NASAA Series 66 Practice Test & Mock Exam

Series 66 combines state-law and ethics concepts that show up across representative and adviser scenarios. If you are searching for Series 66 sample questions, a practice test, mock exam, or simulator, this is the main Securities Prep page to start on web and continue on iOS or Android with the same account. This page includes 24 sample questions with detailed explanations so you can try the exam style before opening the full app question bank.

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What this Series 66 practice page gives you

• a direct route into the Securities Prep simulator for Series 66
• 24 sample questions with detailed explanations across the main Series 66 topic buckets
• targeted practice around registration, exemptions, ethics, disclosure, and combined state-law scenarios
• detailed explanations that show why the best combined-law answer is correct
• a clear free-preview path before you subscribe
• the same subscription across web and mobile

Series 66 exam snapshot

• Issuer: NASAA
• Official exam name: Uniform Combined State Law Examination
• Exam code: Series 66
• Question count: 100
• Exam time: 150 minutes
• Practice reference: 100 practice questions in 150 minutes

Series 66 questions usually reward the option that applies the right state-law rule to the correct role context instead of blurring representative and adviser obligations together.

Topic coverage for Series 66 practice

• Registration triggers: who must register, which exemptions apply, and role-specific boundaries
• Ethics and disclosure: communication standards, conflicts, and prohibited conduct
• Combined state-law judgment: scenarios that mix adviser and representative concepts under time pressure
• Timing control: full timed sets built for the longer combined-law format

What Series 66 is really testing

Series 66 is primarily a combined-role-and-recommendation exam:

• identifying whether the scenario is mostly about adviser law, representative conduct, or investment recommendation logic
• blending product suitability with legal and ethical obligations instead of treating them separately
• choosing the answer that is both appropriate for the client and compliant under state law
• recognizing when the right fix is disclosure, documentation, updated registration logic, or a different recommendation
• switching quickly between product knowledge and legal triggers without losing role clarity

Common question styles

• What role controls this scenario?: IA, IAR, broker-dealer, agent, or administrator
• What is the recommendation issue?: suitability, allocation, product characteristics, diversification, or tax-sensitive fit
• What is the legal trigger?: registration, exemption, custody, discretion, conflict, or prohibited practice
• What is the safest compliant next step?: disclose, document, refuse, escalate, or recommend a better-fit solution
• Which fact changed the answer?: client objective, liquidity, role status, compensation, or state-law classification

High-yield pitfalls

• treating the exam like only a law test and missing the recommendation side
• treating the exam like only a product test and missing the role or disclosure trigger
• confusing IA/IAR scenarios with BD/agent scenarios
• overlooking taxes, liquidity, or time horizon in a recommendation
• choosing a legally possible answer that is still a weak client-fit answer
• forgetting that documentation and disclosure are often the safer path when facts are incomplete

How to use the Series 66 simulator efficiently

1. Start with registration and ethics drills so the main role-dependent rules become easier to separate.
2. Review every miss until you can explain why the best answer fits the correct state-law role and disclosure logic.
3. Move into mixed sets once you can shift between exemptions, ethics, and combined scenarios without losing accuracy.
4. Finish with timed runs so the 150-minute exam pace feels controlled.

Free preview vs premium

• Free preview: 24 public sample questions on this page plus the web app entry so you can validate the question style and explanation depth.
• Premium: the full Series 66 practice bank, focused drills, mixed sets, timed mock exams, detailed explanations, and progress tracking across web and mobile.

Free samples and full bank

• Live now: this exact practice route is available in Securities Prep on web, iOS, and Android.
• On-page sample set: this page includes 24 public sample questions from the current practice coverage.
• Full app: open the Securities Prep web app or mobile app for broader timed coverage.

Free review resources

Use these free SecuritiesMastery.com resources for concept review, then return to this page when you are ready to practice in Securities Prep.

• Series 66 Cheat Sheet
• Series 66 Study Guide

Focused sample questions

Use these focused Series 66 sample-question pages when you want to isolate one official topic area before returning to the mixed simulator.

• Economic Factors
• Investment Vehicles
• Client Recommendations
• Laws and Ethics
• Free Series 66 Full-Length Practice Exam

24 Series 66 sample questions with detailed explanations

These sample questions follow the standard single-answer style used for Series 66 and cover multiple blueprint areas for this exam code. Use them to check your readiness here, then move into the full Securities Prep question bank for broader timed coverage.

