Exam Identity and Fast-Use Map
| Item | Reference |
|---|
| Official vendor/provider | NASAA |
| Official exam title | Series 65 — Uniform Investment Adviser Law Examination |
| Official exam code | Series 65 |
| Page purpose | Independent quick-reference support for candidates preparing for the real exam |
Use this page as a last-mile review sheet: definitions, registration logic, exemptions, ethics, suitability, products, portfolio math, and tax distinctions.
High-Yield Topic Map
| Area | What the exam often asks you to do | Common trap |
|---|
| Investment adviser law | Identify IA, IAR, BD, agent, issuer, federal covered adviser | Confusing an exclusion from the definition with an exemption from registration |
| State vs federal registration | Decide who registers with the state, SEC, both by notice, or neither | Federal covered advisers are not state-registered, but states may require notice filings and enforce antifraud rules |
| Exempt securities and transactions | Separate security registration exemptions from person registration | Exempt securities are still subject to antifraud provisions |
| Ethical practices | Spot prohibited conduct by IAs, IARs, BDs, and agents | Disclosure does not cure every conflict; fiduciary duty still applies |
| Investment products | Match product features to client objectives and risks | Fixed insurance products are generally not securities; variable products are securities |
| Portfolio theory | Apply risk, return, diversification, beta, alpha, Sharpe ratio, CAPM | Beta measures systematic risk, not total risk |
| Tax and retirement | Choose tax-appropriate accounts and investments | Tax deferral is not the same as tax-free treatment |
Core Regulatory Vocabulary
Person and Product Definitions
| Term | Quick definition | Exam distinction |
|---|
| Security | Broad category including stock, bonds, notes, investment contracts, options, fractional interests, variable annuities, and variable life insurance | Substance matters more than label; an “investment contract” can make a nontraditional product a security |
| Investment contract | Investment of money in a common enterprise with expectation of profit primarily from others’ efforts | Often tested with real estate, limited partnerships, pooled ventures, and “managed” programs |
| Issuer | Person who issues or proposes to issue a security | Issuer representatives may or may not be agents depending on the security and transaction |
| Broker-dealer | Person engaged in the business of effecting securities transactions for accounts of others or for its own account | A BD earns transaction compensation; an IA is paid for advice |
| Agent | Individual representing a BD or issuer in effecting securities transactions | Individuals are agents; firms are BDs |
| Investment adviser | Person in the business of advising others about securities for compensation | Compensation can be direct or indirect; “financial planner” can be an IA if securities advice is part of the service |
| Investment adviser representative | Individual associated with an IA or federal covered adviser who gives advice, manages accounts, solicits advisory business, or supervises those functions | Clerical or ministerial employees are excluded |
| Federal covered adviser | Adviser registered with the SEC or excluded from the definition of IA under federal law | States do not register the firm as an IA but may regulate IARs with a place of business in the state |
| Client | Person receiving advisory services | For IA registration exemptions, count clients carefully; institutions and natural persons may be treated differently depending on the rule |
Investment Adviser Definition: Three-Part Test
A person is generally an investment adviser when all three are present:
| Element | Meaning | Exam clue |
|---|
| Advice | Gives advice, reports, analysis, models, or recommendations about securities | Asset allocation including securities counts |
| Business | Holds out, regularly provides advice, or advice is part of services | “Occasional” can still count if marketed as a service |
| Compensation | Receives direct or indirect economic benefit | Fees, commissions, wrap fees, referral fees, or bundled planning fees can qualify |
Common IA Exclusions
| Excluded person | Why excluded | Trap |
|---|
| Bank or bank holding company | Statutory exclusion | Savings institutions may be treated differently depending on the statute tested |
| Lawyer, accountant, teacher, engineer | Advice is solely incidental to professional practice | Charging a separate advisory fee can destroy the exclusion |
| Broker-dealer | Advice is solely incidental to brokerage and no special advisory compensation is received | Wrap fees or separate planning fees can create IA status |
| Publisher | Bona fide publication of general, impersonal advice | Market-timing newsletters tailored to subscribers may not qualify |
| Federal covered adviser | Excluded from state IA registration | Still subject to state antifraud authority and possible notice filing |
| Person excluded by Administrator rule/order | Specific regulatory exclusion | Do not assume an exclusion unless the facts support it |
State, Federal, and Person Registration Logic
Who Registers Where?
