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Series 65: Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices

Series 65 · Work through your exam, one topic at a time.

All guide sections

Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices

Framework

Federal statutes: the Securities Act of 1933 requires registration and a prospectus for new issues and supplies the core antifraud rule; the Securities Exchange Act of 1934 created the SEC and governs reporting issuers, broker-dealers, and proxies; the Investment Company Act of 1940 regulates fund registration and diversification; the Investment Advisers Act of 1940 imposes fiduciary duty, Form ADV, custody, advertising, and performance-fee rules. The Uniform Securities Act governs state registration of advisers, agents, and broker-dealers, plus state antifraud authority.

Adviser registration: SEC if AUM is $100 million or more (or another listed exception applies); state if under $25 million; between $25 million and $100 million generally state, with the SEC able to claim larger multi-state advisers. Advisers must deliver Form ADV Part 2A and update it annually within 90 days of fiscal year end. Custody triggers surprise-exam and qualified-custodian requirements; performance fees require qualified clients. Solicitors need written agreements and disclosure. Hedge clauses are void - care and loyalty cannot be disclaimed.

Unethical practices: churning, unauthorized trading, front-running, misrepresenting guarantees, borrowing from clients, commingling, selling away, market manipulation, and unsuitable recommendations.

Traps

  • Confusing the 1933 and 1934 Acts.
  • Assuming a broker-dealer owes the same fiduciary duty as an adviser.
  • Forgetting that states may impose stricter rules, not looser ones.
  • Believing a signed waiver eliminates fiduciary duty.
  • Missing that a "recommendation" is what triggers suitability.

Rule of thumb

$100M SEC, $25M state, Form ADV annually, custody means a surprise exam, hedge clauses are void.

Worked example

An adviser manages $85 million with clients in three states. She is below the $100 million federal threshold, so she registers in her home state and makes notice filings where required, unless an exempt-reporting-adviser status applies.