Question 1

Topic: Topic I - Economic Factors and Business Information

An investment adviser is evaluating a client’s purchase of a company’s newly issued corporate bond. The company’s debt has increased and the adviser wants a high-level measure of the issuer’s ability to meet ongoing interest payments; which financial ratio best matches that credit-analysis purpose?

• A. Price-to-book (P/B) ratio
• B. Price-to-earnings (P/E) ratio
• C. Interest coverage ratio (e.g., EBIT divided by interest expense)
• D. Dividend payout ratio

Best answer: C

Explanation: In credit analysis, ratios that relate earnings or cash flow to fixed charges help assess default risk. Interest coverage focuses on whether operating earnings are sufficient to pay interest expense as leverage rises. That makes it a direct, high-level measure of debt-servicing strength for a corporate bond issuer.

Financial ratios are used differently depending on whether the question is about credit risk (ability to pay) or equity value (what investors are willing to pay). For a bond buyer, the key concern is the issuer’s capacity to meet contractual payments, so analysts focus on leverage and coverage metrics. Interest coverage (commonly EBIT or EBITDA relative to interest expense) links operating performance to a fixed obligation, making it a practical snapshot of debt-servicing strength.

Equity-focused valuation ratios (like P/E or P/B) are more about pricing and market expectations than the issuer’s ability to make interest payments. Dividend payout is an equity distribution metric and is not a primary measure of bondholder payment capacity. The key takeaway is to match the ratio to the risk being analyzed: payment capacity for credit vs valuation for equity.

Question 2

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

A state-registered IAR proposes a “high-frequency trading” program for a retail client’s taxable account, describing it as placing hundreds of intraday trades to capture very small price movements with holding periods of seconds to minutes. The client’s primary goal is long-term growth over 15 years.

Which outcome is most likely if the strategy is implemented as described?

• A. The state administrator will order the issuer to rescind the client’s trades
• B. Returns may be reduced by trading costs and price slippage from market impact
• C. The client will typically have lower taxable gains because holding periods are longer
• D. The strategy becomes presumptively suitable because it increases diversification

Best answer: B

Explanation: High-frequency trading is characterized by extremely short holding periods and very high turnover, seeking small per-trade profits. Those profits depend on abundant liquidity and very low transaction costs so that orders don’t move prices (market impact) and spreads/commissions don’t dominate results. In a typical retail taxable account, costs and slippage are a common consequence that can materially reduce returns.

High-frequency trading (HFT) is an ultra-short-term, high-turnover approach that attempts to exploit small, fleeting price differences. Because the expected profit per trade is small, the strategy’s viability depends heavily on (1) liquidity (so orders can be filled quickly near quoted prices) and (2) low market impact/slippage (so the act of trading doesn’t move prices against the trader), along with very low all-in trading costs. For a retail client account, frequent intraday trading can create significant spread/commission drag and slippage, which can overwhelm small gross gains and make outcomes inconsistent with a long-term growth objective.

Key takeaway: short holding periods and high turnover make liquidity and market impact central risk considerations.

Question 3

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

HarborView Advisors, LLC is a state-registered investment adviser in the state and will enter advisory contracts in the firm’s name and bill clients from the firm. HarborView hires Jordan, who will work from a local office (a place of business), meet with prospects, and provide ongoing individualized advice with discretionary authority over client accounts. HarborView wants its registrations and required disclosures to be handled correctly while keeping Jordan classified as an individual associated with the firm.

What is the single best compliance decision?

• A. Register HarborView as a broker-dealer and Jordan as an agent
• B. No additional action is needed because HarborView, not Jordan, is the registered adviser
• C. Register Jordan as an investment adviser and have him file his own Form ADV
• D. Register Jordan as an IAR of HarborView and deliver the firm brochure and Jordan’s supplement as required

Best answer: D

Explanation: An investment adviser is the firm that contracts with and charges clients, while an investment adviser representative is the individual who gives advice on the adviser’s behalf. Since Jordan will provide individualized advice and exercise discretion from a place of business, the state expects IAR registration for him. The adviser must also deliver the required written disclosure documents for the firm and the supervised person.