| Party | State registration? | Federal/other treatment | Exam focus |
|---|
| State-covered IA | Yes, in states where required unless exempt | Not SEC-registered | State Administrator regulates registration, books, capital/bonding, and conduct |
| Federal covered adviser | No state IA registration | SEC-registered or federally excluded | State may require notice filing, fee, consent to service, and enforce antifraud |
| IAR of state-covered IA | Generally registers with relevant states | No SEC registration as an individual | Link the IAR to the IA’s business and the IAR’s place/client activity |
| IAR of federal covered adviser | State registration only if the IAR has a place of business in that state | Firm is federally covered | “Place of business” is the key exam phrase |
| Broker-dealer | State registration if doing BD business in the state unless excluded/exempt | Also subject to federal/SRO framework | No office plus institutional-only activity may avoid state BD registration |
| Agent | State registration if representing a BD or issuer in securities transactions unless excluded | No effective agent registration if the represented BD/issuer is not properly registered or exempt | Agents are individuals, not firms |
| Issuer | Does not register as a BD merely for issuing its own securities | Securities may need registration unless exempt/federal covered | Issuer employees may become agents depending on facts |
Investment Adviser SEC vs State Concepts
| Adviser type | Typical treatment | High-yield point |
|---|
| Small adviser | Generally state-registered if required by state law | Do not default to SEC registration merely because securities advice is involved |
| Mid-sized adviser | Often state-registered if the state requires registration and examines advisers | State examination requirement can affect SEC eligibility |
| Large adviser | Generally SEC-registered | Federal covered adviser status preempts state IA registration |
| Adviser to registered investment company | SEC registration | Investment company adviser status is a federal-registration trigger |
| Multi-state adviser | May qualify for SEC registration if state registration burden is broad enough | Know the concept; confirm numeric thresholds in current study materials |
| Exempt reporting adviser | Not fully registered as an IA but may file reports | “Exempt from registration” does not mean “unregulated” |
Common State IA Exemptions
| Scenario | Common result | Trap |
|---|
| No place of business in the state and only institutional clients in the state | Often exempt from state IA registration | Institutions are treated more favorably than retail clients |
| No place of business in the state and limited retail clients during the prior 12 months | De minimis exemption may apply | If there is a place of business in the state, de minimis usually fails |
| Adviser solely to certain private funds or venture funds | May have exemption/reporting treatment | Do not assume exemption eliminates antifraud liability |
| Federal covered adviser | Exempt from state IA registration | State may still require notice filing and fees |
Exempt Securities, Exempt Transactions, and Federal Covered Securities
Key Rule
Exempt from registration does not mean exempt from antifraud rules. Fraud rules apply to exempt securities, exempt transactions, registered securities, and federal covered securities.
Exempt Securities
| Security | Why it matters | Exam trap |
|---|
| U.S. government securities | Exempt security | Government backing does not eliminate interest-rate risk |
| Municipal securities | Exempt security | Municipal interest may be federally tax-exempt, but price can fluctuate |
| Canadian government and municipal securities | Often treated as exempt under USA-style rules | Do not generalize to all foreign issuers |
| Bank securities | Exempt security category | Bank-issued securities differ from bank deposits |
| Insurance company securities | Often exempt if issued by authorized insurer | Fixed annuity is generally not a security; variable annuity is |
| Railroad/equipment trust and public utility securities | Traditional exempt categories | Know as registration exemptions, not antifraud exemptions |
| Nonprofit securities | Charitable, religious, educational, or similar nonprofit issuers | Fraud still prohibited |
| Short-term commercial paper | High-quality, short-maturity commercial paper may be exempt | A “note” is not automatically exempt |
| Federal covered securities | State registration preempted | State notice filing may still be allowed for some categories |
Federal Covered Securities
| Category | Treatment | Exam point |
|---|
| Exchange-listed securities | State registration preempted | Includes certain senior or equal-ranking securities |
| Registered investment company securities | State registration preempted | States may require notice filing and fees |
| Certain private offerings, such as Rule 506 offerings | State registration preempted | Antifraud and notice filing authority remain |
| Securities sold to qualified purchasers | State registration preempted | Do not confuse with “accredited investor” unless facts specify |
Exempt Transactions
| Transaction | Common exemption concept | Trap |
|---|
| Isolated nonissuer transaction | Occasional secondary sale not by issuer | Repeated activity can lose “isolated” status |
| Unsolicited nonissuer transaction | Customer initiates order | Broker should document unsolicited status |
| Fiduciary transaction | Executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, conservator | Fiduciary status drives the exemption |
| Institutional transaction | Sale to bank, insurance company, investment company, pension plan, or other institution | Institutional sophistication supports exemption |
