre-approval.
• Correspondence (individualized) may allow post-review.
• Supervision ensures compliance with suitability, disclosure, and anti-fraud rules.

Memory trick: Mass mail needs a boss's eye, before it flies.

Broker-dealers and investment advisers have a responsibility to reasonably supervise their agents/IARs to prevent and detect violations of the Uniform Securities Act.

• Failure to reasonably supervise can lead to disciplinary action against the firm.
• This includes establishing and enforcing written supervisory procedures.
• The Administrator can suspend or revoke a firm's registration for supervisory failures.

Memory trick: Admin's 'Big Stick': If the firm didn't watch, the firm gets whacked.

An Investment Adviser (IA) is exempt from state registration in a state if it has no place of business in that state AND has fewer than 6 clients (5 or fewer) who are residents of that state during any 12-month period.

• No physical office in the state.
• Must have 5 or fewer retail clients in the state.
• Applies to state-registered IAs, not federal covered IAs (who notice file).

Memory trick: If an IA keeps its footprint small (no office, few clients), the state gives it a pass.

An IAR's fiduciary duty requires them to always act in the client's best interest, which includes refusing to execute a trade that is clearly unsuitable for the client's financial situation, risk tolerance, and objectives, even if the client insists.

• Fiduciary duty is paramount.
• Suitability is a core component.
• IAR must protect client from self-harm (financially).
• Refusal to execute is permissible and often required for unsuitable trades.

Memory trick: Fiduciary's shield blocks client's risky yield.

An Investment Adviser (IA) is any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities.

• Compensation can be explicit fees or implicit benefits.
• Advising includes direct recommendations, asset allocation, and even automated algorithms.
• Discretionary authority is not required for a firm to be considered an IA.

Memory trick: Advising, Business, Compensation = IA 'Triple Threat'.

Certain entities are excluded from the definition of 'broker-dealer' or are exempt from registration under the Uniform Securities Act based on their activities or the types of securities they handle.

• Issuers are generally not broker-dealers.
• Banks and other financial institutions are often excluded.
• Firms dealing exclusively in exempt securities (e.g., U.S. government securities) may be exempt.

Memory trick: Broker-dealers dealing only in Uncle Sam's paper don't need state stamps.

Agents of broker-dealers must have all communications with the public reviewed and approved by a supervisory principal of their firm before use.

• Applies to all written and electronic communications.
• Ensures compliance with advertising rules and anti-fraud provisions.
• Internal firm supervision is paramount.

Memory trick: Agents' messages need a principal's nod before they hit the send button.

Churning is an unethical and illegal practice where a broker-dealer agent executes excessive trades in a client's account solely to generate commissions, disregarding the client's investment objectives and financial well-being.

• Excessive trading volume.
• Primary motive is commission generation.
• Disregards client's best interests and objectives.
• Violates ethical duties of fair dealing and suitability.

Memory trick: Bad brokers and IAs put their wallets first, not their clients.

IARs must respond to client complaints professionally, empathetically, and in accordance with firm procedures, avoiding defensive or blaming language.

• All complaints, written or verbal, must be documented.
• Responses should be timely, professional, and focus on resolution.
• Defensive or accusatory language is inappropriate and unethical.

Memory trick: Respond calmly and professionally, following the firm's complaint 'roadmap'.

An Investment Adviser Representative (IAR) must register in any state where they maintain a 'place of business,' regardless of the number of clients.

• A 'place of business' includes an office where the IAR regularly provides investment advisory services.
• This requirement applies even if the IAR primarily serves existing clients or a small number of clients.
• The de minimis exemption (fewer than 6 clients) does not apply if an IAR has a physical office in the state.

Memory trick: If your office has a 'place' in a new state, you must register there.

Investment Adviser Representatives (IARs) of federal covered investment advisers must register in a state if they have a place of business in that state or if they exceed the de minimis exemption (more than 5 clients) in that state.

• FCIA status does not exempt IARs from state registration.
• De minimis exemption: no registration required if no place of business and 5 or fewer clients.
• 'Place of business' is a key factor for IAR registration.

Memory trick: Even federal IAs' reps need state passes if they set up shop or have too many local friends.

Federal Covered Investment Advisers (FCIAs) are exempt from state registration but must 'notice file' in any state where they have a place of business or more than five clients.

