16 Investment Adviser Regulation (Series 65) Practice Questions & Answers

1. 1. Under the Investment Advisers Act of 1940, a person is defined as an investment adviser only if they meet all parts of a three-prong test. Which of the following is one of those three prongs?

   • A.Manages at least $100 million in assets
   • B.Holds a state-issued securities license
   • C.Is a member of FINRA
   • D.Receives compensation for the advisory service✓ Answer

   The three-prong test requires that a person (1) provides ADVICE about securities, (2) does so as a regular BUSINESS, and (3) receives COMPENSATION. Compensation of any form satisfies the third prong, so receiving pay for the advisory service is one of the three defining elements.

   Source: Investment Advisers Act of 1940, Section 202(a)(11) (three-prong test: advice, business, compensation)Report a problem with this question

2. 2. An investment adviser is a firm (a business entity) that provides advice, whereas an investment adviser representative (IAR) is:

   • A.A natural person associated with the adviser who gives advice or solicits clients✓ Answer
   • B.A federal regulator who audits the adviser
   • C.A separate registered firm that competes with the adviser
   • D.A client who has granted discretionary authority

   An IAR is a natural person (an individual) associated with an investment adviser firm who makes recommendations, gives advice, manages accounts, solicits clients, or supervises those who do. The firm registers as the IA; the people who work for it register as IARs.

   Source: Uniform Securities Act Section 401; Investment Advisers Act Section 202(a)(17) (definition of investment adviser representative)Report a problem with this question

3. 3. Which statement best distinguishes a broker-dealer from an investment adviser under the securities laws?

   • A.Both are identical and the terms are interchangeable
   • B.A broker-dealer owes a fiduciary duty while an investment adviser owes only a suitability standard
   • C.A broker-dealer effects securities transactions and is generally held to a suitability/best-interest standard, while an investment adviser provides advice for compensation and owes a fiduciary duty✓ Answer
   • D.A broker-dealer may never charge commissions, while an investment adviser may never charge fees

   A broker-dealer is in the business of effecting transactions in securities and is compensated primarily through commissions, held to a suitability/best-interest standard. An investment adviser is in the business of giving advice for compensation and owes clients a fiduciary duty, the highest standard of care.

   Source: Investment Advisers Act Section 202(a)(11)(C) broker-dealer exclusion; SEC fiduciary standard for advisers (SEC v. Capital Gains Research Bureau, 1963)Report a problem with this question

4. 4. A broker-dealer that gives investment advice is EXCLUDED from the definition of investment adviser only if the advice meets which condition?

   • A.The advice is given only to institutional clients
   • B.The advice is solely incidental to its brokerage business and it receives no special compensation for the advice✓ Answer
   • C.The broker-dealer registers a separate advisory division with the SEC
   • D.The advice is provided free of any brokerage commissions

   The broker-dealer exclusion applies only when the advice is solely incidental to the conduct of the brokerage business AND the firm receives no special compensation for that advice. If the BD charges a separate fee for advice, it loses the exclusion and must register as an IA.

   Source: Investment Advisers Act Section 202(a)(11)(C) (broker-dealer exclusion: solely incidental + no special compensation)Report a problem with this question

5. 5. An investment adviser with $130 million in regulatory assets under management (AUM) must generally register with:

   • A.FINRA
   • B.The state administrator only
   • C.Both the SEC and every state where it has a client
   • D.The SEC (federal registration)✓ Answer

   An adviser with $110 million or more in AUM is required to register with the SEC as a federal covered adviser. Because $130 million exceeds the $110 million mandatory threshold, this adviser registers federally with the SEC, not the states.

   Source: Investment Advisers Act Section 203A; Rule 203A-1 ($110 million mandatory SEC registration threshold)Report a problem with this question

6. 6. The 'buffer zone' between $100 million and $110 million in AUM allows an adviser to:

   • A.Avoid registration entirely
   • B.Choose whether to register with the SEC or with the state, avoiding frequent switching as AUM fluctuates✓ Answer
   • C.Register with the SEC but not comply with the brochure rule
   • D.Register only with FINRA

   Advisers with AUM between $100 million and $110 million may choose to register with either the SEC or the state. Once an adviser reaches $110 million, SEC registration becomes mandatory; the buffer prevents advisers from having to switch registrations every time AUM crosses the line.

