Financial Terms

Series 65 Section 4: Laws & Ethics

Laws, Regulations, and Guidelines, Including Prohibition on Unethical Business Practices - 30% of the exam, 39 of 130 questions.

The Uniform Securities Act, registration of advisers, representatives, broker-dealers, agents and securities, the Administrator's powers, client communications, and ethical and fiduciary obligations.

The Series 65 has 130 scored questions (plus 10 unscored), runs 180 minutes, and requires 92 correct answers to pass (70.8%). This section covers 80 of the terms in our glossary.

Sample questions

Answers and explanations are shown below each question. The study app has 39 questions for this section, with timed full-length exams.

Under the Uniform Securities Act, which of the following is most likely an investment adviser?

  1. A CPA who prepares tax returns and occasionally mentions municipal bonds, with no separate charge
  2. A newspaper that publishes general market commentary to all subscribers
  3. A financial planner who charges a fee for written plans recommending specific mutual funds
  4. A trust company that manages client portfolios

Answer: A financial planner who charges a fee for written plans recommending specific mutual funds — The planner meets all three tests: advice about securities, in the business of giving it, for compensation. The CPA's advice is solely incidental, the general-circulation publisher is excluded, and trust companies are excluded like banks.

Which of the following is EXCLUDED from the definition of investment adviser under the Uniform Securities Act?

  1. A bank
  2. An out-of-state adviser whose only clients in the state are insurance companies
  3. An adviser with no office in the state and four individual clients there
  4. A state-registered adviser with 20 clients in its home state

Answer: A bank — Banks are outside the definition entirely. The two out-of-state advisers are investment advisers that are exempt from registration (institutional clients only, and de minimis) - exempt is not the same as excluded.

An investment adviser has no place of business in State X. Over the past 12 months it has had five non-institutional clients who live in State X, and it now accepts a sixth. The adviser:

  1. may continue without registering until it has 10 clients in State X
  2. must register in State X
  3. never needs to register in State X, because it has no office there
  4. must register only if the new client has more than $1 million in assets

Answer: must register in State X — The de minimis exemption requires no place of business in the state and fewer than six clients there in the preceding 12 months. The sixth client ends the exemption.

An investment adviser is generally required to register with the SEC rather than the states once its regulatory assets under management exceed:

  1. $25 million
  2. $100 million
  3. $150 million
  4. $110 million

Answer: $110 million — Above $110 million, SEC registration is generally required. Below $100 million it is generally prohibited, and between $100 and $110 million the adviser may choose. $150 million is the private-fund threshold for exempt reporting advisers.

Practice this section Study its terms

Terms in this section

Fiduciary Duty A legal obligation to act in the client's best interest. Suitability Standard A recommendation must be appropriate given the client's profile. Regulation Best Interest (Reg BI) SEC rule requiring broker-dealers to act in a retail client's best interest. Registered Investment Adviser (RIA) A firm registered to give advice for a fee, holding fiduciary duty. Broker-Dealer A firm that executes trades as agent (broker) or principal (dealer). FINRA The self-regulatory organization overseeing broker-dealers. Securities and Exchange Commission (SEC) The federal agency regulating securities markets. SIPC Insurance against broker failure - not against investment losses. Securities Act of 1933 The 'truth in securities' law governing new issues. Securities Exchange Act of 1934 Governs secondary-market trading and created the SEC. Investment Advisers Act of 1940 Defines who is an investment adviser and imposes fiduciary duty. Form ADV The RIA's registration and disclosure document. Churning Excessive trading in a client account to generate commissions. Insider Trading Trading on material non-public information in breach of a duty. Front Running Trading ahead of a known client order to profit from its price impact. Know Your Customer (KYC) The obligation to gather and use essential facts about each client. Uniform Securities Act (USA) The model state securities law most states' 'blue sky' statutes are based on. State Securities Administrator The official or agency that enforces a state's securities act. Person (USA Definition) Anyone who can be held legally responsible - individuals and organizations. Investment Adviser (USA Definition) Advises on securities, as a business, for compensation. Excluded from the Investment Adviser Definition Banks, incidental professionals, broker-dealers, and publishers are not advisers at all. Exemptions from State Adviser Registration An adviser with no office in the state and only institutional or very few clients there. De Minimis Exemption No place of business in the state and fewer than 6 clients there in 12 months. Federal Covered Adviser An adviser registered with the SEC rather than the states.

See all 80 terms in the glossary

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