• Notice filing informs state Administrators of the FCIA's presence.
• It applies if the FCIA has a place of business in the state.
• It also applies if the FCIA has more than five clients in the state (de minimis rule for state registration, but notice filing for FCIAs).

Memory trick: Federal oversight, but state still wants a 'heads-up' notice.

An Investment Adviser Representative (IAR) has a fiduciary duty to act with competence. If an IAR lacks expertise in a specific area, they must decline to advise and refer the client to a qualified professional.

• Fiduciary duty requires competence.
• Do not advise on areas outside expertise.
• Refer clients to specialists when necessary.

Memory trick: Brain says no, refer to the pro.

Investment Adviser Representatives (IARs) must not provide specific tax advice unless they are also licensed tax professionals. Their role is to provide investment advice and assess suitability, often recommending clients consult specialists for areas outside their expertise, such as tax or legal matters.

• IARs are generally not licensed tax professionals.
• Providing tax advice without a license is unethical and potentially illegal.
• IARs should recommend clients seek advice from qualified tax/legal experts.
• IARs still have a duty to assess investment suitability within their scope.

Memory trick: Know your lane, recommend the expert, stay compliant.

Investment Adviser Representatives (IARs) of Federal Covered Investment Advisers (FCIAs) must register in any state where they have a place of business, even though their firm is registered with the SEC.

• FCIA IARs register at the state level.
• Registration required in any state with a 'place of business'.
• De minimis exemption does not apply if a place of business exists.

Memory trick: Federal Firm, State IAR, If Office Is There.

An investment adviser (IA) with $110 million or more in assets under management (AUM) is generally required to register with the SEC as a federal covered investment adviser and typically must withdraw its state registrations.

• AUM of $110 million or more requires SEC registration.
• Federal covered IAs are exempt from state registration (may need notice filing).
• Must withdraw existing state registrations.

Memory trick: Millions Mean Move to Main Office.

An investment adviser (IA) must transition from state registration to federal registration with the SEC once its Assets Under Management (AUM) reach or exceed $110 million, as per the Dodd-Frank Act.

• AUM threshold: $110 million.
• Mandatory SEC registration.
• Must withdraw state registration.
• AUM calculation occurs annually.

Memory trick: Hit 110M AUM, switch to the big leagues.

If an investment adviser (IA) or investment adviser representative (IAR) continues to provide advisory services to a client who moves to a new state where the IA/IAR is not registered, the IA/IAR generally must register in that new state.

• Registration required if providing advice to a resident of a state.
• De minimis exemption (fewer than 6 clients) may apply to the IA, but generally not to IAR directly.
• Client's new state becomes a state where business is conducted.

Memory trick: New Home, New Reg, Keep It Legal.

An Investment Adviser Representative (IAR) must register in any state where they have a place of business or where they solicit, offer, or negotiate for the sale of investment advisory services, or supervise individuals who do so, to a resident of that state.

• Registration required if IAR has a place of business in the state.
• Registration required if IAR advises a resident client in the state.
• No de minimis exemption for IARs for advising a single client from an out-of-state firm.
• The firm's registration status (state or federal) impacts IAR registration rules.

Memory trick: Place, people, or persuasion means you register.

Investment advisers and their representatives must retain client records for a specific period (e.g., 5 years) and make them available to clients upon request, even if the client relationship has terminated.

• Records must be kept for a prescribed period.
• Clients have a right to access their records.
• Obligation continues after client relationship ends.

Memory trick: Keep It Safe, Give When Asked, Even Later.

Agents of broker-dealers are generally prohibited from borrowing money from or lending money to clients, unless the client is a family member or a financial institution, and the firm has written procedures and provides prior written approval.

• Generally prohibited with non-family clients.
• Requires firm's written procedures and approval.
• Prevents conflicts of interest and exploitation.

Memory trick: No money handshake without firm's say and family ties.

Broker-dealers must ensure that all written communications, including research reports and sales literature, that are distributed to the public or to multiple prospective clients are reviewed and approved by a qualified supervisory principal prior to use.

• Applies to all written communications with recommendations.
• Must be reviewed and approved by a principal.
• Ensures accuracy, balance, and compliance with regulations.
• Record of approval must be maintained.

Memory trick: Write, review, approve, then send with care.

Broker-dealers are required by regulators to establish and maintain written procedures for the prompt and thorough handling, investigation, and resolution of all customer complaints, whether written or oral.

