Free Series 66 Exam Flashcards

Model state securities legislation designed to prevent fraud and protect investors at the state level. Each state adopts its own version. Regulates securities, broker-dealers, agents, investment advisers, and IA representatives within the state.

The state official responsible for enforcing securities laws within the state. Powers include: issuing/revoking registrations, conducting investigations, issuing subpoenas, and imposing penalties. Cannot impose imprisonment—only courts can do that.

State securities laws designed to protect investors from fraudulent schemes with 'no more substance than so many feet of blue sky.' Each state has its own blue sky laws enforced by the state Administrator.

Broadly defined to include: individuals, corporations, partnerships, associations, trusts, joint ventures, governments, and other legal entities. Does NOT include minors or deceased individuals.

Securities regulated exclusively by the SEC, exempt from state registration. Includes: NYSE/NASDAQ-listed securities, mutual funds, securities sold under Rule 506 of Reg D. States can still enforce anti-fraud provisions.

Any person engaged in the business of effecting securities transactions for the accounts of others (broker) or for their own account (dealer). Must register in each state where they conduct business, unless exempt.

An individual who represents a broker-dealer in effecting or attempting to effect securities transactions. Must be registered in states where they solicit business. Officers and directors are agents only if they transact securities.

A person who, for compensation, engages in the business of advising others on the value of securities or the advisability of investing in securities. Must register with state or SEC depending on AUM thresholds.

An individual who makes recommendations, manages accounts, determines recommendations, or solicits for advisory services on behalf of an investment adviser. Must pass Series 65 or 66 and register with states.

IAs with $110+ million AUM must register with SEC. IAs with $100-$110 million may choose SEC or state. IAs with less than $100 million register with states. Exception: IAs to registered investment companies must use SEC.

Federal law regulating investment advisers. Requires registration, recordkeeping, brochure delivery, custody rules, and prohibits fraud. Administered by the SEC. Forms: ADV (registration), ADV Part 2A (brochure).

Uniform registration form for investment advisers filed with SEC or states via IARD. Part 1: regulatory information, AUM, fees. Part 2A: firm brochure describing services. Part 2B: brochure supplement for specific personnel.

Must be delivered to clients at least 48 hours before signing advisory contract OR at contract signing with 5-day right to cancel. Updated annually within 120 days of fiscal year end. Material changes require delivery within 120 days.

An advisory program where clients pay a single 'wrapped' fee covering advisory services, brokerage, and custody. Must provide separate wrap fee brochure (Appendix 1 to Form ADV Part 2A) disclosing all costs.

Electronic system operated by FINRA for investment adviser registration filings. Used to file Form ADV and pay state registration fees. Parallel to Web CRD for broker-dealers.

The highest standard of care in law. Investment advisers are fiduciaries who must: put client interests first, provide full disclosure, act in utmost good faith, avoid conflicts of interest, and maintain loyalty and care.

Fiduciary obligation to put client interests ahead of the adviser's own interests. Requires: disclosing all conflicts of interest, avoiding self-dealing, not favoring one client over another, and obtaining best execution.

Fiduciary obligation to act with competence and diligence. Includes: understanding client needs, providing suitable advice, monitoring investments, conducting proper due diligence, and maintaining professional competence.

Fiduciary duty to seek the most favorable terms reasonably available when executing client transactions. Considers: price, speed, likelihood of execution, and overall transaction costs. Not just the lowest commission.

When an IA trades from its own inventory with a client. Requires: written disclosure of capacity and conflicts, client consent BEFORE completion of each transaction. Creates conflict between adviser's interest in profit and client's interest.

Investment advisers must have a reasonable belief that advice is suitable for the client based on: financial situation, investment objectives, risk tolerance, time horizon, liquidity needs, tax status, and other holdings.

Requirement to collect and maintain information about clients: name, address, SSN, date of birth, employment, financial situation, investment experience, objectives, risk tolerance, and investment time horizon.

A written document defining a client's investment objectives, constraints, and guidelines for portfolio management. Includes: return objectives, risk tolerance, time horizon, liquidity needs, tax considerations, and legal constraints.

Investment theory emphasizing diversification to optimize risk-adjusted returns. Key concepts: efficient frontier, systematic vs. unsystematic risk, correlation between assets, and the importance of asset allocation over security selection.