| Private placement | Limited noninstitutional purchasers, investment intent, no general public distribution | Private placement is not a free pass for commissions or resale |
| Preorganization subscription | Limited subscribers, no payment, no commission | Taking funds too early can destroy the exemption |
| Existing security holder transaction | Rights, warrants, stock dividends, or exchanges with existing holders | Compensation for solicitation can change the analysis |
| Underwriter transaction | Transactions between issuers and underwriters | The public distribution still needs its own exemption or registration path |
Securities Registration Methods
| Method | Used when | Effective idea | Exam distinction |
|---|
| Filing / notification | Seasoned issuers meeting statutory conditions | Simpler state filing | Not available to every issuer |
| Coordination | Securities also registered with the SEC | Coordinates state and federal effectiveness | Often used for public offerings |
| Qualification | Any security can be registered this way | Most detailed state review | Default method when others are unavailable |
| Federal covered | State registration preempted | Notice filing may apply | Not the same as “exempt security” in every context |
Registration Administration and Enforcement
Common Registration Mechanics
| Item | Quick rule | Trap |
|---|
| Consent to service of process | Filed so legal papers can be served through the Administrator | Usually filed once and remains effective |
| Effective registration | Often effective at noon on the 30th day after filing unless accelerated or denied | “Filed” does not always mean “effective” |
| Expiration | Registrations commonly expire December 31 unless renewed | Annual renewal matters |
| Amendments | Material changes must be amended promptly | A stale Form ADV can be an exam issue |
| Withdrawal | Becomes effective after a statutory period unless proceedings are pending | Withdrawal does not erase prior liability |
| Successor registration | May preserve continuity when ownership or form changes | Watch for assignment or control changes |
Administrator Powers
| Power | Administrator can do | Administrator cannot do |
|---|
| Rulemaking | Make, amend, and rescind rules/forms | Make rules retroactive unless permitted |
| Investigations | Investigate in or outside the state if jurisdiction exists | Require self-incrimination beyond legal limits |
| Subpoenas | Subpoena witnesses and records | Imprison a violator directly |
| Orders | Deny, suspend, revoke, cancel, or withdraw registrations when statutory standards are met | Act arbitrarily without public-interest basis and cause |
| Injunctions | Seek court injunctions | Award criminal punishment personally |
| Criminal matters | Refer for prosecution | Serve as prosecutor, judge, and jailer |
| Interpretive opinions | Issue no-action or interpretive guidance | Change the statute by opinion |
Denial, Suspension, or Revocation: Two-Part Pattern
Most disciplinary registration questions require both:
- Action is in the public interest.
- A statutory cause exists.
| Cause examples | Exam note |
|---|
| False or misleading application | Materiality matters |
| Willful violation of securities law | “Willful” generally means intentionally doing the act, not necessarily knowing the law |
| Injunction or relevant conviction | Securities, fraud, fiduciary, or financial misconduct is highly relevant |
| Insolvency | Especially relevant for custodial firms |
| Unethical or dishonest practices | Broad category for exam scenarios |
| Lack of qualification | Administrator may require exams, but cannot usually deny solely for lack of experience |
| Failure to supervise | Supervisors can be liable for ignoring red flags |
Jurisdiction
| Situation | State jurisdiction likely? |
|---|
| Offer originates in the state | Yes |
| Offer is directed into and received in the state | Yes |
| Acceptance is communicated from the state | Yes |
| Acceptance is received in the state | Yes |
| Bona fide out-of-state publication with limited in-state targeting | Often no |
| Broadcast or internet communication not specifically directed to the state | Analyze facts; do not assume |
Adviser Contracts, Brochures, Custody, and Discretion
Advisory Contract Requirements
| Contract issue | Rule to remember | Trap |
|---|
| Assignment | Advisory contract cannot be assigned without client consent | Assignment includes transfer of control, not routine minority share changes |
| Partnership changes | Partnership adviser must notify clients of changes in membership | Notice is not the same as consent unless assignment occurs |
| Compliance waiver | Client cannot waive compliance with securities law | “Client agreed” is not a defense to an illegal clause |
| Performance fee | Generally prohibited for ordinary retail advisory clients | Exceptions exist for qualified clients and certain sophisticated/institutional arrangements |
| Compensation disclosure | Fees and conflicts must be disclosed | Hidden referral compensation is a major red flag |
| Termination | Prepaid fees generally require refund of unearned portion | Nonrefundable advisory fees are suspect |
Brochure Delivery and ADV Concepts
| Document/concept | What to know |
|---|
| Form ADV Part 1 | Registration and business information filed with regulators |
| Form ADV Part 2A | Firm brochure: services, fees, conflicts, discipline, methods |
| Form ADV Part 2B | Brochure supplement for supervised persons giving advice |
| Delivery | Brochure must be delivered at or before advisory contract formation under common exam rules |
| Annual update | Material changes require updated disclosure |
| Balance sheet | Required in certain prepaid-fee or custody/financial-condition situations |
Custody
| Custody exists when adviser… | Example |
|---|
