Common Mistakes to Avoid
Watch out for these exam traps that candidates frequently miss on Administrative Provisions questions:
Forgetting 48-hour brochure delivery requirement
Confusing ADV Part 2A vs 2B requirements
Not understanding custody rule triggers
Sample Practice Questions
An investment adviser is required to deliver a disclosure brochure to a new client. To avoid paying a refund, the brochure must be delivered:
B is correct. The brochure rule requires delivery of Form ADV Part 2A (the brochure) at least 48 hours before entering into an advisory contract. This gives clients time to review the adviser's disclosures before committing. If delivered later, the client has the right to terminate within 5 business days without penalty.
A (At signing) is incorrect because delivering at signing doesn't provide the required advance notice period. The 48-hour rule gives clients time to review before commitment. C (Within 5 days after) is incorrect because this describes the penalty-free termination period if the brochure is delivered late, not the proper delivery timing. D (Within 30 days before) is incorrect because while this would satisfy the 48-hour minimum, the specific requirement is at least 48 hours, not 30 days.
The 48-hour brochure delivery rule is the #1 most commonly missed concept in administrative provisions. This question appears frequently on the Series 65 exam because it tests whether you understand the timing that protects client rights. Remember: if you deliver the brochure 48+ hours early, no refund right exists. If you deliver it later (even at signing), the client can cancel within 5 business days without penalty. This rule ensures informed consent by giving clients adequate time to review fees, conflicts, and disciplinary history before signing.
Which of the following information is found in Form ADV Part 2B rather than Part 2A?
C is correct. Form ADV Part 2B is the brochure supplement that provides information about specific supervised persons (IARs) who provide advisory services to the client. It includes their education, business background, disciplinary history, and other activities. Part 2A covers the firm; Part 2B covers the individual advisers.
A (Fee schedule) is incorrect because compensation structure is disclosed in Part 2A (the firm brochure), not Part 2B. B (Disciplinary history) is incorrect because while Part 2B includes disciplinary info about individual advisers, Part 2A includes the firm's disciplinary history, making this answer ambiguous. The question asks what's in Part 2B "rather than" Part 2A, and educational background is uniquely in Part 2B. D (Custody arrangements) is incorrect because custody disclosures appear in Part 2A as a firm-level disclosure.
Understanding the distinction between Form ADV Part 2A (firm brochure) and Part 2B (brochure supplement for individuals) is critical for the Series 65 exam. This is the #2 most commonly missed administrative concept. Part 2A describes the firm's services, fees, conflicts, and disciplinary history. Part 2B provides details about the specific individuals working with the client. Both must be delivered, but they serve different purposes. Questions often test whether you know which information goes where.
Investment adviser recordkeeping rules require retention of books and records for how many years, with how many years in an easily accessible place?
D is correct. The recordkeeping requirement is 5 years total retention, with the first 2 years in an easily accessible place (typically the office). After 2 years, records can be moved to off-site storage or archived electronically, but must still be maintained for the full 5-year period.
A (3 years/2 accessible) is incorrect because while the 2-year accessible period is correct, the total retention is 5 years, not 3. This might confuse candidates who remember the 3-year civil statute of limitations. B (6 years/3 accessible) is incorrect because these numbers don't match the actual requirements. C (7 years/2 accessible) is incorrect because while the accessible period is correct, the total retention is 5 years, not 7.
Recordkeeping requirements appear regularly on the Series 65 exam. The 5-year/2-year rule applies to most advisory records including client communications, trade blotters, ledgers, and advisory agreements. Remember: "first 2 years" means the 2 most recent years must be easily accessible for examination by regulators. After that, records can be archived but must still be retrievable if requested. Questions often test whether you know the specific timeframes or confuse this with the 3-year statute of limitations for civil violations.
Which of the following is the minimum net worth requirement for a state-registered investment adviser that has discretionary authority but does NOT have custody of client funds?
A is correct. State-registered investment advisers with discretionary authority (but not custody) must maintain a minimum net worth of $10,000. This financial requirement ensures the adviser has sufficient financial stability to manage client assets responsibly.
