NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
A state-registered investment adviser (IA) has implemented a new internal policy requiring all client emails to be reviewed by a compliance officer before being sent. An IAR sends an urgent email to a client regarding an important market update without prior compliance review, believing the information is time-sensitive. This action, even if the information in the email is accurate, is a violation of the firm's:
- ADuty of confidentiality.
- BDuty of best execution.
- CSupervisory procedures.
- DDe minimis exemption requirements.
Show answer & explanationAnswer & explanation
Correct answer: C. Supervisory procedures.
Broker-dealers and investment advisers are required to establish and enforce written supervisory procedures designed to ensure compliance with securities laws and ethical standards. An IAR bypassing a firm's established pre-approval process for client communications, regardless of the content's accuracy, is a direct violation of these internal supervisory procedures.
Why the other options are wrong
- A. Confidentiality relates to protecting client information, not the process of reviewing outbound communications.
- B. Best execution refers to obtaining the most favorable terms for client trades, not email review.
- D. De minimis exemptions relate to registration requirements, not internal communication policies.
Supervisory Procedures (Communications)
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.