| Holds client funds or securities | Adviser maintains client stock certificates |
| Can withdraw client funds | Adviser deducts fees without proper controls or has broad withdrawal authority |
| Has legal ownership/access | Adviser is trustee, general partner, or has power of attorney |
| Receives client checks made payable to adviser | Custody issue unless returned promptly under applicable rules |
| Custody control | Exam point |
|---|
| Segregation | Do not commingle client and firm assets |
| Qualified custodian | Client assets should be held by appropriate custodian |
| Notice and statements | Clients must receive proper account information |
| Surprise examination | Often required unless an exception applies |
| Fee deduction | Not always custody if narrowly authorized and procedural safeguards are met |
Discretion
| Authority type | Is it discretion? | Exam point |
|---|
| Adviser chooses security | Yes | Written discretionary authority required |
| Adviser chooses amount | Yes | Written discretionary authority required |
| Adviser chooses buy/sell action | Yes | Written discretionary authority required |
| Client specifies security/action/amount; adviser chooses time or price only | Usually no full discretion | Time-and-price discretion is limited |
| Initial oral discretion | Temporarily permitted under common USA-style rules | Written authority must follow promptly; 10 business days is a commonly tested rule |
Ethics and Fiduciary Duty
IA/IAR Fiduciary Principles
| Duty | Practical meaning | Exam clue |
|---|
| Loyalty | Put client interests ahead of adviser interests | Conflicts must be disclosed and managed |
| Care | Provide suitable, informed, reasonable advice | Recommendation must fit objectives and constraints |
| Full disclosure | Disclose material facts and conflicts | Omission can be fraud |
| Best execution | Seek favorable execution considering total transaction quality | Lowest commission is not always best execution |
| Fair allocation | Allocate limited opportunities fairly | Cherry-picking winners to favored accounts is prohibited |
| Confidentiality | Protect client information | Disclosure requires authorization or legal basis |
| Ongoing suitability | Monitor if the advisory relationship includes monitoring | One-time planning differs from managed account |
Prohibited or Unethical Practices
| Practice | Why wrong |
|---|
| Guaranteeing a profit or no loss | Securities involve risk unless backed by an actual guarantor and properly disclosed |
| Misrepresenting registration | Registration does not imply approval, merit, or recommendation by regulator |
| Borrowing from or lending to clients | Generally prohibited unless a recognized exception applies |
| Commingling funds | Violates custody and fiduciary principles |
| Unauthorized trading | Client authorization is required |
| Churning | Excessive trading to generate compensation |
| Front running | Trading ahead of client orders |
| Insider trading | Trading on material nonpublic information or tipping |
| Selling away | Private securities transactions outside firm supervision |
| Unsuitable recommendation | Recommendation does not match client facts |
| Excessive fees | Fee must be reasonable relative to services |
| False advertising | Misleading testimonials, rankings, performance, or credentials |
| Cherry-picked performance | Showing only winners or omitting material assumptions |
| Failure to disclose conflict | Compensation, affiliation, principal capacity, referral fee, or product incentive hidden |
Principal and Agency Cross Transactions
| Transaction | Requirement concept | Trap |
|---|
| Principal trade | Adviser sells to or buys from client for adviser’s own account | Requires written disclosure and client consent before completion |
| Agency cross | Adviser arranges transaction between advisory client and another party while receiving compensation | Requires proper disclosure, consent, confirmations, and ability to revoke |
| Brokerage referral | Adviser receives benefit for directing trades | Must disclose conflict and still seek best execution |
| Soft dollars | Client commissions pay for research/brokerage services | Must benefit clients; not for ordinary overhead |
Suitability and Client Profile Reference
Core Client Data
| Data point | Why it matters |
|---|
| Age and life stage | Risk capacity, income need, retirement horizon |
| Financial status | Net worth, income, emergency reserves |
| Tax status | Taxable vs tax-deferred vs tax-free placement |
| Investment objectives | Growth, income, preservation, speculation |
| Risk tolerance | Emotional willingness to accept volatility/loss |
| Risk capacity | Financial ability to absorb loss |
| Time horizon | Longer horizon usually supports more volatility |
| Liquidity needs | Avoid illiquid products for near-term cash needs |
| Experience and knowledge | Complexity must be appropriate |
| Legal constraints | Trust terms, ERISA/fiduciary standards, restrictions |
| Existing holdings | Concentration, correlation, tax basis |
| Special circumstances | Dependents, health, employment risk, estate goals |
Suitability Shortcuts
| Client need | Often suitable | Often unsuitable |
|---|
| Emergency reserve | Bank deposits, Treasury bills, money market funds | Long-term bonds, annuities, limited partnerships |
| Current income | Bonds, bond funds, dividend stocks, preferred stock | Non-income growth stocks if income is essential |
| Capital preservation | High-quality short-term debt, insured deposits | Options speculation, small-cap concentration |
| Long-term growth | Diversified equity funds, ETFs, growth allocation | Excess cash if inflation risk is high |
| High tax bracket, taxable account | Municipal bonds, tax-efficient equity funds | High-turnover taxable funds |
