Series 65 Laws & Ethics: what to know
Short answer: “Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices” is 39 of the 130 scored Series 65 questions (about 30%) under NASAA's June 2023 outline. The highest-stakes section: state securities law under the Uniform Securities Act, the Investment Advisers Act of 1940, and the ethical rules that define how advisers must deal with clients. Many questions hinge on one precise definition or threshold.
Independent practice questions. Not affiliated with or endorsed by NASAA or FINRA.
Core concepts
The Uniform Securities Act and registration
Investment adviser status generally involves securities Advice, being in the Business and Compensation, subject to statutory exclusions. Under the Uniform Securities Act of 1956, distinguish coordination, qualification and notification, and distinguish exempt securities from exempt transactions; antifraud rules still apply. Federal covered advisers are exempt from state adviser registration but may owe notice filings. Generally, $100 million AUM permits SEC registration and $110 million requires it, subject to exceptions and the registration buffer.
Investment adviser representatives (IARs)
IARs are individuals who perform covered advisory functions for a firm. Passing the Series 65, or meeting the Series 7 plus Series 66 examination requirement, is not itself registration or permission to advise. Distinguish representatives of state-registered advisers from representatives of federal covered advisers, for whom state authority hinges on a place of business. The adviser de minimis exemption is not a blanket IAR exemption.
The Investment Advisers Act of 1940
Advisers owe fiduciary duties of care and loyalty. Distinguish Form ADV registration information, the Part 2 brochure and supplements, and Form CRS where required. Custody safeguards and surprise-examination requirements have exceptions, so identify the custody arrangement before applying the rule. Under Advisers Act Rule 205-3, qualifying AUM with the adviser or qualifying net worth can satisfy the qualified-client test; primary-residence value is excluded. $1.4M AUM / $2.7M net worth for contracts entered on or after June 29, 2026 (previously $1.1M / $2.2M); the live exam can lag rule changes, so know both.
Advertising and communications rules
The SEC Marketing Rule governs testimonials, endorsements, third-party ratings, and performance advertising. Performance presentations require net-of-fee figures and prescribed periods. False, misleading, or unsubstantiated claims are prohibited — including guaranteed results and cherry-picked performance.
Prohibited and unethical business practices
Memorize the classic violations: churning, front-running, selling away, borrowing from clients, commingling client and firm funds, misappropriation, misrepresentation, unauthorized trading, excessive markups, guaranteeing returns, and sharing in client account profits without written consent and proportionate terms. Also know insider trading rules, the fiduciary duty of best execution, and soft-dollar arrangements.
Client funds, records, and enforcement
Advisers must keep required books and records and comply with applicable privacy and safeguarding requirements. Avoid assuming every adviser is subject to the same anti-money-laundering regime or effective date. State administrators can investigate, subpoena and take administrative action, but courts impose criminal fines and imprisonment. Learn the Uniform Securities Act of 1956 remedies separately from federal remedies.
Subtopics we cover
- Investment adviser registration
- Adviser representative registration
- Broker-dealer & agent registration
- Securities registration & exemptions
- Administrator powers & remedies
- Fiduciary duties & ethics
- Custody & safeguards
- Advisory contracts & fees
- Advertising & marketing
- Fraud & prohibited practices
- Communications, privacy & cybersecurity
15 free laws & ethics practice questions
Each includes the answer and an explanation of why it is right and why the tempting alternative is wrong. Prefer to answer interactively? Take the free sets.
1.An investment adviser with $150 million in regulatory assets under management must generally:
- A. Register only in the states where it has offices
- B. Register with the SEC as a federal covered adviser and notice file in states as required
- C. Register with both the SEC and every state where it has a client
- D. Avoid registration entirely
Show answer and explanation
Answer: Register with the SEC as a federal covered adviser and notice file in states as required
Section 203A and Rule 203A-1 generally place an adviser with $150 million in regulatory AUM under SEC registration, absent an exemption. Dual SEC and state adviser registration is the tempting alternative, but states may require notice filings rather than registration of a federal covered adviser.
