Series 65 Ethics & Fiduciary Duty Practice Questions
Ethics & Fiduciary Duty makes up 6 of every 50 questions on a Tigertest Series 65 practice test. Here are 10 of the 24 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on NASAA's Series 65 test specifications. Original questions; 50 per test, weighted like the real 130-question exam. Not affiliated with NASAA or FINRA.
1. An investment adviser's fiduciary duty to its clients consists of a duty of care and a duty of:
- A.Best execution only
- B.Loyalty
- C.Profit
- D.Confidentiality only
Answer: B. Advisers owe clients a duty of care (advice in the client's best interest, best execution, monitoring) and a duty of loyalty (put the client first and disclose conflicts).
2. An adviser requires clients to prepay substantial fees six or more months in advance. As a result it must:
- A.Register with the SEC
- B.Stop charging fees in advance
- C.Refund the fees each quarter
- D.Include a balance sheet
Answer: D. Advisers that require large prepayments six or more months ahead must give clients an audited balance sheet with their disclosure, since clients are creditors of the firm.
3. An advisory firm organized as a partnership admits a new minority partner. Under the Act it must:
- A.Notify its clients
- B.Do nothing at all
- C.Get every client's consent
- D.Re-sign all contracts
Answer: A. Contracts of a partnership adviser must require it to tell clients of any change in membership within a reasonable time. A change of the majority is an assignment that needs consent.
4. An adviser without custody receives a client's stock certificate in the mail by mistake. To avoid having custody, it should:
- A.Deposit it in its own account
- B.Hold it until the client visits
- C.Return it to the sender promptly
- D.Keep it in the office safe
Answer: C. Inadvertently received client securities are not custody if the adviser promptly returns them to the sender, and keeps a record of doing so.
5. An adviser charges 1% a year of the assets it manages. Which statement is true?
- A.It is a prohibited fee
- B.It must be refunded yearly
- C.It is not a performance fee
- D.It needs qualified clients
Answer: C. A fee figured as a percentage of assets averaged over a period is not a performance fee, so it may be charged to any client. A share of capital gains is a performance fee.
6. A new client receives the adviser's brochure 24 hours before signing the advisory contract. The client:
- A.May cancel within 5 business days
- B.May cancel within 90 calendar days
- C.May cancel only with a penalty
- D.Has no right to cancel
Answer: A. When the brochure is delivered less than 48 hours before the contract is signed, the client may end the contract without penalty within five business days.
7. An IAR tells a prospective client she holds a professional designation she never earned. This is:
- A.Allowed if no fee is charged
- B.Fine if she is studying for it
- C.Puffery, not a violation
- D.Misrepresenting qualifications
Answer: D. Misrepresenting an adviser's or IAR's qualifications, or the nature of its services or fees, is an unethical practice and fraud.
8. An adviser's written business continuity plan should mainly address:
- A.Choosing a fund benchmark
- B.Disaster recovery and succession
- C.Raising fees during a market downturn
- D.Marketing to new clients
Answer: B. NASAA's model rule asks state-registered advisers to plan for disruptions such as natural disasters, cyber attacks and the death or disability of key people, including succession.
9. A dual-registered rep acts as both an IAR and a broker-dealer agent for the same client. When recommending a product, she must make clear:
- A.Her personal net worth
- B.Which capacity she is in
- C.Only her commission rate
- D.Nothing, since she's registered
Answer: B. Dual registrants owe a fiduciary duty as advisers and a best interest duty as brokers, so they must tell clients which role they are acting in and the conflicts that follow.
10. An adviser pays higher commissions in exchange for research from a broker. Clients must be told about this in:
- A.A press release
- B.Only if a client asks
- C.A FINRA filing
- D.The Form ADV brochure
Answer: D. Soft-dollar arrangements are a conflict of interest, so the adviser must describe them in Part 2A of Form ADV, the brochure delivered to clients.
Practice all 24 ethics & fiduciary duty questions, and the rest of the 200-question bank, in the free Series 65 training sets. Questions you miss come back until you have mastered them.
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