B (Positive net worth) is incorrect because this is the minimum for advisers who have neither custody nor discretion. Simply being above zero is insufficient if the adviser exercises discretion. C ($25,000) is incorrect because this is not a standard NASAA threshold. D ($35,000) is incorrect because this is the requirement for advisers who have custody of client funds or securities, which is higher than the discretion-only requirement.
Net worth requirements for state-registered advisers are frequently tested on the Series 65 exam. You need to know three tiers: positive net worth (neither custody nor discretion), $10,000 (discretion only), and $35,000 (custody). If an adviser cannot meet the requirement, they can post a surety bond for the shortfall, rounded up to the nearest $5,000. Also remember: advisers must notify the Administrator by the next business day if net worth falls below the minimum. Federal covered advisers generally don't have minimum net worth requirements.
An investment adviser that has custody of client funds is required to undergo which of the following?
C is correct. Investment advisers with custody of client assets must undergo an annual surprise examination conducted by an independent public accountant registered with the PCAOB (Public Company Accounting Oversight Board). The examination timing is unannounced and irregular to verify client assets are properly held. Form ADV-E must be filed within 120 days of the exam.
A (Annual audit by any accountant) is incorrect because the accountant must be PCAOB-registered, not just any licensed accountant, and the examination is a surprise examination, not a routine annual audit. B (Quarterly verification by Administrator) is incorrect because the Administrator doesn't conduct these examinations. The qualified custodian sends quarterly statements to clients, but that's separate from the surprise exam. D (Semi-annual review by custodian) is incorrect because the custodian sends quarterly (not semi-annual) statements, and the surprise exam is conducted by an independent accountant, not the custodian.
Custody rules are the #3 most commonly tested administrative provision on the Series 65 exam. Understanding custody triggers is critical: having custody means holding client funds or securities, having authority to withdraw them, or acting as qualified custodian. The surprise examination requirement protects clients from misappropriation. Exceptions exist for advisers who only deduct fees or are operationally independent from the custodian. Questions often test whether you know who conducts the exam (independent PCAOB accountant) and the filing deadline (120 days for Form ADV-E).
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Access Free BetaHow long after the fiscal year end must an investment adviser file its annual update to Form ADV?
A is correct. Investment advisers must file annual amendments to Form ADV within 90 days after the end of their fiscal year. This annual update ensures the information on file with regulators remains current regarding the firm's business, conflicts of interest, and disciplinary history.
B (60 days) is incorrect because the deadline is 90 days, not 60. This might confuse candidates who remember the 60-day appeal deadline for Administrator orders. C (120 days) is incorrect because while 120 days is the filing deadline for Form ADV-E after a surprise examination, the annual Form ADV update is due within 90 days. D (30 days) is incorrect because this describes the typical timeframe for other-than-annual amendments for material changes, not the regular annual update requirement.
Form ADV filing deadlines appear regularly on the Series 65 exam. The 90-day annual update rule is straightforward but often tested. Additionally, advisers must file other-than-annual amendments promptly when material changes occur (new services, disciplinary events, ownership changes). The annual update includes a recalculation of assets under management, which determines whether an adviser must switch between SEC and state registration. Questions often test whether you know the specific 90-day timeframe versus other regulatory deadlines.
A state securities Administrator has the power to do all of the following EXCEPT:
B is correct. State securities Administrators cannot issue injunctions. Only courts have the power to issue injunctions. The Administrator can petition a court to issue an injunction, but cannot issue one directly. This separation of powers protects against administrative overreach.
A (Conduct investigations) is incorrect because investigations and examinations of registrants are core Administrator powers. C (Issue subpoenas) is incorrect because Administrators do have the power to issue subpoenas compelling production of documents and testimony during investigations. D (Cease and desist without hearing) is incorrect because Administrators can issue cease and desist orders without prior hearing as a "warning shot" to stop ongoing violations. Due process comes later if the person requests a hearing.
