Study guide
At 45 percent of the exam, roughly 45 scored questions, this is the section that decides whether you pass. It draws on the Uniform Securities Act, the Investment Advisers Act of 1940, and NASAA model rules to test registration of the four key persons (investment advisers, IARs, broker-dealers, agents), registration of securities, the Administrator's powers and remedies, and, heavily, ethical practices and fiduciary obligations. Learn the definitions and their exclusions cold, because most questions turn on them.
Investment Advisers and Their Representatives
An investment adviser is any person who, for compensation, is in the business of advising others about securities, the three-prong advice, business, and compensation test. Excluded from the definition are banks, broker-dealers whose advice is incidental and specially uncompensated, publishers of general-circulation media, and professionals (lawyers, accountants, teachers, engineers) whose advice is solely incidental to their practice. Registration splits by size: advisers with $110 million or more in assets under management must register with the SEC as federal covered advisers, those below $100 million generally register with the states, and those in the buffer between may choose. Federal covered advisers do not register with states but may owe a notice filing, a fee-and-paperwork requirement, in states where they solicit clients. A state-registered adviser must register where it has a place of business, but the de minimis exemption excuses registration in a state where it has no place of business and five or fewer non-institutional clients in twelve months. Registration on Form ADV becomes effective at noon on the thirtieth day after filing, and advisers must keep required books and records, file annual updating amendments, and meet any minimum financial requirements. An investment adviser representative (IAR) is an individual who gives advice, manages accounts, solicits advisory business, or supervises those who do; purely clerical staff are excluded. An IAR of a state-registered adviser registers wherever the de minimis standard is exceeded, but an IAR of a federal covered adviser registers only in states where the IAR has a place of business. Under NASAA's model rule, IARs complete twelve continuing education credits annually, six in ethics and professional responsibility and six in products and practice. Firms must reasonably supervise their IARs.
Broker-Dealers, Agents, and the Registration of Securities
A broker-dealer is a person in the business of effecting securities transactions for others (broker) or its own account (dealer). Excluded are agents, issuers, banks, and firms with no place of business in the state that deal only with institutions or other broker-dealers. An agent is an individual representing a broker-dealer or an issuer in securities transactions; clerical employees are excluded, and an individual representing an issuer is excluded when selling certain exempt securities or in exempt transactions or to the issuer's own employees without commission. Agents and their broker-dealers must both be registered; an agent's registration is not effective when the individual is between firms, and if an agent moves firms, the old firm, new firm, and agent must all notify the Administrator. Securities themselves must be registered before sale in a state unless exempt. Federal covered securities, such as exchange-listed stocks and registered investment company shares, cannot be required to register with states, though mutual funds typically make notice filings. Registration by coordination piggybacks on a federal registration and becomes effective simultaneously with the SEC registration, while registration by qualification, used for purely intrastate offerings, becomes effective only when the Administrator so orders. Exempt securities include U.S. government and municipal issues, securities of banks and insurance companies, nonprofit securities, and short-term commercial paper rated in the top three grades with denominations of at least $50,000 and maturities of nine months or less. Exempt transactions include isolated nonissuer trades, unsolicited customer orders, transactions with institutional investors or fiduciaries, and private placements offered to no more than ten non-institutional persons in twelve months. Crucially, exemption never reaches the antifraud provisions.
The Administrator's Powers, Remedies, and Penalties
Each state's securities Administrator enforces the Uniform Securities Act over any offer or sale that originates in, is directed into, or is accepted in the state. The Administrator may make rules and orders, conduct investigations inside or outside the state, subpoena witnesses and records (even for conduct in other states), and issue cease and desist orders, which can be entered without a prior hearing when swift action is needed. The Administrator may deny, suspend, or revoke registrations, but only when the order is both in the public interest and supported by a statutory cause such as felony convictions within ten years, willful violations, insolvency, or unqualified applicants; public interest alone is never sufficient, a heavily tested point. Lack of experience by itself is not grounds for denial. The Administrator cannot impose prison sentences; criminal punishment requires prosecution through the courts, where willful violations carry fines up to $5,000 and up to three years' imprisonment, with a five-year statute of limitations. Civil liability lets a buyer sue to rescind an unlawful sale and recover the price paid plus interest, costs, and reasonable attorney's fees, minus any income received on the security; the suit must be brought within the earlier of three years after the sale or two years after discovery of the violation. A seller who discovers its own violation may extend a rescission offer, and a buyer who fails to accept within thirty days loses the right to sue. Withdrawal of a registration becomes effective on the thirtieth day after filing, but the Administrator keeps jurisdiction over the registrant for one year after withdrawal.