The core distinction is “entity vs. individual.” HarborView is the investment adviser because it is the business providing advisory services, contracting with clients, and collecting advisory fees. Jordan is an investment adviser representative because he is a natural person who will solicit clients, give individualized advice, and exercise discretion on behalf of HarborView.

With a place of business in the state, Jordan typically must be registered as an IAR of the adviser (and be supervised as an associated person). Separately, the adviser is responsible for required client disclosures (for example, the adviser’s brochure and the disclosure about the supervised person providing the advice). The key takeaway is that you don’t “solve” an individual’s advisory activity by making the person a separate adviser when the firm is the contracting advisory business.

Question 4

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An investment adviser representative recommends a mutual fund share class that pays the adviser a higher ongoing trail than lower-cost share classes of the same fund available to the client. Which compliance requirement best matches the adviser’s fiduciary standard in this situation?

• A. Provide full and fair disclosure of the compensation conflict and obtain the client’s informed consent
• B. Deliver a prospectus to the client no later than settlement
• C. File the recommendation with the state administrator before execution
• D. Determine the recommendation is suitable based on the client profile

Best answer: A

Explanation: Investment advisers and their representatives are fiduciaries, so they must put the client’s interest first and address conflicts of interest through full and fair disclosure. Getting paid more for one share class than another is a material conflict. The fiduciary framework expects informed client consent (and a best-interest process), not mere suitability.

The core distinction is that an investment adviser’s relationship is fiduciary: advice must be in the client’s best interest and material conflicts must be fully and fairly disclosed in a way a client can understand. When the adviser has an incentive to recommend one share class over another (higher trail vs. lower cost), that incentive is a conflict of interest. A fiduciary cannot rely on “it’s suitable” as the standard; the adviser must disclose the conflict and obtain informed consent, and the recommendation still must be supportable as serving the client’s interest. By contrast, broker-dealer standards (suitability/Reg BI) focus on a best-interest/suitability recommendation framework with required disclosures, but they are not the same as the adviser’s fiduciary obligation to the client.

Question 5

Topic: Topic II - Investment Vehicle Characteristics

A common stockholder’s preemptive right is best described as the right to:

• A. Receive dividends before preferred stockholders
• B. Be paid before creditors in a corporate liquidation
• C. Convert common shares into preferred shares at par value
• D. Maintain ownership percentage in new share offerings

Best answer: D

Explanation: Preemptive rights are anti-dilution rights that let existing common shareholders purchase their pro rata share of a new stock issuance. The purpose is to preserve the shareholder’s percentage ownership (and related voting power) when additional shares are issued. Not all common stocks include preemptive rights, but when they do, this is what the term means.

Preemptive rights (sometimes described as anti-dilution rights) give existing shareholders the opportunity to buy newly issued shares before they are offered to the public. By purchasing their proportionate share, a shareholder can keep the same percentage ownership in the company after the issuance.

This matters because issuing additional shares can dilute:

• Ownership percentage
• Voting power
• Potential claim on future earnings

Preemptive rights do not change the priority of dividends or liquidation proceeds; those priorities are determined by the security’s class (common vs. preferred) and the firm’s capital structure. The key idea is protection against dilution from new equity issuance.

Question 6

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

A broker-dealer sells bonds to a retail customer out of the firm’s inventory, and the trade confirmation shows the firm acted “as principal” with no commission listed. Which outcome best matches how the firm is compensated and what must be disclosed?

• A. Compensation is a markup/markdown; principal capacity must be disclosed
• B. Compensation is a commission; agency capacity must be disclosed
• C. Compensation is a markup/markdown; agency capacity must be disclosed
• D. Compensation is a commission; principal capacity need not be disclosed

Best answer: A

Explanation: When a broker-dealer trades from its own inventory, it is acting as a principal (dealer) and is compensated through the spread embedded in the price (a markup or markdown), rather than a stated commission. The customer must be told the firm’s capacity on the confirmation so the customer understands the conflict and how the firm may be compensated.

The key distinction is whether the firm is trading for its own account or simply arranging a trade for the customer. In a principal transaction, the broker-dealer is the counterparty (selling from inventory or buying into inventory), so its economic benefit typically comes from the difference between its cost and the customer’s price (a markup/markdown). Because that role creates an inherent conflict (the firm may benefit from the price), the firm must disclose that it acted as principal (dealer) on the confirmation. In an agency transaction, the firm does not take the other side; it executes the order on the customer’s behalf and is typically compensated by a commission that is disclosed on the confirmation.

