Series 65 Fiduciary Duty Practice Questions
Question 1
An investment adviser pays a third party a cash referral fee for each new client the third party introduces. Which of the following is required for this solicitor arrangement to comply with disclosure obligations?
- A. No disclosure is required to the client if the referral fee is paid as a single one-time payment for each client introduced
- B. Disclosure is needed when the solicitor is also a registered representative of a broker-dealer, and is optional for any other solicitor who receives a flat fee per referral
- C. Oral disclosure of the referral arrangement at the initial client meeting satisfies the requirement, with no written document needed
- D. The client must receive written disclosure of the referral arrangement and fee structure prior to or at the time of entering into the advisory contract
Show answer and explanation
Correct answer: D. The client must receive written disclosure of the referral arrangement and fee structure prior to or at the time of entering into the advisory contract
Cash solicitor/referral arrangements generally require written disclosure to the prospective client describing the nature of the arrangement and the compensation involved, delivered before or at the time the advisory relationship begins, regardless of whether the fee is a one-time or ongoing payment.
- A. Payment frequency doesn't exempt the arrangement from disclosure; any cash referral fee arrangement requires disclosure to the client.
- B. The disclosure obligation applies to solicitor arrangements generally, not only when the solicitor is also a registered representative of a broker-dealer, and a flat per-referral fee does not make it optional.
- C. Oral disclosure alone does not satisfy the requirement; written disclosure is required.
- D. The client must receive written disclosure describing the referral relationship and fee structure before or at the time the advisory contract is entered into, which is the correct solicitor-disclosure requirement.
Question 2
An adviser acts as investment adviser to Client A and, in the very same transaction, also acts as broker for the other side of the trade on behalf of Client B, receiving compensation from both parties. This is best described as:
- A. A principal transaction
- B. A routine transaction requiring no special treatment, since no proprietary inventory is involved
- C. A prohibited transaction with no possible exemption
- D. An agency cross transaction, requiring specific disclosure and consent
Show answer and explanation
Correct answer: D. An agency cross transaction, requiring specific disclosure and consent
An agency cross transaction occurs when an adviser (or an affiliate) acts as broker for both sides of a trade between two clients, earning compensation from each. Because of the inherent conflict, this arrangement requires specific written disclosure and client consent, distinct from a principal transaction where the adviser trades from its own inventory.
- A. A principal transaction involves the adviser trading out of its own account/inventory with a client, not matching two different clients' orders against each other.
- B. Because the adviser is compensated by both sides of the trade in the same transaction, this is exactly the kind of conflicted situation requiring special disclosure and consent, not routine treatment.
- C. Agency cross transactions are not categorically prohibited; they are permissible when properly disclosed and consented to, so this overstates the restriction.
- D. Acting as adviser to one client while simultaneously acting as broker for the other side of the same trade, and getting paid by both, is an agency cross transaction, which requires specific disclosure and client consent — the correct answer.
Question 3
An adviser's obligation to always place the client's interests ahead of its own, including through the honest disclosure of conflicts of interest, is most closely associated with the:
- A. Duty of care
- B. Duty to maintain books and records
- C. Duty of best execution
- D. Duty of loyalty
Show answer and explanation
Correct answer: D. Duty of loyalty
Fiduciary duty is generally divided into the duty of care (competent, suitable advice based on the client's objectives) and the duty of loyalty (putting the client's interests first and eliminating or disclosing conflicts). Prioritizing client interests and disclosing conflicts falls under the duty of loyalty.
- A. The duty of care concerns providing competent, well-researched advice and diligent execution; placing the client's interests first and disclosing conflicts is more specifically tied to the duty of loyalty.
- B. Books and records requirements are a separate regulatory/recordkeeping obligation, unrelated to the substantive duty to place client interests first.
- C. Best execution is a specific application of fiduciary obligation to trade execution, not the broad principle of prioritizing client interests and disclosing conflicts generally.
- D. Correct. Prioritizing the client's interests over the adviser's own and disclosing conflicts of interest is the essence of the fiduciary duty of loyalty.
Considering a career as an advisor?
Explore careers at ParsonexQuestion 4
An advisory agreement with a retail client states: "The adviser will not be liable for any loss arising from the adviser's negligence, and the client waives all claims against the adviser under federal and state securities laws." How should this clause be evaluated?
- A. It is inconsistent with the adviser's fiduciary duty and Section 215(a), because a client cannot waive the duty or the protections of the securities laws
- B. It is acceptable if the adviser describes the clause in Form ADV Part 2A and the client signs the agreement
- C. It is acceptable if the client receives a five-business-day right to cancel the agreement after signing
- D. It is acceptable because informed consent to a waiver cures the conflict of interest the clause creates, provided the adviser discloses the clause in writing beforehand
Show answer and explanation
Correct answer: A. It is inconsistent with the adviser's fiduciary duty and Section 215(a), because a client cannot waive the duty or the protections of the securities laws
An adviser's federal fiduciary duty may be shaped by agreement, but it cannot be waived, and Section 215(a) of the Advisers Act voids any provision waiving compliance with the Act. A clause that purports to release the adviser from negligence and from securities-law claims is therefore misleading to a retail client.
- A. Correct: the fiduciary duty and statutory protections are non-waivable, so the clause is void and misleading.
- B. Disclosure and a signature do not make a prohibited waiver enforceable.
- C. A cancellation right affects the contract term, not the non-waivable nature of the statutory protections.
- D. Informed consent can address certain conflicts but cannot waive the fiduciary duty or the client's securities-law remedies, so written disclosure does not make the clause valid.