2.A client who was sold securities in violation of the Act is entitled to recover:
- A. Only the commission paid
- B. The consideration paid plus interest, less any income received, and reasonable attorney's fees and court costs
- C. Triple damages automatically
- D. Nothing if the security has appreciated
Show answer and explanation
Answer: The consideration paid plus interest, less any income received, and reasonable attorney's fees and court costs
Section 410 permits recovery of consideration paid plus statutory interest, costs, and reasonable attorney fees, less income received, upon tender; damages apply if the buyer no longer owns the security. Automatic treble damages are not the statutory purchaser remedy.
3.Under the Uniform Securities Act, which of the following is NOT included in the definition of a security?
- A. Variable annuity contract
- B. Fixed annuity contract
- C. Certificate of interest in an oil and gas program
- D. Warrant to subscribe to a security
Show answer and explanation
Answer: Fixed annuity contract
The Uniform Securities Act excludes an annuity whose payments do not vary with a separate account from its security definition. A variable annuity is the tempting alternative, but its investment-dependent benefits make it a security.
4.Which of the following is an exempt security under the Uniform Securities Act?
- A. Common stock of a start-up sold to 50 retail investors
- B. A U.S. government or municipal bond
- C. A limited partnership interest in a real estate program
- D. A promissory note with an 18-month maturity sold to the public
Show answer and explanation
Answer: A U.S. government or municipal bond
Section 402 exempts securities issued or guaranteed by the United States and qualifying governmental subdivisions from state securities registration. An ordinary eighteen-month public promissory note does not qualify merely because it is a debt instrument.
5.Under SEC Rule 206(4)-2, an SEC-registered adviser with custody must generally satisfy which safeguards, subject to the rule’s exceptions?
- A. Provide only annual account statements prepared by the adviser
- B. Use a qualified custodian, have account statements sent to clients at least quarterly, and generally undergo a surprise annual verification
- C. Maintain a $5,000 bond only
- D. Notify the Administrator only if custody exceeds one year
Show answer and explanation
Answer: Use a qualified custodian, have account statements sent to clients at least quarterly, and generally undergo a surprise annual verification
SEC Rule 206(4)-2 generally requires qualified-custodian safeguards, quarterly custodian statements, and an annual surprise examination, subject to exceptions. Annual adviser-prepared statements alone do not satisfy these protections.
6.A person who manages advisory accounts for a state-registered investment adviser and has no place of business in the state where certain clients reside would MOST likely be defined as which of the following under the USA?
- A. Broker-dealer
- B. Agent
- C. Investment adviser representative
- D. Issuer
Show answer and explanation
Answer: Investment adviser representative
Managing securities accounts for an adviser is an investment adviser representative function under the amended model Act. An agent instead represents a broker-dealer or issuer in securities transactions; the client’s location does not change the functional definition.
7.Which statement about advisory advertising under the SEC marketing rule is TRUE?
- A. Testimonials and endorsements are absolutely prohibited
- B. Testimonials and endorsements are permitted with required disclosures, oversight, and compensation conditions
- C. Past specific recommendations may never be shown
- D. Performance advertising requires no net-of-fees presentation
Show answer and explanation
Answer: Testimonials and endorsements are permitted with required disclosures, oversight, and compensation conditions
The SEC marketing rule permits testimonials and endorsements subject to applicable disclosures, oversight, agreements, and disqualification provisions, including exceptions. The older blanket prohibition is not the current SEC framework.
8.A federal covered adviser's investment adviser representative with a place of business in a state must:
- A. Register with the SEC
- B. Register in that state as an IAR
- C. Do nothing, because the adviser is federal covered
- D. Register only if compensated by performance fees
Show answer and explanation
Answer: Register in that state as an IAR
Section 203A preserves state registration authority over an SEC-registered adviser’s investment adviser representatives who have a place of business in that state. Federal registration of the firm does not exempt its qualifying representatives from state registration.
