Fiduciary Obligations

B is correct. Investment advisers owe a fiduciary duty to their clients that includes both a duty of care (provide suitable advice with reasonable diligence) and a duty of loyalty (put client interests first, no self-dealing). This is a comprehensive obligation covering the entire adviser-client relationship.

A (Duty of care alone) is incorrect because it only describes one component of fiduciary duty, missing the equally important duty of loyalty. C (Suitability standard) is incorrect because suitability is the lower standard that applies to broker-dealers, not the higher fiduciary standard for investment advisers. D (Disclosure) is incorrect because while disclosure is required, it's part of the duty of loyalty and doesn't fully capture the fiduciary obligation. The duty of care cannot be satisfied by disclosure alone.

C is correct. Hedge clauses that attempt to waive compliance with securities laws, waive fiduciary duties, or limit liability for fraud, negligence, or violations are prohibited. An adviser cannot contractually eliminate their duty to exercise reasonable care, even with client consent.

A (Acceptable if voluntary) is incorrect because prohibited provisions remain prohibited regardless of whether the client signs voluntarily. B (Acceptable for institutional clients) is incorrect because hedge clauses attempting to waive liability for negligence are prohibited for all clients, not just retail. D (Savings clause) is incorrect because while a savings clause is required if any exculpatory language is present, it cannot cure a clause that purports to waive liability for negligence.

D is correct. The Prudent Investor Rule requires that prudence be judged at the total portfolio level, not on individual investments in isolation. This principle, based on Modern Portfolio Theory, recognizes that portfolio-level diversification is what matters for risk management.

A (Each investment judged independently) is incorrect because this contradicts the portfolio-level approach. An individual investment might appear risky in isolation but could reduce overall portfolio risk through diversification. B (Certain categories prohibited) is incorrect because the Prudent Investor Rule explicitly states that no categorical restrictions apply. Any investment type can be appropriate depending on the client's circumstances. C (Outcome, not process) is incorrect because prudence is judged by the process and reasoning at the time of the decision, not by hindsight based on results.

A is correct. The fundamental distinction is scope: fiduciary duty applies to the entire ongoing relationship between adviser and client, covering all aspects of the relationship, not just individual recommendations. In contrast, the suitability standard (and even Regulation Best Interest for broker-dealers) applies primarily to specific recommendations.

B (Disclosure) is incorrect because both standards require disclosure of material information, though the fiduciary standard is more comprehensive. C (Client type) is incorrect because fiduciary duty applies to all advisory clients regardless of whether they're retail or institutional, and suitability applies based on the role (BD vs IA), not client type. D (Authorization type) is incorrect because this doesn't capture the core difference between the standards. Both may require authorization for certain activities.

B is correct. Performance fees are generally prohibited to protect clients from advisers taking excessive risks to boost compensation. However, qualified clients are permitted. A qualified client has either $1.1 million in assets under management with the adviser OR $2.2 million in net worth (excluding primary residence).

A ($500,000 with adviser) is incorrect because this threshold is too low and doesn't match the qualified client definition. C ($5 million total assets) is incorrect because while this describes a qualified purchaser for other purposes, the performance fee exception uses the lower qualified client thresholds. D (Written acknowledgment) is incorrect because simply acknowledging the fee structure doesn't create an exception. The client must meet specific financial thresholds demonstrating they can bear the risks of performance-based compensation.

C is correct. Principal transactions (selling securities from the adviser's own account to a client) create a direct conflict between the adviser's self-interest and the client's interest. This is self-dealing, which is prohibited under the duty of loyalty unless there is full and fair disclosure AND client consent. The adviser must disclose the conflict and obtain authorization.

A (Recommending suitable securities) is incorrect because this is the adviser's job and doesn't violate the duty of loyalty, provided the securities truly are suitable. B (Different fees based on account size) is incorrect because tiered fee schedules are acceptable business practice and don't constitute a loyalty violation if properly disclosed. D (Using third-party research) is incorrect because advisers may use external research, though soft dollar arrangements must be properly disclosed.

B is correct. Soft dollar arrangements fall under Section 28(e) safe harbor, which permits advisers to pay higher commissions in exchange for research, market data, and trade execution services, provided these items meet the eligible criteria and the arrangement is disclosed in Form ADV. This balances the adviser's need for research tools with transparency to clients.

A (Always prohibited) is incorrect because soft dollars are permitted under Section 28(e) when used properly for eligible items. C (Client discount required) is incorrect because the nature of soft dollars is that higher commissions are paid, not lower. The trade-off is that the adviser receives research that benefits clients. D (Any business expense) is incorrect because Section 28(e) has strict limits on what qualifies. Computer hardware, office equipment, rent, salaries, travel, and entertainment are NOT eligible for soft dollar payments.

B is correct. Best execution is a duty to seek the most favorable terms reasonably available under the circumstances. This requires evaluating multiple factors including execution speed, price improvement opportunities, commission costs, and market liquidity. It's a holistic assessment, not just finding the cheapest commission.

A (Only commission costs) is incorrect because best execution considers total value, not just explicit costs. A higher commission might be justified if it results in better price execution. C (Research from soft dollars) is incorrect because while soft dollar research is permitted, the adviser cannot sacrifice best execution just to obtain research. The best execution duty remains paramount. D (Lowest commission) is incorrect for the same reason as A. The lowest commission might result in poor execution, delayed fills, or worse prices that cost the client more than the commission savings.

B is correct. The duty of care requires that advisers provide suitable advice based on reasonable diligence, care, and skill. This duty cannot be satisfied merely by disclosing potential problems. The adviser must actually act with competence and prudence. Disclosure alone is not enough to meet the duty of care.

A (Disclosure satisfies duty) is incorrect because while disclosure is part of the duty of loyalty, it doesn't eliminate the duty of care. An adviser cannot disclose their way out of the obligation to provide competent, suitable advice. C (Only recommendations) is incorrect because fiduciary duty applies to the entire relationship, including fee arrangements, custody selection, and all other aspects of the adviser-client relationship. D (Equivalent to suitability) is incorrect because fiduciary duty is a higher standard than suitability or Regulation Best Interest. It encompasses more and applies more broadly.

C is correct. The Prudent Investor Rule judges prudence based on the process and reasoning at the time the investment decision was made, not based on outcomes. This prevents second-guessing decisions with hindsight. A fiduciary who follows a sound process cannot be liable simply because an investment loses value due to unforeseen events.

A (Actual returns) is incorrect because judging by results would penalize fiduciaries for unforeseeable market events and encourage overly conservative strategies. B (Benchmark performance) is incorrect because while benchmarking is a useful tool, the Prudent Investor Rule doesn't require outperformance. A properly diversified portfolio appropriate for the client's goals is prudent even if it underperforms a benchmark. D (Avoiding all losses) is incorrect because this would be impossible and would force fiduciaries into cash-only positions. Risk taking is appropriate when aligned with client objectives.