Question 7

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

Two clients ask about the federal tax treatment of IRA distributions.

• Client A (age 45) takes a $20,000 distribution from a traditional IRA. No exception to the early distribution rules applies.
• Client B (age 62) takes a $20,000 distribution from a Roth IRA. The first Roth IRA contribution was made 8 years ago.

Assume distributions before age 5912 are generally subject to a 10% penalty in addition to income taxes. Which statement correctly classifies the tax treatment?

• A. A: tax-free return of principal; B: tax-free after age 5912 only
• B. A: taxable + 10% penalty; B: tax-free distribution
• C. A: 10% penalty only; B: taxable as ordinary income
• D. A: taxable only; B: taxable + 10% penalty

Best answer: B

Explanation: Traditional IRA contributions are generally pre-tax, so distributions are generally included in ordinary income; if taken before age 5912 and no exception applies, an additional 10% penalty typically applies. Roth IRA contributions are made with after-tax dollars, and a distribution is tax-free when it is qualified (generally age 5912 or older and meeting the 5-year requirement).

The key classification is whether the account is pre-tax (traditional IRA) or after-tax (Roth IRA), and whether the distribution is early or qualified. Client A’s traditional IRA distribution is generally taxed as ordinary income because pre-tax retirement contributions (and growth) were not previously taxed; taking it at age 45 also triggers the stated 10% early distribution penalty when no exception applies. Client B’s Roth IRA distribution is qualified because the client is over age 5912 and the first contribution was made more than 5 years ago, so the distribution is generally tax-free. The decisive facts are account type (traditional vs Roth) and qualification/early status based on age and the provided 5-year timing.

Question 8

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

An IAR is meeting with a married client who has children from a prior marriage. The client’s taxable account is currently titled as tenants in common (TIC) with the spouse, consistent with the client’s estate plan to leave their share to the children. The IAR recommends retitling the account to JTWROS or tenancy by the entirety (TBE) and mentions the custodian pays the IAR a $300 bonus for each new joint account registration.

What is the primary ethical/compliance risk the IAR must address before making or implementing this recommendation?

• A. A compensation-driven conflict could bias the titling advice versus the client’s estate objectives
• B. The IAR must avoid TIC registrations because they always create survivorship rights
• C. The IAR must obtain written consent from the client’s children before changing the registration
• D. The IAR must guarantee the client that JTWROS will avoid probate in every state

Best answer: A

Explanation: Account titling choices can materially change who receives the assets at death (survivorship vs. probate). Here, the IAR is being paid extra to recommend a new joint registration that may defeat the client’s stated estate intent. The key compliance issue is the conflict of interest created by the bonus and the need to ensure any recommendation is made in the client’s best interest with appropriate disclosure.

The core issue is a compensation-related conflict of interest tied to a recommendation that affects estate outcomes. TIC generally allows each owner’s interest to pass according to their estate plan (often through probate), while JTWROS and TBE generally include a right of survivorship that transfers the decedent’s interest to the surviving spouse and can override the client’s intent to leave that interest to children from a prior marriage. When the IAR receives a bonus for a particular registration, the firm must treat it as a material conflict: disclose it clearly, evaluate whether the titling change is actually appropriate for the client’s objectives, and avoid presenting the change as a sales-driven “probate fix.” A good practice is to encourage coordination with the client’s estate attorney rather than implying certainty about legal outcomes.

Question 9

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

An IAR is preparing a written retirement-plan recommendation for a new client who is a self-employed consultant operating through a single-member LLC. The client wants an “individual (Solo) 401(k)” and says they have no employees, but they pay a part-time helper who works set hours using the client’s equipment.

What is the IAR’s best next step before recommending the Solo 401(k)?

• A. Notice file the recommendation with the state Administrator before delivery
• B. Confirm whether the helper is a common-law employee and document plan eligibility
• C. Proceed with the Solo 401(k) since the helper is paid as a 1099 contractor
• D. Amend the firm’s Form ADV to add Solo 401(k) plan services

Best answer: B

Explanation: A Solo 401(k) is designed for an owner-only business (and can include the owner’s spouse), so the key gating issue is whether there are any eligible common-law employees. Because worker classification is based on the facts and circumstances-not just receiving a 1099-the IAR should first verify eligibility and document it before recommending that specific plan type.

