Series 65 – Uniform Investment Adviser Law Exam Laws, Regulations, and Ethics 1 — Questions and Answers
Question 1: Under the Investment Advisers Act of 1940, who is generally required to register with the SEC?
- All investment advisers regardless of AUM
- Investment advisers with $110 million or more in assets under management (Correct answer)
- Investment advisers with fewer than 15 clients
- Only advisers who charge performance-based fees
Correct answer: Investment advisers with $110 million or more in assets under management
Generally, investment advisers with $110 million or more in AUM must register with the SEC; those below that threshold register with state regulators.
Question 2: What constitutes 'churning' in an investment account?
- Excessive trading in a client's account to generate commissions for the adviser, regardless of the client's interest (Correct answer)
- Rotating between different asset classes quarterly
- Rebalancing a portfolio more than twice per year
- Investing in highly liquid instruments to take advantage of short-term price changes
Correct answer: Excessive trading in a client's account to generate commissions for the adviser, regardless of the client's interest
Churning is the unethical and often illegal practice of excessively trading a client's account primarily to generate commissions rather than to benefit the client.
Question 3: What is insider trading?
- Trading securities based on publicly available information
- Trading securities based on material, non-public information in violation of a duty (Correct answer)
- Buying shares in a company where you are employed
- Selling shares before a public earnings announcement
Correct answer: Trading securities based on material, non-public information in violation of a duty
Insider trading involves buying or selling securities based on material non-public information in breach of a fiduciary or other duty of trust, which is illegal under SEC rules.
Question 4: Which document must investment advisers provide to clients under the Investment Advisers Act?
- Form ADV Part 2 (the brochure) (Correct answer)
- Form 10-K
- Form S-1
- Schedule 13D
Correct answer: Form ADV Part 2 (the brochure)
Form ADV Part 2 is the adviser's disclosure brochure that must be delivered to clients and prospective clients, containing information about the adviser's services, fees, and conflicts of interest.
Question 5: What is a 'conflict of interest' in the context of investment advisory relationships?
- A disagreement between the adviser and client about investment strategy
- A situation where the adviser's personal or financial interests could improperly influence advice given to the client (Correct answer)
- A legal dispute between two competing advisers
- The risk that client goals conflict with market conditions
Correct answer: A situation where the adviser's personal or financial interests could improperly influence advice given to the client
A conflict of interest arises when an adviser's own financial interests or other loyalties could improperly influence the advice provided, which must be disclosed to clients.
Question 6: What is the Uniform Securities Act designed to do?
- Standardize brokerage commission rates nationally
- Provide a model framework for state securities regulation, including registration of securities, advisers, and broker-dealers (Correct answer)
- Replace all federal securities laws
- Establish a uniform fee schedule for investment advisers
Correct answer: Provide a model framework for state securities regulation, including registration of securities, advisers, and broker-dealers
The Uniform Securities Act is a model law created to help states develop consistent securities regulations covering registration of securities, investment advisers, and broker-dealers.