| Inflation protection | Equities, TIPS, real assets | Long fixed-rate bonds only |
| Estate liquidity | Life insurance | Illiquid private placements |
| Tax deferral | Retirement plans, annuities where appropriate | Annuity inside tax-deferred account without added benefit |
| Speculation | Options or aggressive equities only if suitable | Speculative product for conservative client |
Investment Product Decision Matrix
Cash, Debt, and Money Markets
| Product | Key features | Major risks | Exam distinction |
|---|
| Treasury bill | Short-term U.S. government obligation sold at discount | Reinvestment, inflation | No periodic coupon |
| Treasury note/bond | Intermediate/longer U.S. government debt | Interest-rate risk, inflation | State/local tax exemption on interest |
| STRIPS | Zero-coupon Treasury components | High duration, phantom income in taxable accounts | No current cash interest |
| Money market fund | Portfolio of short-term instruments | Not the same as bank deposit insurance | Stable objective, but still investment product |
| Negotiable CD | Bank-issued, often large denomination | Interest-rate and secondary-market risk | FDIC coverage depends on ownership/limits; market price can fluctuate |
| Commercial paper | Short-term corporate debt | Credit/liquidity risk | High-quality paper may be exempt security |
| Corporate bond | Corporate debt obligation | Credit, interest-rate, call risk | Higher yield usually means higher risk |
| Secured bond | Backed by collateral | Collateral value risk | Senior to unsecured debt |
| Debenture | Unsecured corporate bond | Credit risk | Backed by issuer’s general credit |
| Subordinated debenture | Lower priority unsecured debt | Greater credit risk | Higher yield required |
| Convertible bond | Bond convertible into common stock | Equity downside, call risk | Lower coupon due to conversion feature |
| Callable bond | Issuer can redeem early | Reinvestment risk | Call benefits issuer when rates fall |
| Put bond | Investor can sell back to issuer | Lower yield | Put benefits investor when rates rise |
| Municipal GO bond | Backed by taxing power | Political/tax-base risk | Safer than many revenue bonds if tax base strong |
| Municipal revenue bond | Backed by project revenues | Project/revenue risk | Feasibility studies matter |
| Private activity muni | Benefits private entity | AMT risk | Interest may trigger alternative minimum tax issues |
Equity and Pooled Products
| Product | Key features | Major risks | Exam distinction |
|---|
| Common stock | Ownership, voting, residual claim | Market/business risk | Highest claim risk among corporate securities |
| Preferred stock | Fixed dividend preference | Interest-rate risk, limited upside | Equity security with bond-like income |
| Cumulative preferred | Missed dividends accumulate | Issuer credit risk | Dividends in arrears owed before common dividends |
| Participating preferred | Can receive extra dividends | Still limited upside | Rare but testable |
| ADR | U.S.-traded certificate for foreign shares | Currency/political risk | Simplifies U.S. trading of foreign equity |
| Mutual fund | Redeemable investment company | Market risk, expenses, tax distributions | Bought/sold at NAV plus any sales charge |
| ETF | Exchange-traded pooled portfolio | Market, tracking, liquidity risk | Intraday trading; may trade at premium/discount |
| Closed-end fund | Fixed shares traded on exchange | Premium/discount risk | Does not redeem at NAV |
| UIT | Fixed portfolio for defined life | Market risk, limited management | Unit holders redeem; portfolio generally unmanaged |
| Hedge fund/private fund | Pooled private investment | Liquidity, leverage, complexity | Suitable only for sophisticated/qualified investors |
| REIT | Real estate investment trust | Real estate, rate, sector risk | Equity REIT owns property; mortgage REIT owns loans |
| DPP/limited partnership | Pass-through business interest | Illiquidity, tax complexity | Limited partners risk loss of limited liability if they manage |
Derivatives, Insurance, and Annuities
| Product | Key features | Major risks | Exam distinction |
|---|
| Call option | Right to buy underlying asset | Premium loss | Bullish for buyer |
| Put option | Right to sell underlying asset | Premium loss | Bearish or protective for buyer |
| Covered call | Long stock plus short call | Opportunity risk | Income strategy, limited upside |
| Protective put | Long stock plus long put | Premium cost | Downside protection |
| Futures | Obligation to buy/sell later | Leverage, margin, price risk | Commodity futures as such are not securities, but related products can be |
| Fixed annuity | Insurer guarantees payments/interest | Inflation, insurer claims-paying risk | Generally not a security |
| Variable annuity | Separate account investment performance | Market risk, expenses | Security; requires securities registration/licensing |
| Immediate annuity | Payments begin soon after purchase | Liquidity loss | Income-focused |
| Deferred annuity | Accumulation before payout | Surrender charges, tax penalties | Tax-deferred growth |
| Term life | Death benefit for term | No cash value | Pure insurance |
| Whole life | Permanent insurance with cash value | Cost, low flexibility | Not primarily a securities product |
| Variable life | Cash value in separate account | Market risk | Security |
| Universal life | Flexible premium/death benefit | Lapse risk | Securities status depends on variable investment component |
Bond and Interest-Rate Reference
| Relationship | Rule |
|---|
| Interest rates up | Existing bond prices down |
| Interest rates down | Existing bond prices up |
| Longer maturity | More interest-rate sensitivity |
| Lower coupon | More interest-rate sensitivity |
| Higher coupon | Less price sensitivity than otherwise similar lower-coupon bond |