The core concept is that a Solo 401(k) is a 401(k) plan intended for a business with no eligible employees other than the owner (and possibly the owner’s spouse). That feature is what differentiates it from a standard employer 401(k), which is established to cover employees and carries broader eligibility, coverage, and administration considerations.

Because “1099 contractor” labeling does not control whether someone is a common-law employee, the IAR’s workflow should first clarify the client’s staffing facts (control of work, schedule, tools/equipment, integration into the business) and document whether the client can properly use a Solo 401(k). If the business has eligible employees, the recommendation must shift to an employee-covered arrangement (or another suitable plan), rather than proceeding with a Solo 401(k).

Question 10

Topic: Topic II - Investment Vehicle Characteristics

An IAR is reviewing a term sheet excerpt for a client considering purchasing Series A preferred stock. Which statement is supported by the exhibit?

Exhibit: Series A Preferred (excerpt, summary)

• Liquidation: 1.0x Original Issue Price + declared unpaid dividends, senior to Common

• Voting: votes together with Common on an as-converted basis

• Anti-dilution: broad-based weighted-average adjustment for issuances below the conversion price

• Preemptive rights: none

• A. Series A holders do not have voting rights under any circumstance.

• B. Series A holders have preemptive rights to buy new shares to maintain ownership.

• C. Any down-round automatically resets the conversion price to the lowest issuance price.

• D. Series A holders receive their liquidation preference before any distribution to common shareholders.

Best answer: D

Explanation: The exhibit states the preferred stock has a liquidation preference that is senior to the common stock. That priority means preferred holders must be paid up to the stated preference (and any specified unpaid amounts) before common shareholders receive liquidation proceeds. This is a core shareholder-rights distinction between preferred and common equity.

Liquidation preference describes payout priority if the issuer is liquidated (or in similar exit events, depending on the terms). When a preferred series is described as “senior to Common” with a stated preference (here, 1.0x the Original Issue Price plus declared unpaid dividends), it means preferred holders are entitled to receive that amount first, and only then can any remaining proceeds be distributed to common shareholders.

The same excerpt also addresses other shareholder-rights concepts (voting on an as-converted basis, anti-dilution via a weighted-average adjustment, and the absence of preemptive rights), but those terms do not change the basic conclusion about liquidation priority.

Question 11

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An investment adviser is onboarding a new retail client and provides an advisory contract for the client to e-sign. Which provision is required to be included as part of the advisory contract’s core terms?

• A. A description of the services and how the fee is calculated
• B. A requirement that any client dispute be decided by the state Administrator
• C. A clause making the contract non-cancelable for the first year
• D. A guarantee that the adviser will outperform a stated benchmark

Best answer: A

Explanation: An advisory contract should set out the key economic and relationship terms so the client can understand what the adviser will do and what the client will pay. A clear description of services and the method of compensation are core elements that must be addressed in the agreement. This aligns with the expectation that advisory arrangements be transparent and not misleading.

The key compliance goal for an investment advisory contract is clear, written disclosure of the basic relationship terms: what services the adviser will provide, what fees the client will pay (and how they’re computed), and practical terms like termination and the scope of the adviser’s authority to act for the client. These items let the client give informed consent and help prevent misleading or coercive arrangements.

Provisions that attempt to promise results, restrict a client’s ability to terminate, or shift regulatory authority are inconsistent with the principles governing advisory contracts and client protections under state law. The agreement should be written so the client can readily understand the services/fees and can end the relationship under reasonable terms.

Question 12

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

A retail customer asks an agent why the broker-dealer routes most marketable equity orders to a particular wholesale market maker. The agent mentions that the firm receives payment for order flow (PFOF) from that market maker.

Which statement about PFOF and best execution is INCORRECT?

• A. PFOF can be permissible if the arrangement is disclosed and managed
• B. PFOF can create a conflict because it may influence routing decisions
• C. If PFOF is received, routing to the paying market maker satisfies best execution
• D. The firm must still seek best execution regardless of receiving PFOF

Best answer: C

Explanation: Payment for order flow is compensation a broker-dealer may receive from a venue for routing customer orders. Because it can bias routing decisions, it creates a conflict that must be addressed through disclosure, oversight, and ongoing best-execution review. Receiving PFOF does not reduce or replace the broker-dealer’s duty to pursue best execution for the customer.

