Series 66 – Uniform Combined State Law Exam Fiduciary Duties & Suitability Standards 1 — Questions and Answers
Question 1: Under the Uniform Securities Act, investment advisers are held to which standard when dealing with clients?
- Suitability standard
- Fiduciary standard (Correct answer)
- Best efforts standard
- Prudent speculator standard
Correct answer: Fiduciary standard
Investment advisers registered under the Uniform Securities Act are held to a fiduciary standard, requiring them to act in the client's best interest at all times.
Question 2: Which of the following best describes the fiduciary duty of loyalty owed by an investment adviser to a client?
- Recommending only the highest-yielding investments
- Placing the client's interests ahead of the adviser's own interests (Correct answer)
- Disclosing only material conflicts of interest
- Ensuring all trades are executed at the lowest commission
Correct answer: Placing the client's interests ahead of the adviser's own interests
The duty of loyalty requires investment advisers to place the client's interests above their own, avoiding or fully disclosing any conflicts of interest.
Question 3: A broker-dealer registered under the Uniform Securities Act is generally held to which standard when making recommendations to clients?
- Fiduciary standard
- Suitability standard (Correct answer)
- Best interest standard
- Negligence standard
Correct answer: Suitability standard
Broker-dealers are traditionally held to a suitability standard, meaning recommendations must be suitable for the client based on their financial situation and objectives.
Question 4: Under the fiduciary standard, what must an investment adviser do when a conflict of interest exists?
- Avoid all conflicted transactions entirely
- Disclose the conflict and obtain client consent (Correct answer)
- Refer the client to another adviser
- Seek approval from the state securities administrator
Correct answer: Disclose the conflict and obtain client consent
Fiduciaries must disclose material conflicts of interest to clients and obtain informed consent before proceeding with a conflicted transaction.
Question 5: Which of the following client factors is LEAST relevant when determining the suitability of an investment recommendation?
- Investment time horizon
- Risk tolerance
- The adviser's commission rate (Correct answer)
- Current income and net worth
Correct answer: The adviser's commission rate
Suitability analysis focuses on client-specific factors such as time horizon, risk tolerance, and financial situation — not the adviser's compensation.
Question 6: An investment adviser who executes transactions without the client's authorization in a non-discretionary account is most likely violating which duty?
- Duty of loyalty (Correct answer)
- Duty of care
- Duty of confidentiality
- Duty to disclose
Correct answer: Duty of loyalty
Unauthorized trading in a non-discretionary account violates the duty of loyalty because the adviser is acting outside the client's wishes and in potential self-interest.
Question 7: What information is an investment adviser required to gather under the 'know your customer' principle before making a recommendation?
- Only the client's current portfolio holdings
- The client's financial situation, investment objectives, and risk tolerance (Correct answer)
- The client's tax returns for the past three years
- The client's employment history and credit score
Correct answer: The client's financial situation, investment objectives, and risk tolerance
The know-your-customer principle requires advisers to gather comprehensive information including financial situation, objectives, and risk tolerance to make suitable recommendations.
Series 66 – Uniform Combined State Law Exam Fiduciary Duties & Suitability Standards 1
Under the Uniform Securities Act, investment advisers are held to which standard when dealing with clients?