| Premium bond | Coupon rate greater than current yield greater than yield to maturity |
| Discount bond | Yield to maturity greater than current yield greater than coupon rate |
| Callable premium bond | Yield to call can be lower than yield to maturity |
| Zero-coupon bond | Large duration risk and no periodic income |
| Bond ladder | Reduces reinvestment and maturity concentration risk |
| Barbell strategy | Short and long maturities; less middle exposure |
| Bullet strategy | Maturities concentrated around target date |
Risk Reference
| Risk | Meaning | Most exposed |
|---|
| Systematic risk | Market-wide risk not diversified away | Equities, broad market portfolios |
| Unsystematic risk | Company/industry-specific risk | Concentrated portfolios |
| Interest-rate risk | Bond price declines as rates rise | Long-term bonds, preferred stock |
| Reinvestment risk | Income reinvested at lower rates | Callable bonds, short maturities |
| Credit/default risk | Issuer cannot pay | Low-rated debt |
| Inflation/purchasing power risk | Return fails to keep up with inflation | Cash, fixed income |
| Liquidity risk | Cannot sell quickly at fair price | DPPs, private placements, thinly traded issues |
| Call risk | Issuer redeems when rates fall | Callable bonds |
| Prepayment risk | Principal returned earlier than expected | Mortgage-backed securities |
| Extension risk | Principal returned later than expected | Mortgage-backed securities when rates rise |
| Currency risk | Exchange-rate movement affects return | Foreign investments |
| Political/regulatory risk | Law or political events impair value | Foreign securities, regulated sectors |
| Business risk | Issuer operations underperform | Common stock, corporate bonds |
| Longevity risk | Client outlives assets | Retirees relying on portfolio withdrawals |
| Sequence-of-returns risk | Poor early retirement returns damage sustainability | Retirees taking withdrawals |
Portfolio Theory and Calculation Sheet
\[
\text{Total return} =
\frac{\text{income} + \text{ending value} - \text{beginning value}}
{\text{beginning value}}
\]\[
\text{Tax-equivalent yield} =
\frac{\text{tax-free yield}}{1 - \text{marginal tax rate}}
\]\[
\text{After-tax yield} =
\text{taxable yield} \times (1 - \text{marginal tax rate})
\]\[
1 + r_{\text{real}} =
\frac{1 + r_{\text{nominal}}}{1 + \text{inflation rate}}
\]\[
\text{Required return under CAPM} =
R_f + \beta(R_m - R_f)
\]\[
\text{Sharpe ratio} =
\frac{\text{portfolio return} - \text{risk-free rate}}
{\text{portfolio standard deviation}}
\]
| Measure | Plain formula | Use |
|---|
| Holding-period return | Income plus price change, divided by beginning value | Total performance over period |
| Current yield | Annual income divided by current market price | Bond or income stock cash yield |
| Approximate YTM | Annual interest plus annualized discount/premium, divided by average of par and price | Bond yield estimate |
| Tax-equivalent yield | Tax-free yield divided by 1 minus tax rate | Compare municipal to taxable bond |
| After-tax yield | Taxable yield times 1 minus tax rate | Compare taxable investments |
| Real return | Approximate: nominal return minus inflation | Purchasing-power analysis |
| Expected return | Sum of each possible return times its probability | Probability-weighted forecast |
| Alpha | Actual return minus CAPM required return | Risk-adjusted outperformance |
| Beta | Security covariance with market divided by market variance | Systematic risk |
| Standard deviation | Dispersion of returns around mean | Total volatility |
| Correlation | Degree two assets move together | Diversification benefit |
| Sharpe ratio | Excess return divided by standard deviation | Risk-adjusted return using total risk |
| Treynor ratio | Excess return divided by beta | Risk-adjusted return using systematic risk |
| Dividend payout ratio | Dividends per share divided by EPS | Portion of earnings paid out |
| EPS | Earnings available to common divided by common shares | Profit per common share |
| P/E ratio | Market price per share divided by EPS | Valuation multiple |
| Book value per share | Common equity divided by common shares | Accounting value per share |
| Current ratio | Current assets divided by current liabilities | Liquidity |
| Quick ratio | Cash plus marketable securities plus receivables, divided by current liabilities | Stricter liquidity |
| Debt-to-equity | Total debt divided by total equity | Leverage |
| NAV per fund share | Assets minus liabilities, divided by shares | Mutual fund pricing |
Portfolio Concepts
| Concept | Meaning | Exam use |
|---|
| Diversification | Combining assets to reduce unsystematic risk | Does not eliminate market risk |
| Efficient frontier | Portfolios with highest expected return for each risk level | Rational portfolio selection |
| Capital market line | Efficient portfolios combining market portfolio and risk-free asset | Uses total risk |
| Security market line | CAPM relationship between beta and required return | Uses systematic risk |
| Beta greater than 1 | More volatile than market | Aggressive |
| Beta less than 1 | Less volatile than market | Defensive |
| Beta near 0 | Little market correlation | Cash-like or market-neutral |
| Negative correlation | Assets tend to move opposite | Strong diversification potential |
| Rebalancing | Restores target allocation | Forces sell-high/buy-low discipline but may create tax costs |
| Dollar-cost averaging | Invest fixed dollars periodically | Does not guarantee profit or prevent loss |
| Strategic allocation | Long-term target mix | Policy-driven |
| Tactical allocation | Short-term deviation from target | Market view-driven |
Quick Yield Example
A municipal bond yields 3.0 percent. The client’s marginal tax rate is 24 percent.
