Series 65 – Uniform Investment Adviser Law Exam Laws, Regulations, and Ethics 2 — Questions and Answers
Question 1: What is 'front-running' as it applies to investment advisers?
- Placing client orders before all paperwork is complete
- Trading securities for the adviser's own account ahead of executing client orders to take advantage of anticipated price movements (Correct answer)
- Recommending securities before conducting due diligence
- Soliciting clients before completing registration
Correct answer: Trading securities for the adviser's own account ahead of executing client orders to take advantage of anticipated price movements
Front-running is the unethical practice of an adviser trading for their own account based on advance knowledge of pending client orders that will likely move the security's price.
Question 2: Under the Uniform Securities Act, which of the following is considered a 'security'?
- A fixed annuity
- A collectible art piece
- A common stock (Correct answer)
- A commodity futures contract
Correct answer: A common stock
Common stock is explicitly included in the definition of a security under the Uniform Securities Act; fixed annuities, collectibles, and certain commodities contracts are generally excluded.
Question 3: What is the 'anti-fraud' provision that applies to all investment advisers under the Investment Advisers Act?
- Section 12(a)
- Section 206 (Correct answer)
- Rule 10b-5
- Section 17(a)
Correct answer: Section 206
Section 206 of the Investment Advisers Act prohibits investment advisers from engaging in fraudulent, deceptive, or manipulative practices with clients, regardless of registration status.
Question 4: What is the statute of limitations for civil liability under the Uniform Securities Act for an investor who was sold a security using fraudulent means?
- 1 year from discovery, 3 years from the transaction (Correct answer)
- 2 years from discovery, 3 years from the transaction
- 5 years from discovery or the transaction, whichever is sooner
- No time limit for fraud claims
Correct answer: 1 year from discovery, 3 years from the transaction
Under the Uniform Securities Act, civil actions must be brought within 2 years of discovery of the fraudulent act or 3 years from the date of the transaction, whichever comes first.
Question 5: Which of the following is an example of an unethical practice by an investment adviser?
- Disclosing all material conflicts of interest to clients
- Recommending suitable investments aligned with client goals
- Sharing in client profits and losses without written consent (Correct answer)
- Charging a performance-based fee to a qualified client
Correct answer: Sharing in client profits and losses without written consent
Sharing in client profits and losses without written client consent and proper regulatory permission is an unethical and generally prohibited practice.
Question 6: What is the 'de minimis' exemption under the Uniform Securities Act for investment adviser registration?
- Advisers with fewer than 5 clients in a state are exempt from state registration
- Advisers with no place of business in a state and fewer than 6 clients residing there are exempt from state registration (Correct answer)
- Advisers who charge no fees are exempt from registration
- Advisers whose clients are all accredited investors are exempt
Correct answer: Advisers with no place of business in a state and fewer than 6 clients residing there are exempt from state registration
The de minimis exemption allows advisers without a place of business in a state to avoid state registration if they have fewer than 6 clients residing in that state during a 12-month period.
Series 65 – Uniform Investment Adviser Law Exam Laws, Regulations, and Ethics 2
What is 'front-running' as it applies to investment advisers?