• All complaints, written or oral, must be addressed.
• Requires written procedures.
• Must be handled promptly and thoroughly.
• Supervisory personnel are typically involved.

Memory trick: Hear the complaint, follow the script, protect the client.

Agents of broker-dealers have a primary responsibility to recommend only investments that are suitable for each individual client, based on their specific investment objectives, risk tolerance, and financial situation.

• Customer-specific suitability is paramount.
• Applies to all recommendations.
• Factors include objectives, risk tolerance, financial situation.
• Exempt securities are still subject to suitability.

Memory trick: Know Your Client, Fit the Fund.

Investment Adviser Representatives (IARs) must operate within the scope of their firm's authorized activities and their own competence, avoiding actual or perceived conflicts of interest, especially when dealing with unvetted private offerings or personal connections.

• Fiduciary duty requires acting in client's best interest.
• Must adhere to firm's due diligence and compliance policies.
• Avoid situations that create actual or perceived conflicts of interest.
• Unvetted private placements pose significant risks and due diligence challenges.

Memory trick: Stay in your lane, protect your client, follow the rules.

An investment adviser (IA) is generally exempt from state registration in a state where it has no place of business and transacts business with fewer than 6 clients who are residents of that state during any 12-month period.

• No place of business in the state
• Fewer than 6 clients who are residents of the state
• Applies on a state-by-state basis

Memory trick: No Place, Few Clients, Stay Free!

Upon notification of a client's death, an IAR's authority over the account ceases, and the account must be frozen, awaiting instructions from the legal representative of the estate.

• IAR's authority terminates immediately.
• Account must be frozen.
• Await instructions from executor/legal representative.

Memory trick: Death means stop, freeze, then await the estate's call.

Under the Uniform Securities Act (USA), an investment adviser (IA) is deemed to have 'custody' if it holds, directly or indirectly, client funds or securities, or has the authority to obtain possession of them. This can include acting as a trustee.

• Possession or control over client funds/securities.
• Acting as a trustee typically constitutes custody.
• Triggers enhanced regulatory requirements.

Memory trick: Hold Their Money, Heavier Rules.

Unauthorized trading occurs when a registered representative executes a securities transaction in a client's account without the client's prior consent or without having proper discretionary authority.

• Requires client consent for each trade unless discretionary authority is granted.
• Violation of ethical conduct and securities regulations.
• Can lead to disciplinary action against the agent and firm.

Memory trick: Don't touch client funds without their nod.

An exemption from state registration for an Investment Adviser (IA) if they have no place of business in that state and direct communications to no more than 5 non-institutional clients in that state during any 12-month period.

• No physical office in the state.
• No more than 5 non-institutional clients in the state.
• Applies to state-registered IAs.

Memory trick: No home, five friends, no need to register.

Investment Adviser Representatives (IARs) owe a fiduciary duty to their clients, requiring them to always act in the client's best interest, including recommending only suitable investments aligned with the client's financial situation, objectives, and risk tolerance.

• Act in client's best interest.
• Ensure investments are suitable.
• Discretionary authority does not override suitability.

Memory trick: Trust, Care, Always Fair.

Under the USA, a person who, in the regular course of business, furnishes investment advice solely through bona fide newspapers, news magazines, or business or financial publications of general and regular circulation is excluded from the definition of an investment adviser.

• Applies to generic, impersonal investment information.
• Must be of general and regular circulation.
• No personalized advice or client-specific recommendations.

Memory trick: Advice, Business, Compensation - ABCs of IA.

Broker-dealers must establish and enforce written policies and procedures for the use of social media by their agents, ensuring all business-related communications are supervised, reviewed, and retained in accordance with regulatory requirements.

• All business communications must be supervised and retained.
• Personal social media accounts used for business are subject to the same rules.
• Firms are responsible for capturing and reviewing communications.
• Challenges exist in supervising personal accounts.

Memory trick: Every digital word must be seen, saved, and sealed.

Under the Uniform Securities Act (USA), investment advisers must generally retain all required books and records for a period of five years, with the first two years being kept in an easily accessible location.

• Five-year retention period for IAs (USA).
• First two years must be readily accessible.
• Includes correspondence, statements, trade confirmations, etc.
• States can impose stricter requirements.

Memory trick: Five years to keep, two years to find fast.

