Investment Advisory Representative Certification Practice Test Video Answers

1. B
The fiduciary duty requires investment advisers to act in their clients’ best interests at all times. This includes both the duty of care (providing suitable advice) and the duty of loyalty (putting the client’s interests ahead of the adviser’s own). This standard is higher than the suitability standard that applies to broker-dealers.

2. B
Under the Dodd-Frank Act, investment advisers with less than $100 million in AUM typically register with state securities administrators. SEC registration is generally required when AUM exceeds $110 million, with an optional registration window between $100-110 million. Advisers with $25-100 million are considered mid-size and register at the state level.

3. C
Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. It consists of multiple parts: Part 1A contains general information about the adviser, Part 1B (state-registered only) covers indirect owners, and Part 2A/2B constitute the brochure and brochure supplement delivered to clients.

4. B
The de minimis exemption under the Uniform Securities Act allows an investment adviser without an office in a state to avoid registration if they advise no more than five clients in any 12-month period. This provision reduces regulatory burden for advisers with minimal presence in a state.

5. C
Custody is defined as holding client funds or securities, or having any authority to obtain possession of them. This includes the ability to withdraw funds from client accounts. Simply having discretionary trading authority (buying and selling securities) without withdrawal authority is considered limited discretion, not custody.

6. B
The brochure rule requires investment advisers to deliver updated Form ADV Part 2 to all existing clients annually within 120 days of the adviser’s fiscal year-end. Alternatively, advisers can deliver a summary of material changes and offer to provide the complete brochure upon request.

7. D
Under the Dodd-Frank Act, investment advisers must register with the SEC as federal-covered advisers when their AUM exceeds $110 million. Advisers with $100-110 million have the option to register with either the SEC or state. Below $100 million, advisers typically register at the state level.

8. D
A financial planner who charges fees specifically for investment advice meets the definition of an investment adviser and is not excluded. Banks, lawyers providing incidental advice, and publishers of general circulation materials are specifically excluded from the definition under the Investment Advisers Act of 1940.

9. B
State-registered investment advisers that maintain custody of client assets must additionally disclose a balance sheet in their brochure (Form ADV Part 2A). This requirement applies only to state-registered advisers; the Investment Advisers Act of 1940 does not require this disclosure for SEC-registered advisers.

10. B
NASAA rules require an annual surprise audit for investment advisers with custody. If the auditor discovers material issues with the adviser’s custody system, they must notify the state administrator within one business day. If no issues are found, Form ADV-E is filed within 120 days of the audit.

11. B
The fiduciary duty consists of two main components: the duty of care (providing suitable, well-informed advice based on the client’s situation) and the duty of loyalty (placing the client’s interests ahead of the adviser’s own and avoiding conflicts of interest).

12. C
Beta measures a security’s volatility relative to the overall market. A beta of 1.0 indicates the security moves in line with the market. Beta greater than 1.0 indicates higher volatility than the market, while beta less than 1.0 indicates lower volatility.

13. C
A stock with a beta of 1.5 is expected to be 50% more volatile than the market. If the market rises 10%, the stock would be expected to rise approximately 15%. Conversely, if the market falls 10%, the stock would be expected to fall approximately 15%.

14. C
Alpha represents the excess return earned on a portfolio relative to the return predicted by a benchmark or model such as CAPM. A positive alpha indicates the portfolio manager has added value through security selection, outperforming what would be expected given the portfolio’s risk level.

15. B
Under the Uniform Securities Act, an issuer selling only its own securities is excluded from the definition of a broker-dealer. However, if the issuer facilitates trading in securities of other issuers, this exclusion does not apply. Banks are excluded, but bank holding companies are not.

16. B
Officers and directors of a broker-dealer who have no involvement with customers, securities transactions, or supervision are not required to register as agents. All other agents representing a broker-dealer must register, regardless of what securities they trade.