Tax-equivalent yield = 3.0 percent divided by 0.76 = 3.95 percent.
A taxable bond must yield more than 3.95 percent before tax to beat the 3.0 percent tax-free municipal yield for that client, ignoring state taxes and risk differences.
Tax Reference
| Item | Tax treatment concept | Exam trap |
|---|
| Ordinary income | Wages, interest, nonqualified dividends, short-term gains | Taxed less favorably than long-term capital gains |
| Short-term capital gain | Gain on asset held one year or less | Generally taxed as ordinary income |
| Long-term capital gain | Gain on asset held more than one year | Preferential rates may apply |
| Qualified dividend | Dividend meeting statutory requirements | Not all dividends qualify |
| Municipal interest | Generally federally tax-exempt | Private activity bonds may affect AMT; out-of-state interest may face state tax |
| U.S. Treasury interest | Federally taxable | Exempt from state and local income tax |
| Corporate bond interest | Taxable as ordinary income | Higher nominal yield may not mean higher after-tax yield |
| Capital loss | Offsets capital gains, then limited ordinary income offset | Unused losses can carry forward |
| Wash sale | Loss disallowed when substantially identical security bought around sale window | Adds disallowed loss to basis of replacement shares |
| Return of capital | Reduces basis | Taxable as capital gain after basis reaches zero |
| Stock split | Total basis unchanged; per-share basis adjusted | No immediate taxable event |
| Reinvested dividends | Increase basis because dividend is taxable when paid | Avoid double taxation on sale |
| Inherited property | Often receives stepped-up basis | Gifted property uses different basis logic |
| Tax-deferred account | Tax delayed until distribution | Not tax-free |
| Roth-style account | Qualified distributions may be tax-free | Contributions are after-tax |
| Traditional retirement account | Deductible or pre-tax funding may apply | Distributions generally ordinary income |
| Annuity withdrawal | Earnings generally come out first before annuitization | Surrender charges and tax penalties may apply |
| Annuitized payment | Part principal return, part earnings under exclusion ratio | Once basis is recovered, payments taxable |
Retirement, Education, and Estate Planning
| Tool/account | Primary purpose | Tax/ownership concept | Suitability note |
|---|
| Traditional IRA | Individual retirement savings | Possible deductible contribution; taxable distributions | Useful when current deduction is valuable |
| Roth IRA | After-tax retirement savings | Qualified tax-free distributions | Useful when future tax rate may be higher |
| Employer plan | Workplace retirement accumulation | Salary deferral and possible employer match | Match is usually a high-priority benefit |
| Rollover | Move retirement assets | Must preserve tax-qualified status | Mishandled rollovers can create tax |
| 529 plan | Education savings | Tax-free qualified education withdrawals | Donor may retain control; investment options limited |
| Coverdell ESA | Education savings | Qualified education tax benefits | Contribution limits and income limits are testable in current materials |
| UTMA/UGMA | Custodial account for minor | Irrevocable gift to minor | Counts as minor’s asset; custodian controls until termination age |
| Trust | Fiduciary management of assets | Revocable vs irrevocable treatment differs | Investment policy must follow trust terms |
| JTWROS | Joint ownership with survivorship | Survivor receives property at death | Avoids probate for that asset |
| Tenants in common | Joint ownership without survivorship | Decedent’s share passes through estate | Unequal ownership allowed |
| Life insurance | Death benefit and estate liquidity | Death benefit often income-tax-free to beneficiary | Product choice should start with insurance need |
| Variable annuity | Tax-deferred investment with insurance features | Ordinary-income taxation on earnings | High expenses; unsuitable if tax deferral already available without benefit |
Economic and Market Indicators
| Indicator | Meaning | Market implication |
|---|
| GDP | Total economic output | Growth supports earnings; overheating can invite tightening |
| CPI | Consumer inflation measure | Higher inflation hurts fixed income and purchasing power |
| PPI | Producer price measure | Can foreshadow consumer inflation |
| Unemployment rate | Labor-market condition | Lagging indicator |
| Yield curve | Yields across maturities | Inversion can signal slowdown expectations |
| Leading indicators | Predictive economic data | Used for cycle forecasting |
| Coincident indicators | Move with economy | Confirm current conditions |
| Lagging indicators | Confirm after the fact | Less useful for forecasting |
| Expansion | Rising output/employment | Cyclical stocks may perform well |
| Peak | Growth tops out | Inflation/rate pressure may build |
| Contraction | Declining output | Defensive assets may be favored |
| Trough | Downturn bottoms | Early-cycle opportunities may emerge |
Monetary and Fiscal Policy
| Policy action | Who does it | Typical effect |
|---|
| Lower short-term rates | Central bank | Stimulates borrowing and spending |
| Raise short-term rates | Central bank | Slows inflation and borrowing |
| Open market purchases | Central bank | Adds reserves/liquidity |
| Open market sales | Central bank | Drains reserves/liquidity |
| Increase government spending | Legislature/executive fiscal policy | Stimulative |
