Series 66 Laws, Regulations, and Ethics Practice Questions

Correct answer: D. State IAR registration may apply based on place of business and federal/state definitions and exemptions.

States may register IARs of federal covered advisers who have a place of business in the state, subject to definitions and exclusions. Firm and individual registration are separate matters.

• A. States can register individual IARs even when the firm is SEC-registered.
• B. IAR registration turns on place of business, not the employer's state of incorporation.
• C. Preemption covers the adviser firm; it does not bar state IAR registration.
• D. Place of business and the applicable definitions and exclusions drive IAR registration.

• Source: NASAA Model Rule USA 2002 102(16) (Investment Adviser Representative Definition)
• Source: Investment Advisers Act Section 203A (15 U.S.C. 80b-3a, State and Federal Responsibilities)

Correct answer: D. Exempt as an unsolicited brokerage transaction

An unsolicited order — one initiated entirely by the customer without any recommendation or solicitation by the broker-dealer or its agent — is an exempt transaction under the USA, regardless of whether the underlying security itself is registered. This exemption protects execution-only order flow from being blocked by the registration status of the security.

• A. Incorrect — the unsolicited exemption isn't limited to institutional investors; it applies to any customer-initiated, non-recommended order.
• B. Incorrect — the exemption applies precisely because the trade was unsolicited; the underlying security's registration status doesn't defeat this transaction-level exemption.
• C. Incorrect — merely processing a customer-initiated order doesn't remove the exemption; what matters is that the broker-dealer didn't recommend or solicit the trade.
• D. Correct — an unsolicited transaction, where the customer initiates the purchase without any recommendation from the broker-dealer, is exempt from the Act's registration requirements even if the security itself isn't registered.

Correct answer: A. The SEC, as a federal covered adviser

Investment advisers with regulatory assets under management at or above the federal covered adviser threshold (generally $100 million, with certain buffer provisions) must register with the SEC rather than with individual states and are known as federal covered advisers. Smaller advisers typically register at the state level instead.

• A. Correct — $150 million AUM places the adviser above the federal covered adviser threshold, requiring SEC registration.
• B. Incorrect — this is an investment adviser, not a broker-dealer; FINRA registration is not the applicable requirement.
• C. Incorrect — federal covered status generally preempts full state registration; states may only require notice filing, not full dual registration in every client's state.
• D. Incorrect — at this AUM level the adviser is a federal covered adviser and registers with the SEC, not state-by-state.

• Source: SEC Rule 203A-1 (Eligibility for SEC Registration)
• Source: Investment Advisers Act Section 203A (15 U.S.C. 80b-3a, State and Federal Responsibilities)

Correct answer: A. Authority for a specific transaction does not necessarily confer discretion over future securities or timing decisions.

Discretion requires authority and documentation from the client. Approving one trade is transaction-specific consent and does not extend to later securities or timing choices.

• A. One-time approval of a specific trade does not grant ongoing discretion.
• B. Advisory accounts are discretionary only when the client grants authority.
• C. Discretion depends on the client's grant of authority, not the type of holding.
• D. A confirmation or silence does not retroactively authorize an unauthorized trade.

• Source: NASAA Model Rule 102(a)(4)-1 (Unethical Business Practices of Investment Advisers, 1956 Act)
• Source: NASAA Model Rule USA 2002 502(b) (Prohibited Conduct of Investment Advisers)