Payment for order flow (PFOF) is a routing arrangement where a broker-dealer receives compensation (cash or other economic benefits) from a market center/wholesaler for sending customer orders to that venue. The key compliance issue is conflict of interest: the firm could be tempted to route to the highest-paying venue instead of the venue offering the most favorable overall execution for the client.

Best execution remains a separate, ongoing obligation. Even if PFOF is disclosed and permitted under the firm’s policies, the broker-dealer must regularly evaluate execution quality (e.g., price improvement, effective spreads, speed, fill rates) and route orders based on the client’s best interests, not simply because a venue pays for the orders. The closest trap is assuming PFOF automatically makes one venue “best.”

Question 13

Topic: Topic II - Investment Vehicle Characteristics

A state-registered investment adviser is considering recommending a third-party private equity limited partnership to a retail client. The fund’s pitch deck highlights “institutional returns,” but the adviser learns the investment is locked up for 8 years, the fund may borrow to enhance returns, and the fee structure includes a 2% annual management fee plus 20% carried interest.

Before the client signs the subscription agreement, what is the best next step for the IAR?

• A. Register the fund’s limited partnership interests as securities in the state
• B. Notice file the fund with the state administrator before discussing it with the client
• C. Provide and review the fund’s PPM/LP documents, emphasizing illiquidity, leverage, and fees
• D. Execute the subscription and then deliver the PPM as a post-sale disclosure

Best answer: C

Explanation: Private funds such as private equity partnerships commonly have limited liquidity, may use leverage, and often charge management and incentive-style fees. A prudent and compliant workflow is to obtain, deliver, and review the private placement/offering documents with the client so the material risks and costs are understood before the client commits and signs subscription paperwork.

Private funds (hedge funds, private equity, venture capital) are typically offered by private placement and are not designed for frequent liquidity like mutual funds. The key investor-facing risks to cover before the client commits are (1) limited liquidity (lockups, gates, capital call structures, long time horizons), (2) leverage (which can magnify gains and losses), and (3) higher and more complex fees (management fees plus performance allocations/carried interest).

In a recommendation workflow, the adviser’s best next step is to ensure the client receives and can evaluate the actual offering documents (commonly the PPM and partnership/LP agreement) and to document the discussion of these features and risks before the subscription is executed. The takeaway is that disclosure and client understanding must occur before commitment, not after.

Question 14

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

An IAR tells a client: “For many large-cap U.S. stocks, prices rapidly incorporate earnings releases, analyst reports, and other publicly available data. Investors using only public information should not expect fundamental research to consistently beat a broad index, although insiders could still have an advantage.” This view is most consistent with which form of the Efficient Market Hypothesis (EMH)?

• A. Strong-form EMH
• B. Weak-form EMH
• C. Semi-strong form EMH
• D. A market that is inefficient by EMH standards

Best answer: C

Explanation: The statement describes a market where prices reflect all publicly available information (earnings, reports, analyst coverage). That is the semi-strong form of EMH. Under this form, consistently outperforming with fundamental analysis is unlikely, making passive indexing a logical baseline, while insider information could still confer an advantage.

EMH is commonly described in three forms based on what information is assumed to be incorporated into security prices. The scenario says prices quickly reflect public information like earnings releases and analyst reports, and it also notes insiders may still have an edge. That combination aligns with semi-strong form EMH: public information is impounded in prices, so a strategy based only on public data (including fundamental analysis) should not reliably generate risk-adjusted outperformance versus a comparable benchmark. The implication for portfolio construction is that passive, low-cost exposure (e.g., indexing) is often an appropriate default unless a client has a specific reason to pursue active management (such as specialized mandates, tax management, or risk controls).

Question 15

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

Jordan runs an online service that collects a client questionnaire and then sends each client a customized ETF model portfolio and periodic rebalancing suggestions. Clients pay $200 per month. Jordan also receives a revenue-share payment from a robo-platform when clients open and fund accounts through Jordan’s link, but that payment is not disclosed to clients. Which action best complies with a broad fiduciary disclosure standard and reflects Jordan’s likely adviser status?

