Laws, Regulations, and Guidelines, Including Prohibition on Unethical Business Practices — Series 66 practice questions

Backdating a client's new account form to make it appear an advisory agreement was signed earlier than it actually was is:

1. An acceptable administrative correction as long as the client later ratifies the paperwork
2. A falsification of records constituting an unethical practice and a recordkeeping violation
3. Permitted if done to correct an honest clerical mistake discovered the same business day
4. Irrelevant to securities regulation since it involves only internal firm paperwork

Answer: B — A falsification of records constituting an unethical practice and a recordkeeping violation

A) Client ratification doesn't cure falsified documentation. B) Correct — backdating is a falsification of records violation under both BD and IA recordkeeping regimes. C) Even a same-day 'correction' via backdating misstates the actual signing date and is improper. D) Recordkeeping accuracy is directly a securities regulatory matter.

The Series 66 exam is administered by which self-regulatory organization?

1. SEC as the primary federal securities regulator overseeing broker-dealers and advisers
2. NASAA as the association of state securities administrators developing model exams
3. FINRA as the self-regulatory organization overseeing broker-dealer firms and personnel
4. MSRB as the self-regulatory organization overseeing the municipal securities marketplace

Answer: B — NASAA as the association of state securities administrators developing model exams

A) SEC is federal, not an SRO for exams. B) Correct — NASAA sponsors 63/65/66 (FINRA delivers). C) FINRA delivers but NASAA sponsors. D) MSRB is munis.

Structuring cash transactions to avoid the $10,000 CTR threshold under the Bank Secrecy Act is:

1. Permitted if the customer's aggregate daily activity is under the $10,000 threshold
2. A federal crime regardless of whether the underlying source of funds is itself legitimate
3. Permitted if the customer notifies the firm in writing that the intent is not evasive
4. A civil violation only, with no criminal exposure if the underlying source is lawful funds

Answer: B — A federal crime regardless of whether the underlying source of funds is itself legitimate

A) Structuring is the crime. B) Correct — 31 U.S.C. § 5324. C) Notification doesn't cure. D) It's criminal.

A broker-dealer is exempt from state registration under the USA when it has no place of business in the state AND:

1. Deals exclusively with issuers of the securities being offered for the transactions in question
2. Deals exclusively with other institutional clients such as BDs, banks, insurers, and IAs
3. Has any single retail client in the state during the prior 12 months regardless of frequency
4. Has any office presence in the state used only for administrative back-office functions

Answer: B — Deals exclusively with other institutional clients such as BDs, banks, insurers, and IAs

A) Wrong exemption. B) Correct — institutional-only + no place of business. C) Retail client triggers registration. D) Any office = place of business.

Form ADV Part 2B, the brochure supplement, is required to provide information specifically about:

1. The overall investment adviser firm's disciplinary history and regulatory filings
2. The individual investment adviser representative providing advice to the client
3. The custodian holding the client's assets and its regulatory capital position
4. The broker-dealer executing trades on behalf of the advisory client's account

Answer: B — The individual investment adviser representative providing advice to the client

A) Firm-level disciplinary history is covered in Part 1 and Part 2A. B) Correct — Part 2B covers the specific IAR's background and qualifications. C) Custodian details aren't the subject of Part 2B. D) Executing broker-dealer information isn't the Part 2B focus.

Series 66 combines the content coverage of which two NASAA exams?

1. Series 63 and Series 65 combined, permitting registration as an agent and IAR
2. Series 6 and Series 7 combined, permitting broker-dealer registration nationwide
3. Series 24 and Series 26 combined, permitting principal registration in most states
4. Series 79 and Series 99 combined, permitting registration as an investment banker

Answer: A — Series 63 and Series 65 combined, permitting registration as an agent and IAR

A) Correct — 66 = 63 + 65. B) FINRA representative exams, not NASAA. C) Principal exams. D) Investment banking + operations.

A broker-dealer that has no place of business in a state and deals exclusively with other broker-dealers is generally:

1. Exempt from registration in that state under the institutional/no-place-of-business exemption
2. Required to register in every state where any counterparty broker-dealer is located
3. Required to register as an investment adviser instead of as a broker-dealer
4. Subject to the same de minimis client-count exemption that applies to investment advisers

Answer: A — Exempt from registration in that state under the institutional/no-place-of-business exemption

B) The exemption specifically avoids this broad registration requirement. A) Correct — dealing exclusively with other BDs/institutions with no place of business qualifies for exemption. C) Nothing converts the BD into an IA. D) The BD exemption standard differs from the IA de minimis (client-count) test.

An investment adviser must deliver its Form ADV Part 2A brochure to a new client:

1. At least 48 hours before entering the advisory contract, or at signing with a 5-day right to terminate without penalty
2. Within 30 days after the advisory relationship has already begun and fees are billed
3. Only upon the client's specific written request submitted after the first billing cycle
4. At the end of the first full calendar year of the advisory relationship

Answer: A — At least 48 hours before entering the advisory contract, or at signing with a 5-day right to terminate without penalty

A) Correct — the 48-hour or 5-day-termination-right framework is the standard delivery rule. B) Delivery must precede or coincide with contracting, not follow it by 30 days. C) Delivery isn't request-only; it's a proactive obligation. D) Waiting a full year is far too late.

A registered representative recommends a mutual fund to a customer without disclosing that the representative's firm receives revenue-sharing payments from the fund company. This omission is MOST likely a violation of:

1. No rule, because revenue sharing is a private arrangement between firms not subject to disclosure
2. The USA's unethical-practices provisions requiring disclosure of material conflicts of interest
3. The customer protection rule governing segregation of customer securities and funds
4. The federal Investment Company Act's diversification requirements for registered funds

Answer: B — The USA's unethical-practices provisions requiring disclosure of material conflicts of interest

A) Undisclosed compensation conflicts are squarely covered by unethical-practices/conflict disclosure rules. B) Correct — failure to disclose a material conflict of interest violates unethical-practices standards. C) That rule concerns custody, not compensation disclosure. D) Diversification requirements are unrelated to this disclosure issue.

Under Rule 204-2 of the Advisers Act, an investment adviser must generally retain required books and records for:

1. 2 years from the date the record was created, with no further extension available
2. 5 years from the end of the fiscal year in which the record was created, with the first 2 years in an easily accessible place
3. 10 years from the date of the adviser's initial SEC registration only
4. Indefinitely, since no defined retention period applies to advisory records

Answer: B — 5 years from the end of the fiscal year in which the record was created, with the first 2 years in an easily accessible place

A) Understates the retention period. B) Correct — the standard 5-year retention, with the first 2 years readily accessible. C) Not tied to the initial registration date. D) A defined period does apply; records aren't retained indefinitely by default.

Define 'churning' and the rule prohibiting it.

Excessive trading in a customer's account primarily to generate commissions. Violates suitability (FINRA 2111 quantitative prong) and USA Section 102 (fraud).

What is the Investment Advisers Act of 1940?

Federal statute regulating IAs. Establishes registration, conduct standards, antifraud rules, and recordkeeping for SEC-registered IAs.

What is the AML / BSA framework for BDs?

BDs must implement AML programs (CIP, CTRs, SARs, ongoing monitoring), train staff, and conduct annual independent testing. FinCEN administers BSA.

How does an IAR register?

Through the IA via IARD: Form U4, applicable exams (e.g., Series 65 or 66+7), state fees. Federal-covered IAs only need IAR state registration where IAR has place of business.