9.The Administrator may deny, suspend, or revoke a registration for all of the following EXCEPT:
- A. A felony conviction within the past 10 years
- B. Filing an incomplete or misleading application
- C. Lack of adequate financial responsibility or qualification
- D. The Administrator's belief that the applicant's fees are higher than competitors' fees
Show answer and explanation
Answer: The Administrator's belief that the applicant's fees are higher than competitors' fees
Section 204 requires both the public interest and a statutory ground to deny, suspend, or revoke a registration. Merely charging more than competitors is not such a ground, whereas a recent felony can be a statutory ground.
10.Excessive trading in a client's account primarily to generate commissions is known as:
- A. Front running
- B. Churning
- C. Painting the tape
- D. Backing away
Show answer and explanation
Answer: Churning
Churning is excessive trading in light of the customer’s objectives and account circumstances to generate compensation. Front running instead involves trading ahead of a known customer order, not simply trading too frequently.
11.Which of the following persons is NOT an agent under the Uniform Securities Act?
- A. An individual who sells exempt securities to retail clients for commissions
- B. A clerical employee of a broker-dealer with no role in effecting securities transactions
- C. An individual representing an issuer in selling non-exempt securities to the public for compensation
- D. An individual selling variable annuities for a broker-dealer
Show answer and explanation
Answer: A clerical employee of a broker-dealer with no role in effecting securities transactions
An agent is an individual who represents a broker-dealer or issuer in effecting or attempting to effect securities transactions, subject to exclusions. A purely clerical worker does not perform that function, whereas selling exempt securities for a broker-dealer does not itself remove agent status.
12.Under the Investment Advisers Act of 1940, a person meeting the three-part test of advice, business, and compensation is an investment adviser. Which professional is MOST likely excluded?
- A. A financial planner charging a fee for a plan that recommends specific securities
- B. An accountant whose securities advice is solely incidental to accounting practice and who receives no special compensation for it
- C. A person who publishes a newsletter with specific timing recommendations for subscribers
- D. A pension consultant advising plans on selecting investment managers for a fee
Show answer and explanation
Answer: An accountant whose securities advice is solely incidental to accounting practice and who receives no special compensation for it
The Advisers Act excludes accountants whose investment advice is solely incidental to their professional practice. A fee-based financial planner recommending securities is not excluded merely because advice appears within a broader financial plan.
13.Under NASAA Model Rule 102(a)(4)-1, what authorization must a state-registered adviser obtain when exercising investment discretion?
- A. Oral authority only, valid indefinitely
- B. Client authority, with written discretionary authority obtained within ten business days after the first transaction under oral authority
- C. Authority from the broker-dealer only
- D. No authority if trades are profitable
Show answer and explanation
Answer: Client authority, with written discretionary authority obtained within ten business days after the first transaction under oral authority
NASAA’s unethical-practices rule requires written discretionary authority within ten business days after the first transaction under oral discretionary authority. Oral permission is therefore not sufficient indefinitely, even when the trades are profitable.
14.Regulation S-ID, the 'Red Flags Rule,' primarily requires covered financial institutions to:
- A. Develop and implement a written identity theft prevention program
- B. Disclose all fees charged to advisory clients
- C. Register all associated persons with FINRA
- D. File a Form ADV amendment within 30 days of any material change
Show answer and explanation
Answer: Develop and implement a written identity theft prevention program
Regulation S-ID requires covered financial institutions and creditors with covered accounts to implement an appropriate written identity-theft prevention program. It does not impose that requirement merely because an entity provides financial advice or require every employee to register with FINRA.
15.For an ordinary individual advisory client, which status supports the performance-fee exemption under SEC Rule 205-3?
- A. Any client who signs a waiver
- B. A qualified client meeting net worth or assets-under-management thresholds
- C. A client with at least 5 years of investing experience
- D. A client who is also an accredited investor by income only
Show answer and explanation
Answer: A qualified client meeting net worth or assets-under-management thresholds
Rule 205-3 permits performance fees for a qualified client, subject to its conditions; accredited status by income alone does not itself satisfy the qualified-client tests. $1.4M AUM / $2.7M net worth for contracts entered on or after June 29, 2026 (previously $1.1M / $2.2M); the live exam can lag rule changes, so know both.