• A. Register as required and disclose all direct and indirect compensation
• B. Keep the revenue share undisclosed because it does not change recommendations
• C. Avoid registration because ETFs are securities and not insurance products
• D. Disclose only the $200 monthly fee because it is paid by clients

Best answer: A

Explanation: Jordan appears to be “in the business” of providing individualized investment advice and is receiving compensation for it, so adviser status is likely. A fiduciary-style disclosure standard requires fair, full disclosure of material conflicts, including indirect compensation like revenue sharing from a third party. Registering as required and disclosing both compensation streams best aligns with those principles.

Investment adviser status is generally triggered when a person is in the business of providing advice about securities and receives compensation, whether the compensation is paid directly by the client or indirectly by a third party. Here, Jordan provides customized ETF recommendations and ongoing rebalancing suggestions on a regular basis, and is paid a monthly fee plus a third-party revenue share tied to client referrals. Because third-party payments can bias advice (or appear to), they are material conflicts that must be clearly disclosed to clients in a way they can understand, typically before or at the time advice is provided. The key takeaway is that indirect compensation counts as compensation and must be disclosed as a conflict, not hidden.

Question 16

Topic: Topic III - Client/Customer Investment Recommendations and Strategies

Which statement about retirement plans is most accurate?

• A. A 403(b) plan is typically sponsored by for-profit corporations for their employees.
• B. In a defined contribution plan, the employer guarantees a specific retirement payout regardless of investment results.
• C. A 401(k) is a defined benefit plan that guarantees a stated monthly benefit at retirement.
• D. A defined benefit plan promises a specific retirement benefit, and the employer typically bears the investment risk.

Best answer: D

Explanation: Defined benefit plans are characterized by a promised benefit (often formula-based), with the employer responsible for ensuring the plan can meet that obligation. Because the benefit is defined, poor investment performance generally creates a funding shortfall the sponsor must address. Defined contribution plans instead define the contribution, not the ultimate benefit.

The key distinction is what is “defined.” In a defined benefit plan, the plan defines the retirement benefit (for example, a monthly amount based on salary and years of service), so the employer/plan sponsor generally bears the investment and funding risk needed to deliver that promised benefit.

In a defined contribution plan, the plan defines the amount contributed to an individual account (often with an employer match), and the participant’s retirement outcome depends on contributions and investment performance-so the participant generally bears the investment risk. Common defined contribution examples include 401(k) plans (often corporate employers) and 403(b) plans (often public schools and certain nonprofits).

Question 17

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An individual applying to register as an investment adviser representative had a personal bankruptcy eight years ago and a written customer complaint that was settled while he was previously registered with a broker-dealer. When completing Form U4, he wants to answer “No” to the related disclosure questions because the matters were resolved.

Which compliance requirement best matches this situation?

• A. He should disclose these items on the adviser’s Form ADV instead of on his personal Form U4.
• B. He may answer “No” unless the state administrator specifically requests additional information later.
• C. He must disclose the events on Form U4; omitting them can be treated as a dishonest filing and a basis for denial or discipline.
• D. He only needs to disclose felony convictions; bankruptcy and settled complaints are not reported on Form U4.

Best answer: C

Explanation: Form U4 is the individual’s registration record and includes key background items such as disciplinary events and certain financial matters. The expectation is full, accurate disclosure, even if an event is old or was settled. Omissions or misleading answers can be viewed as a material misstatement and lead to denial, suspension, revocation, or other disciplinary action.

Form U4 is used to register and track an individual’s history, including items regulators consider important to investor protection-such as customer complaints and disciplinary matters (even if settled) and certain financial events like bankruptcy. The compliance outcome that best matches this fact pattern is “disclose on Form U4,” because the disclosure questions are designed to capture these categories and allow the regulator to evaluate fitness. Answering inaccurately (or leaving out requested information) is not a harmless omission; it can be treated as making a misleading filing and as an unethical business practice, which can trigger denial of registration or later discipline. The key takeaway is that complete disclosures matter as much as the underlying event.

Question 18

Topic: Topic II - Investment Vehicle Characteristics

A 52-year-old client wants a small allocation as an inflation hedge but specifies these constraints: (1) the position must be held in her existing brokerage account like a traditional security, (2) she does not want to arrange storage or worry about loss/theft of the asset, and (3) she wants to avoid the custody and regulatory uncertainty she associates with owning cryptocurrency directly. Which recommendation best satisfies all constraints?