| Decrease taxes | Fiscal policy | Stimulative |
| Decrease spending or raise taxes | Fiscal policy | Restrictive |
Account Authority and Fiduciary Roles
| Account/role | Key point | Exam trap |
|---|
| Individual account | One owner controls | Death freezes account until estate authority |
| Joint tenants with rights of survivorship | Survivor owns account | Not controlled by will for that asset |
| Tenants in common | Each owner has fractional interest | No automatic survivorship |
| Transfer on death | Beneficiary receives after death | Beneficiary has no lifetime control |
| Custodial account | Custodian manages for minor | Gift is irrevocable |
| Discretionary account | Adviser can decide action, asset, or amount | Written authority required |
| Margin account | Borrowing against securities | Requires margin agreement; increases risk |
| Fiduciary account | Trustee/executor/guardian manages for beneficiary | Must follow fiduciary duty and governing document |
| Corporate account | Entity authorization required | Need resolutions/authorized traders |
| Partnership account | Authority from partnership agreement | General partner typically manages |
| Trust account | Trustee authority controls | Trust document governs investments |
Business Entity Quick Reference
| Entity | Liability | Tax concept | Exam use |
|---|
| Sole proprietorship | Owner personally liable | Pass-through | Simple but unlimited liability |
| General partnership | General partners personally liable | Pass-through | Each general partner can bind partnership |
| Limited partnership | General partner liable; limited partners limited if passive | Pass-through | DPP structure often uses LP |
| LLC | Limited liability for members | Often pass-through | Flexible structure |
| C corporation | Shareholder liability limited | Entity-level tax plus shareholder tax on dividends | Double taxation concept |
| S corporation | Shareholder liability limited | Pass-through if requirements met | Restrictions on shareholders/classes |
| Trust | Trustee manages for beneficiaries | Depends on trust type | Fiduciary investment standards |
| Nonprofit | Mission-driven entity | Special tax status possible | Securities may be exempt but antifraud applies |
Common Exam Traps Checklist
Law and Registration
- Registration never means regulator approval or recommendation.
- Antifraud rules apply even when a security or transaction is exempt.
- An IA exclusion means the person is not an IA; an IA exemption means the person is an IA but need not register.
- Federal covered advisers are not state-registered as IAs, but state notice filing and antifraud authority can remain.
- IARs of federal covered advisers are state-registered only where they have a place of business.
- Broker-dealer exclusion is not the same as investment adviser exclusion.
- Issuer employees are not automatically agents, but can become agents depending on compensation, security type, and transaction.
- Private placement exemption focuses on purchaser count/type, investment intent, solicitation, and compensation.
- Administrator can investigate and seek injunctions but does not personally impose prison sentences.
- Public interest plus statutory cause is the pattern for denial, suspension, or revocation.
Ethics
- A fiduciary cannot rely on disclosure alone if the recommendation remains improper.
- Time-and-price discretion is not the same as full discretionary authority.
- Principal trades require special disclosure and consent before completion.
- Soft dollars are not automatically illegal, but conflicts and client benefit matter.
- Testimonials, rankings, and performance ads must not be misleading.
- Referral fees and solicitor arrangements require disclosure and proper agreements.
- Churning can occur when trading is excessive relative to client objectives.
- Borrowing from clients, lending to clients, and sharing profits/losses are heavily restricted.
- Insider trading includes tipping others, not just personal trading.
- Client consent cannot waive securities-law compliance.
Products and Suitability
- Variable annuities and variable life insurance are securities; fixed annuities are generally not.
- Mutual funds redeem at NAV; closed-end funds trade in the secondary market at premium or discount.
- ETFs trade intraday but still have market and tracking risk.
- Callable bonds benefit issuers; put bonds benefit investors.
- Long maturities and low coupons increase duration risk.
- Municipal bonds are not automatically suitable just because interest is tax-exempt.
- High yield usually means high risk.
- Illiquid products are poor matches for emergency reserves.
- Tax deferral is less valuable inside an already tax-deferred account unless other benefits justify the product.
- Diversification reduces unsystematic risk, not systematic market risk.
Last-Week Review Plan
| Time available | Best use |
|---|
| 2 hours | Drill definitions, IA/IAR/BD/agent distinctions, exempt securities vs exempt transactions |
| 4 hours | Add ethics scenarios, Administrator powers, registration mechanics, and product suitability |
| 1 day | Complete mixed practice, review every missed explanation, then memorize formulas and bond relationships |
| 2 to 3 days | Rotate law, ethics, products, tax, and portfolio math; use timed sets to build endurance |
Practical next step: take a timed mixed Series 65 practice set, tag every miss by category, then rework the weakest law/ethics and calculation topics until you can explain the rule without looking it up.