   Source: Investment Advisers Act Rule 203A-1 ($100M eligibility / $110M mandatory buffer for SEC registration)Report a problem with this question

7. 7. A mid-sized adviser with $90 million in AUM operating in a single state generally must register with:

   • A.The SEC
   • B.No regulator, because it is below $100 million
   • C.The state administrator (state registration)✓ Answer
   • D.Both the SEC and FINRA

   An adviser with less than $100 million in AUM is generally prohibited from SEC registration and must register at the state level. At $90 million the adviser is below the $100 million threshold, so it registers with the state administrator (subject to the de minimis and notice-filing rules).

   Source: Investment Advisers Act Section 203A(a) (advisers below $100M generally barred from SEC registration)Report a problem with this question

8. 8. Form ADV is the uniform registration form for investment advisers. What is the purpose of Part 2A of Form ADV?

   • A.It is a confidential document filed only with FINRA
   • B.It is the firm 'brochure' — a plain-English narrative disclosure delivered to clients about the adviser's services, fees, and conflicts✓ Answer
   • C.It reports the adviser's quarterly investment returns
   • D.It lists the adviser's proprietary trading positions

   Part 2A of Form ADV is the firm brochure: a narrative, plain-English document disclosing the adviser's business, fees, disciplinary history, and conflicts of interest. It is the document that satisfies the delivery requirement of the brochure rule to clients and prospects.

   Source: Investment Advisers Act Rule 204-3 (brochure rule); Form ADV Part 2A instructionsReport a problem with this question

9. 9. Under the SEC's brochure rule, when must an investment adviser generally deliver its brochure (Form ADV Part 2A) to a prospective client?

   • A.Only upon the client's written request at any time
   • B.At the end of the first calendar year of service
   • C.Within 90 days after the contract is signed
   • D.No later than the time the advisory contract is entered into✓ Answer

   The brochure rule requires an adviser to deliver its brochure to a prospective client no later than the time the client enters into the advisory contract. (Under state rules a 48-hour-before option with a right of rescission may also apply, but delivery at or before contract signing is the baseline federal requirement.)

   Source: Investment Advisers Act Rule 204-3(b) (brochure delivery no later than contract entry)Report a problem with this question

10. 10. An investment adviser is deemed to have 'custody' of client funds or securities when it:

    • A.Merely recommends which securities a client should buy
    • B.Delivers a brochure to the client
    • C.Receives a performance-based fee
    • D.Holds client assets directly or has authority to withdraw funds from a client's account, such as through direct fee deduction beyond a limited scope✓ Answer

    Custody means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them — including having the ability to withdraw funds from a client account. Custody triggers protective requirements such as use of a qualified custodian and, often, a surprise annual verification.

    Source: Investment Advisers Act Rule 206(4)-2 (custody rule; definition of custody)Report a problem with this question

11. 11. Which of the following persons is EXCLUDED from the definition of investment adviser under the Advisers Act because of the professional's exclusion (the 'LATE' exclusion)?

    • A.A lawyer whose investment advice is solely incidental to the practice of law and who receives no special compensation for it✓ Answer
    • B.A financial planner who charges a separate fee for building portfolios
    • C.A pension consultant advising a $250 million plan
    • D.A person who publishes a paid stock-picking newsletter targeting specific clients

    The 'LATE' exclusion covers Lawyers, Accountants, Teachers, and Engineers whose investment advice is solely incidental to their profession and who receive no special compensation for it. Because the lawyer's advice is incidental to practicing law and separately uncompensated, they are excluded from the IA definition.