Client Communications, Contracts, and Compensation
Communication rules police what clients are told. Advisers must deliver disclosure documents (the Form ADV brochure and brochure supplements) describing services, fees, and conflicts, and both advisers and broker-dealers must disclose their capacity and compensation. It is unlawful to state or imply that the Administrator or the SEC has approved, endorsed, or passed on the merits of any registration; registration may be described only as fact. Guaranteeing a client against loss or promising a specific return is prohibited, as is any material misrepresentation or omission. Advisory contracts under NASAA rules must be in writing, must describe the services, the fee, the fee formula, the amount refundable on early termination, and any discretion granted, and cannot be assigned to another adviser without client consent; for partnerships, clients must be notified of changes in a minority of partners. Fees must be reasonable, and unreasonable fees are treated as unethical even when disclosed. Performance-based compensation, fees calculated as a share of capital gains, is generally prohibited except for qualified clients, currently defined (after the SEC's June 2026 inflation adjustment) as clients with at least $1.4 million under the adviser's management or more than $2.7 million in net worth. Soft dollars, research and brokerage services received from a broker-dealer in exchange for directing client trades, are permissible under the Section 28(e) safe harbor only when the benefits serve clients, such as research reports, not the adviser's rent or travel. Advertising, websites, email, and social media are all communications subject to the same antifraud standards, must be retained as records, and, for state-registered advisers in many states, remain subject to older NASAA prohibitions on testimonials even though the SEC marketing rule permits federal covered advisers to use testimonials and endorsements with disclosures.
Fiduciary Duty, Custody, and Prohibited Practices
Investment advisers and IARs owe clients a fiduciary duty: act in the client's best interest, disclose all material conflicts, and obtain informed consent for principal or agency-cross trades. Broker-dealers and agents recommending securities to retail customers are held to a best-interest standard of care built on care, disclosure, conflict, and compliance obligations. Custody means holding client funds or securities or having authority to obtain them, and deducting advisory fees or serving as general partner of a client fund counts. A state adviser with custody must notify the Administrator, use a qualified custodian, send account statements, undergo surprise examinations where required, and, under NASAA model rules, maintain minimum net worth of $35,000 (a surety bond may substitute); discretion alone requires $10,000. Accepting prepaid fees of more than $500 six or more months in advance (over $1,200 for federal covered advisers) requires delivering an audited balance sheet. Discretion requires written authority, although time and price decisions on an order the client has already specified by asset, action, and amount are not discretion. Prohibited practices supply endless questions: churning (excessive trading to generate commissions), unsuitable recommendations, unauthorized trading, commingling client and firm assets, front running, market manipulation through wash trades or matched orders, insider trading (both tipper and tippee are liable for trading on material nonpublic information), selling away (private securities transactions outside the firm without approval), borrowing from or lending to clients unless the client is a bank, broker-dealer, or affiliate in that business, and sharing in a client account's profits (never permitted for IAs; agents only with written consent of both the client and the employing broker-dealer — NASAA’s rule, unlike FINRA’s, does not require proportionality). Pay-to-play rules impose a two-year compensation time-out after political contributions above small de minimis amounts. Firms must guard against exploitation of vulnerable adults, permitting reporting and delayed disbursements, maintain cybersecurity and privacy safeguards, and keep a business continuity and succession plan.
Key terms
- Investment adviser
- — A person in the business of providing securities advice to others for compensation.
- Federal covered adviser
- — An adviser registered with the SEC (generally $110 million or more in AUM) and exempt from state registration.
- Investment adviser representative (IAR)
- — An individual who gives advice, manages accounts, solicits, or supervises advisory activity for an adviser.
- Broker-dealer
- — A person in the business of effecting securities transactions for others or for its own account.
- Agent
- — An individual who represents a broker-dealer or issuer in effecting securities transactions.
- Administrator
- — The state official empowered to enforce the Uniform Securities Act within that state.
- Exempt transaction
- — A transaction, such as an unsolicited order or institutional trade, excused from registration and advertising-filing rules but never from antifraud provisions.
- Registration by coordination
- — State registration that becomes effective simultaneously with a related federal registration.
- Custody
- — Holding, or having authority to obtain, client funds or securities, including by deducting fees.
- Churning
- — Excessive trading in a client account for the purpose of generating commissions.
- Qualified client
- — A client eligible to be charged performance fees, currently at least $1.4 million under management or over $2.7 million net worth.
- Rescission
- — The remedy letting a buyer undo an unlawful sale, recovering the price plus interest and costs, less income received.
Exam tips
- Any answer saying the Administrator or SEC 'approved' a security or registration is wrong; regulators never approve, and implying they do is itself a violation.
- To deny, suspend, or revoke, the Administrator needs BOTH public interest AND a statutory cause; 'in the public interest' alone is never a sufficient answer, and lack of experience alone is never grounds.
- Keep the de minimis rules straight: an out-of-state adviser or IAR with no place of business may serve up to five retail clients in twelve months without registering, but there is no comparable retail de minimis for broker-dealers or their agents.
- Exempt security versus exempt transaction: the security's status travels with the security (government bonds), while the transaction exemption depends on how the sale happens (unsolicited order). Either way, antifraud rules always apply.
- Custody questions often hide the trigger: automatic deduction of advisory fees from client accounts is custody, bringing net worth, qualified custodian, and reporting requirements with it, whereas mere discretion carries the lower $10,000 net worth minimum.