Administrator powers and limitations are frequently tested on the Series 65 exam. Understanding what Administrators cannot do is just as important as knowing their powers. Remember: Administrators cannot issue injunctions, make judicial determinations, imprison anyone, or sentence to jail. These are court functions. However, Administrators can investigate, subpoena, issue orders, suspend or revoke registrations, and refer cases to criminal prosecutors. Questions often present scenarios asking whether the Administrator acted properly or overstepped their authority.
All of the following statements in investment adviser advertising are prohibited EXCEPT:
A is correct. Stating the firm has been in business for 15 years is a factual statement about longevity and is permitted in advertising. Advisers can truthfully describe their history, experience, and qualifications without implying governmental approval.
B (Registered with SEC) is incorrect because advertising that states the firm is "registered with the SEC" or "state-registered" is prohibited as it implies governmental approval or endorsement. C (Guarantees return) is incorrect because guaranteeing specific returns is prohibited. Investment advisers cannot promise or guarantee any level of performance due to market uncertainties. D (Approved by regulators) is incorrect because stating the firm is "approved" by regulators is explicitly prohibited. Registration is not approval or endorsement.
Advertising rules are heavily tested on the Series 65 exam, particularly prohibited claims and statements. Advisers cannot imply governmental approval, guaranteed returns, or use testimonials without proper disclosures. They also cannot use misleading titles, show performance without proper disclosures, or make exaggerated claims. The registration statement prohibition is particularly common on the exam because many candidates assume factual accuracy makes it acceptable. Remember: you can state facts (years in business, services offered) but cannot imply regulatory endorsement or guarantee results.
The state Administrator wishes to deny an investment adviser's registration application. Before doing so, the Administrator must provide all of the following EXCEPT:
D is correct. The Administrator does not need to prove anything "beyond a reasonable doubt." That's the criminal standard used in criminal trials. Administrative proceedings use a lower standard. The Administrator must show the denial is in the public interest and that one of the statutory grounds exists (fraud, felony conviction, etc.), but not to the criminal standard of proof.
A (Prior written notice) is incorrect because this is required. Due process demands that the applicant receive written notice of the intent to deny and the reasons. B (Specific reasons) is incorrect because the notice must include the grounds for denial. C (Opportunity for hearing within 15 days) is incorrect because applicants have the right to request a hearing, which must be granted within 15 days of the written request. These are fundamental due process protections.
Due process requirements for Administrator actions appear frequently on the Series 65 exam. When taking punitive actions (denial, suspension, revocation), Administrators must follow specific procedures: prior written notice, opportunity for hearing (within 15 days of request), written findings of fact, and 60 days to appeal to court. Remember the two-part test for punitive action: (1) in the public interest, and (2) statutory grounds within the past 10 years (felony, securities misdemeanor, fraud, false application). Lack of experience alone cannot be the sole basis for denial.
An investment adviser files a withdrawal of registration with the state Administrator. The withdrawal becomes effective:
C is correct. Withdrawal of registration becomes effective 30 days after filing, unless there is a proceeding pending against the adviser. If a proceeding is in progress, the Administrator can delay or deny the withdrawal until the matter is resolved. After withdrawal, the Administrator retains jurisdiction for 1 year.
A (Immediately) is incorrect because there is a 30-day waiting period before withdrawal becomes effective. This gives the Administrator time to review and ensures orderly client transition. B (15 days) is incorrect because while 15 days is relevant for hearing requests, the withdrawal period is 30 days. D (60 days) is incorrect because the standard period is 30 days, not 60. However, 60 days is the timeframe to appeal Administrator orders to court.
Withdrawal procedures are tested on the Series 65 exam, particularly the timing and Administrator's retained jurisdiction. The 30-day effective date prevents advisers from withdrawing to avoid pending disciplinary actions. The Administrator's 1-year post-withdrawal jurisdiction allows them to pursue violations that occurred while the adviser was registered. Questions often present scenarios where an adviser tries to withdraw during an investigation, testing whether you know the Administrator can deny or delay withdrawal. Remember: withdrawal is voluntary, while cancellation is non-punitive (death, incapacity).
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