Series 66 – Uniform Combined State Law Exam Fiduciary Duties & Suitability Standards 2 — Questions and Answers
Question 1: Which of the following activities would most likely constitute a breach of fiduciary duty by an investment adviser?
- Recommending a diversified portfolio
- Recommending securities that generate higher commissions without client benefit (Correct answer)
- Disclosing all fees in the Form ADV
- Rebalancing a portfolio according to the client's stated objectives
Correct answer: Recommending securities that generate higher commissions without client benefit
Recommending securities primarily to generate higher compensation, rather than to benefit the client, constitutes a breach of the fiduciary duty of loyalty.
Question 2: What is 'churning' in the context of investment accounts, and which fiduciary principle does it violate?
- Excessive trading to generate commissions, violating the duty of loyalty (Correct answer)
- Failing to diversify a portfolio, violating the duty of care
- Trading without disclosures, violating the duty to inform
- Selling unsuitable products, violating the suitability standard
Correct answer: Excessive trading to generate commissions, violating the duty of loyalty
Churning involves excessive trading primarily to generate commissions rather than to benefit the client, directly violating the adviser's duty of loyalty.
Question 3: Under the prudent investor standard, an investment adviser managing a discretionary account must:
- Maximize returns regardless of risk
- Invest only in government securities
- Make investment decisions as a prudent person would with regard to risk, return, and the client's objectives (Correct answer)
- Follow the client's specific instructions on every individual trade
Correct answer: Make investment decisions as a prudent person would with regard to risk, return, and the client's objectives
The prudent investor standard requires advisers to manage assets with the care, skill, and caution that a reasonable person in similar circumstances would exercise.
Question 4: An investment adviser has a material conflict of interest with a client. Under the Uniform Securities Act, the adviser must:
- Terminate the advisory relationship immediately
- Disclose the conflict fully and obtain the client's informed consent (Correct answer)
- Report the conflict to FINRA within 30 days
- Transfer the account to a non-conflicted adviser
Correct answer: Disclose the conflict fully and obtain the client's informed consent
The Uniform Securities Act requires investment advisers to fully disclose material conflicts and obtain the client's informed consent before proceeding.
Question 5: Which of the following best describes a discretionary account managed by an investment adviser?
- The client must approve each individual trade before execution
- The adviser can make investment decisions without prior client approval on each trade (Correct answer)
- The client selects specific securities and the adviser executes them
- The adviser can only trade pre-approved securities listed in the IPS
Correct answer: The adviser can make investment decisions without prior client approval on each trade
In a discretionary account, the investment adviser has written authority to make investment decisions and execute trades without obtaining client approval for each transaction.
Question 6: Under the Uniform Securities Act, an investment adviser's fiduciary duty requires which of the following when recommending a security?
- The security must be the highest-rated available
- The recommendation must be in the client's best interest based on their profile (Correct answer)
- The security must be registered with the state administrator
- The adviser must receive written confirmation from the issuer
Correct answer: The recommendation must be in the client's best interest based on their profile
The fiduciary duty requires that all recommendations be made in the client's best interest, based on their individual financial profile, objectives, and risk tolerance.
Question 7: When is an investment adviser permitted to execute transactions in a client's account without obtaining prior client approval?
- Only when the client is traveling abroad
- When the client has granted discretionary authority to the adviser in writing (Correct answer)
- When the adviser believes the transaction is clearly beneficial
- Whenever the transaction involves low-risk securities
Correct answer: When the client has granted discretionary authority to the adviser in writing
An investment adviser may execute trades without prior approval only when the client has granted written discretionary authority, which is documented in the advisory agreement.
Series 66 – Uniform Combined State Law Exam Fiduciary Duties & Suitability Standards 2
Which of the following activities would most likely constitute a breach of fiduciary duty by an investment adviser?