Reasonable-basis suitability is a component of the overall suitability obligation, requiring a broker-dealer and its agents to have a reasonable basis to believe that a recommendation is suitable for at least some investors, typically achieved through adequate due diligence on the investment product itself.

• Focuses on the investment product itself.
• Requires due diligence on the product's risks, rewards, and characteristics.
• Must be suitable for 'some' investors, not necessarily the specific client yet.
• Precedes customer-specific suitability.

Memory trick: Know the product, know the client, watch the numbers.

Under the Uniform Securities Act (USA), a 'broker-dealer' is defined as any person engaged in the business of effecting transactions in securities for the account of others or for its own account. This typically involves buying and selling securities.

• Engaged in the 'business of effecting transactions'.
• Acts for others (broker) or for its own account (dealer).
• Does not include agents, issuers, or certain banks.
• Providing general advice/recommendations alone typically does not trigger BD registration.

Memory trick: Buy, sell, transact, that's a BD act.

Agents of broker-dealers must ensure all communications with clients and prospective clients are fair, balanced, truthful, and not misleading, and must include all material disclosures.

• Must be fair and balanced
• Must not be misleading or omit material facts
• Required disclosures (e.g., conflicts of interest) must be included

Memory trick: Truthful Talk, Clear Disclosure, Safe Client.

An investment adviser (IA) is exempt from state registration in a state where it does not have a place of business and directs communications to no more than 5 non-institutional clients during any 12-consecutive-month period.

• Applies to state-registered IAs only.
• No place of business in the new state.
• Limit of 5 non-institutional clients in the new state.

Memory trick: No office, few friends, no need to register.

Under the Uniform Securities Act (USA), the Administrator has broad powers to investigate potential violations, including subpoena power, examining records, and administering oaths, but cannot issue court injunctions.

• Can subpoena witnesses and compel testimony.
• Can examine books and records.
• Can administer oaths.
• Cannot issue injunctions (requires court order).

Memory trick: Investigate, record check, swear, but no court decree.

State Administrators have broad remedial powers under the Uniform Securities Act (USA) to address violations, including issuing cease and desist orders, revoking or suspending registrations, and imposing civil penalties, but they do not typically initiate criminal prosecutions.

• Civil and administrative powers.
• Can suspend/revoke registrations.
• Can impose fines and issue cease and desist orders.
• Can refer cases for criminal prosecution, but do not prosecute themselves.

Memory trick: Stop, Suspend, Fine, Refer, Not Jail.

Investment advisers and their representatives have obligations under Anti-Money Laundering (AML) regulations, including filing a Suspicious Activity Report (SAR) with FinCEN if they detect suspicious transactions or activities, without 'tipping off' the client.

• Mandatory SAR filing for suspicious activity.
• Must not 'tip off' the client about the SAR.
• Applies to IAs and IARs involved in financial transactions.

Memory trick: See Something Bad, Secretly Send It.

A professionally managed investment company that issues a fixed number of shares through an initial public offering (IPO), which then trade on stock exchanges like individual stocks.

• Shares trade on exchanges throughout the day.
• Price determined by supply/demand, may differ from NAV.
• Offers diversification and professional management.
• Fixed number of shares; no new shares issued after IPO.

Memory trick: Closed-end funds: The stock market's managed friend.

An options strategy where an investor who owns a stock buys a put option on that same stock to protect against a decline in its price, while still retaining upside potential.

• Acts like an insurance policy for the stock holding.
• Sets a floor (strike price) below which the stock's value cannot fall.
• Cost is the premium paid for the put option.

Memory trick: Put protects the fall; call caps the rise; collar combines both for a wise price.

The yield a taxable bond would need to offer to provide the same after-tax return as a tax-exempt bond.

• Formula: Tax-Exempt Yield / (1 - Marginal Tax Rate)
• Used to compare taxable and tax-exempt investments.
• Marginal tax rate includes federal and, if applicable, state and local taxes.
• Higher for investors in higher tax brackets.

Memory trick: TEY: your tax-free gain, divided by one minus the tax pain.

The mean annual growth rate of an investment over a specified period longer than one year, assuming the profits are reinvested at the end of each year.

• Smooths out volatile annual returns.
• Calculated as: (Ending Value / Beginning Value)^(1 / Number of Years) - 1.
• Represents a geometric progression rate.
• Useful for comparing different investment performances over time.

Memory trick: CAGR: End over Start, power of one over years, then subtract one, my dears.