17. B
Under the Uniform Securities Act, a broker-dealer’s registration becomes effective at noon, 30 days after the initial application has been received, or at noon, 30 days after the administrator has received the last piece of required information.

18. C
The CPA designation alone does not typically provide an exemption from the Series 65 examination. CFP, CFA, ChFC, and certain other professional designations approved by NASAA may exempt individuals from the examination requirement, though they must still register as IARs.

19. B
The CAPM states that the expected return of a security equals the risk-free rate plus a risk premium. The risk premium is calculated by multiplying the security’s beta by the market risk premium (the difference between the expected market return and the risk-free rate).

20. C
The capital market line (CML) uses standard deviation as its measure of risk. This contrasts with the security market line (SML), which uses beta. The CML represents the risk-return relationship for efficient portfolios combining the market portfolio with a risk-free asset.

21. B
If a client mistakenly sends funds to an investment adviser instead of the qualified custodian, the adviser must forward or return the funds within three business days to avoid being deemed to have custody. Exceeding this timeframe triggers custody requirements.

22. B
Under the Investment Advisers Act of 1940, an investment adviser is defined as any person who, for compensation, engages in the business of advising others on the value of securities or the advisability of investing in securities. Both compensation and being in the business of providing advice are required elements.

23. B
Earning commissions on insurance products sold to advisory clients creates a conflict of interest because the adviser receives additional compensation for recommending certain products. This must be disclosed to clients. Standard practices like charging management fees or quarterly meetings do not inherently create conflicts.

24. B
NSMIA, enacted in 1996, eliminated regulatory duplication by dividing investment advisers into two categories: state-registered (smaller advisers) and federal-covered (larger advisers registered with the SEC). This prevented conflicting rules between state and federal regulators.

25. B
According to modern portfolio theory, an optimal portfolio lies on the efficient frontier—the set of portfolios that offers the highest expected return for each level of risk. These portfolios are considered efficient because no other portfolio offers higher returns for the same risk level.

26. B
Material changes to Form ADV must be updated promptly, which is typically interpreted as within 30 days of the change. Annual updates must be filed within 90 days of fiscal year-end, and clients must receive updated brochures within 120 days of fiscal year-end.

27. C
Unsystematic risk (also called nonsystematic, diversifiable, or company-specific risk) can be reduced or eliminated through proper diversification. Systematic risk (market risk) affects all securities and cannot be diversified away; it can only be reduced by reducing overall market exposure.

28. B
Investment adviser representatives must register in the state where they maintain an office. They register through their employing investment adviser by filing Form U4 through the Central Registration Depository (CRD) system.

29. C
The Series 65 examination consists of 130 scored questions. An additional 10 unscored pretest questions are included for validation purposes, bringing the total to 140 questions. Candidates do not know which questions are pretest questions.

30. C
To pass the Series 65 examination, candidates must correctly answer at least 92 of the 130 scored questions, which equals approximately 72% (technically 70.8%). Prior to 2010, the passing score was 68.5%.

31. B
Investment advisers with limited discretionary authority (able to buy and sell securities but not withdraw funds) must maintain minimum net capital of $10,000. Advisers with full discretion or custody have higher capital requirements.

32. B
Form ADV Part 2B, the brochure supplement, contains biographical information about the supervised persons who provide investment advice to clients. This includes their educational background, business experience, and any disciplinary history.

33. B
The Sharpe ratio measures risk-adjusted return using standard deviation (total risk) as the risk measure. It calculates the excess return (return above the risk-free rate) per unit of total risk. This differs from the Treynor ratio, which uses beta (systematic risk).

34. B
The snowbird/vacation rule allows an investment adviser to service existing clients temporarily in another state without registration if the adviser has no place of business in that state and the clients are non-residents who are temporarily present (typically on vacation).

35. C
Failing to disclose conflicts of interest is an unethical business practice under NASAA rules. Investment advisers have a fiduciary duty to disclose all material conflicts to clients, including compensation arrangements that could influence recommendations.

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