    Source: Investment Advisers Act Section 202(a)(11)(B) (LATE professional exclusion: solely incidental + no special compensation)Report a problem with this question

12. 12. A federal covered investment adviser that has no place of business in a state and directs business communications to fewer than the de minimis number of clients in that state (other than certain institutional clients) is typically:

    • A.Required to register with FINRA in that state
    • B.Prohibited from having any clients in that state
    • C.Exempt from that state's registration under the de minimis exemption✓ Answer
    • D.Required to register in that state as a state adviser

    Under the Uniform Securities Act's de minimis exemption, an adviser with no place of business in a state that has had five or fewer non-institutional clients in that state during the preceding 12 months is exempt from that state's registration requirement. This prevents occasional cross-border contacts from triggering full registration.

    Source: Uniform Securities Act Section 403(b)(2) (de minimis exemption: no place of business + 5 or fewer clients)Report a problem with this question

13. 13. The Uniform Securities Act excludes certain persons from the definition of 'investment adviser representative.' Which of the following is a clerical or ministerial employee's status?

    • A.Every employee of an advisory firm is automatically an IAR
    • B.Clerical employees must register as IARs but not take an exam
    • C.A purely clerical or ministerial employee who does not give advice or solicit clients is not an IAR✓ Answer
    • D.Clerical employees register as broker-dealers instead

    The definition of IAR excludes persons whose functions are solely clerical or ministerial. Because such employees do not provide advice, manage accounts, solicit clients, or supervise those who do, they fall outside the IAR definition and are not required to register as IARs.

    Source: Investment Advisers Act Rule 203A-3(a); Uniform Securities Act Section 401 (IAR definition excludes clerical/ministerial personnel)Report a problem with this question

14. 14. An investment adviser has its only place of business in State A and no place of business in State B. Under the Uniform Securities Act's de minimis standard, it does NOT have to register in State B as long as, during the preceding 12 months, its only clients there (other than institutions and other advisers) numbered no more than how many?

    • A.5 clients✓ Answer
    • B.10 clients
    • C.25 clients
    • D.15 clients

    The de minimis exemption lets an adviser with no place of business in a state avoid registration there if it has had no more than 5 clients (fewer than six) resident in that state during the preceding 12 months, excluding institutional clients. The rule exists so advisers with only incidental contact in a state are not forced into full registration, while antifraud provisions still apply.

    Source: Uniform Securities Act §201(c) / NSMIA §222(d)(3) de minimis standard (fewer than 6 clients, no place of business)Report a problem with this question

15. 15. Under the Uniform Securities Act, which of the following persons is EXCLUDED from the definition of 'investment adviser'?

    • A.A pension consultant who, for compensation, advises institutions on selecting portfolio managers
    • B.A broker-dealer whose advice is solely incidental to its brokerage business and who receives no special compensation for that advice✓ Answer
    • C.A person who manages client securities portfolios for a percentage of assets under management
    • D.A financial planner who charges an annual fee for preparing comprehensive financial plans

    A broker-dealer is excluded from the 'investment adviser' definition when its advice is solely incidental to conducting its brokerage business AND it receives no special compensation for the advice. If either condition fails—for example, charging a separate advisory fee—the broker-dealer would fall within the definition. The other choices all involve giving securities advice for compensation as a regular business.

    Source: Uniform Securities Act §401(f)(2) / Investment Advisers Act of 1940 §202(a)(11)(C) — broker-dealer exclusionReport a problem with this question

16. 16. A person is an investment adviser representative (IAR) of a FEDERAL COVERED investment adviser. In which circumstance must that person register as an IAR in a particular state?

    • A.Whenever the representative has even one advisory client residing in that state
    • B.Whenever the representative has more than five clients residing in that state
    • C.The representative is never required to register at the state level
    • D.Only if the representative has a place of business located in that state✓ Answer

    Although a federal covered adviser itself registers with the SEC (not the states), NSMIA preserves the states' authority to register the adviser's individual representatives. An IAR of a federal covered adviser must register in a state only if he or she has a place of business in that state; the number of resident clients is irrelevant for these IARs, which is why the client-count answers are wrong.

    Source: NSMIA / Investment Advisers Act §203A(b) and §202(a)(17); IAR state registration governed by 'place of business' testReport a problem with this question

Practice questions based on the NASAA content outlines and the Uniform Securities Act. Not affiliated with NASAA or FINRA, and not investment or legal advice. About NASAA exams →