The process of dividing a portfolio among different asset classes (stocks, bonds, cash, alternatives) based on client objectives and risk tolerance. Studies show asset allocation is the primary determinant of portfolio returns.

Investment advisers must adopt a written code of ethics describing standards of business conduct. Must be provided to clients upon request. Includes provisions for personal trading, gifts, and outside business activities.

Any supervised person who has access to nonpublic information about client transactions or portfolio holdings. Must report personal securities holdings and transactions to the IA. Subject to stricter personal trading rules.

IAs must have policies addressing employee personal trading to prevent conflicts. Access persons typically must: pre-clear trades, report holdings annually, report transactions quarterly, and avoid front-running client trades.

Practice of using client commissions to pay for research and brokerage services. Permitted under SEC Rule 28(e) safe harbor if: services provide lawful research assistance, commissions are reasonable, and proper disclosure is made.

When a client instructs the adviser to use a specific broker for their transactions. Adviser must inform client this may result in less favorable execution. Does not relieve adviser of best execution duty for other clients.

Excessive trading in a client's account to generate commissions or fees, without regard for the client's interests. Prohibited under anti-fraud provisions. Particularly egregious when IA has discretionary authority.

Trading ahead of a client order with knowledge that the client order will likely move the market price. Example: adviser buys stock, then places large client orders that drive up price, then sells for profit. Strictly prohibited.

Allocating winning trades to favored accounts (often personal accounts) and losing trades to disfavored accounts. Violates fiduciary duty of loyalty and fair dealing. Must have fair allocation policies.

Recommending a security while secretly holding a position, then selling after the recommendation causes the price to rise. Fails to disclose material conflict of interest. Form of market manipulation.

Mixing client funds or securities with the adviser's own funds or securities. Prohibited because it makes it difficult to identify what belongs to whom and increases risk of misappropriation.

Having authority to obtain possession of client funds or securities. Triggers special requirements: qualified custodian, account statements to clients quarterly, and annual surprise examination by independent accountant.

An entity that can hold client assets: banks, broker-dealers, trust companies, or certain foreign financial institutions. Client assets must be maintained with a qualified custodian, not at the IA's office.

Annual audit by an independent CPA verifying client funds and securities held in custody. Required when IA has custody of client assets. Must be conducted without prior notice on a date chosen by the accountant.

IAs must maintain books and records for 5 years (2 years in principal office). Includes: client agreements, advertising, financial statements, correspondence, trade records, and written supervisory procedures.

State Administrator can: issue/deny/revoke registrations, conduct investigations, subpoena witnesses and documents, issue cease and desist orders, and seek civil/criminal penalties. Cannot: impose jail time (only courts can).

Administrator may take action if applicant: filed incomplete application, was convicted of felony in past 10 years, has been subject to regulatory discipline, is insolvent, or lacks qualifications. Must provide notice and opportunity for hearing.

Administrative order requiring a person to stop violating securities laws. Can be issued by Administrator without prior hearing if necessary to protect public interest. Person may request hearing within 15 days.

Under the Uniform Securities Act, violations may result in: fines up to $5,000 per violation, rescission offers to defrauded investors, and injunctions. Criminal penalties require court action and can include imprisonment.

Under USA: civil actions must be brought within 2 years of discovery of violation OR 3 years after sale, whichever is earlier. Criminal prosecutions: 5 years from violation. Administrator actions: no specific limit but must be reasonable.

State securities registration method used when security is being registered federally under Securities Act of 1933. State registration becomes effective simultaneously with federal registration. Most common method for IPOs.

State securities registration method requiring full state review regardless of federal status. Used when no federal registration is required. Most burdensome method; requires Administrator approval before effective.

Simplified state registration for seasoned issuers with established track records. Available to companies that have been operating profitably for 3+ years and meet other financial criteria. Least burdensome method.

Securities excluded from registration requirements: U.S. government securities, municipal bonds, bank securities, credit union securities, insurance policies, and securities issued by nonprofits. Still subject to anti-fraud rules.

Transactions exempt from registration requirements even if the security itself is not exempt. Includes: private placements, transactions with institutional investors, unsolicited orders, and isolated non-issuer transactions.

Sale to a limited number of purchasers (typically 10 or fewer) without general solicitation. Buyer must be purchasing for investment, not resale. Commissions may be paid only to registered broker-dealers.