• A. Invest in a commodity futures limited partnership for broad commodities exposure
• B. Buy bitcoin directly and hold it in a self-custodied digital wallet
• C. Purchase physical gold coins and store them in a home safe
• D. Buy shares of an exchange-traded product that holds gold bullion

Best answer: D

Explanation: A gold bullion exchange-traded product (ETP) provides precious-metals exposure through a security that can be bought and sold in a standard brokerage account. Because the fund/trust handles holding the bullion, the client avoids personal storage, theft, and loss concerns. It also avoids the unique custody and regulatory uncertainties of directly holding cryptocurrency.

The best fit is an exchange-traded product that holds gold bullion because it delivers precious-metals exposure in a familiar, regulated wrapper that trades like a stock. Precious metals held directly (coins/bars) create practical custody risks (storage, insurance, theft, and liquidity frictions). Digital assets such as bitcoin can be highly volatile and introduce operational custody decisions (private keys, wallet/provider risk) plus evolving regulatory treatment, which is exactly what the client wants to avoid. A commodity futures partnership may trade as a security interest, but it introduces a different structure and risks (derivatives/roll risk and often complex tax reporting) and does not specifically meet the client’s precious-metals focus.

Question 19

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An IAR is also registered as an agent of a broker-dealer (a dual registrant). A long-time advisory client in a fee-based account is told, “To reduce your costs, we should move you to my brokerage platform and buy this Class A mutual fund.” The representative does not discuss that the transaction would generate a front-end sales charge and an ongoing trail paid to the broker-dealer.

What is the primary ethical/compliance risk that must be addressed before implementing the recommendation?

• A. Failing to aggregate the order with other clients to improve execution
• B. Failing to clearly disclose the role change and the compensation-related conflict
• C. Failing to deliver a prospectus before the trade is executed
• D. Failing to obtain the client’s written discretionary trading authority

Best answer: B

Explanation: Because the representative is switching from an advisory relationship to a brokerage transaction, the client must understand the capacity in which the professional is acting and the material compensation differences. Sales charges and trails are material conflicts that can bias the recommendation. The central risk is misleading the client by presenting the switch as “lower cost” without full conflict and capacity disclosure.

The core issue is a dual-registrant “hat switch.” When an IAR recommends moving a client from a fee-based advisory account to a brokerage transaction, the client must be told (clearly and timely) the capacity in which the professional will act and the material conflicts created by compensation. A front-end load and ongoing trail are material because they create an incentive to recommend the product/account structure even if it is not in the client’s best interest. Presenting the change primarily as a cost reduction while omitting commission-based compensation is a misleading omission and an unethical business practice. The key takeaway is that role change + compensation conflict disclosure is the first problem to fix before any implementation details.

Question 20

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An agent at a broker-dealer sends the following message to 215 retail clients using the firm’s email system.

Exhibit: Compliance archive excerpt (auto-captured)

Item type: Retail email (bulk)
Prepared by: J. Lee (Agent)
Audience: 215 existing retail clients
Subject: "ABCX is a buy before earnings"
Contains specific security: Yes (ABCX)
Pre-approval required: Yes
Principal approval status: Not approved (sent 9:12 a.m.)

Based on the exhibit, which interpretation is best supported under Series 66 supervision principles?

• A. Pre-approval is only required when a message includes a guaranteed performance claim.
• B. Because the recipients are existing clients, the email is not subject to broker-dealer supervision.
• C. Only the agent, not the broker-dealer, is responsible for the content of the email.
• D. The broker-dealer must supervise and review agents’ communications, and failing to do so can be an unethical practice.

Best answer: D

Explanation: Broker-dealers are expected to establish and enforce supervisory procedures over associated persons, including reviewing recommendations and client communications. The exhibit shows a bulk retail email about a specific security that required pre-approval but was sent without principal approval. That supports the conclusion that supervision and monitoring are required and that failure to supervise can be unethical and sanctionable.

A core broker-dealer obligation is to reasonably supervise its agents to help prevent securities law and conduct violations. That supervision commonly includes monitoring recommendations and communications (such as bulk emails) because communications can be misleading, omit material facts, or amount to unsuitable or unapproved recommendations.

Here, the archived record shows a retail bulk email naming a specific security and explicitly indicating that pre-approval was required, yet it was sent before principal approval. That fact pattern supports the supervision takeaway: the firm must have and enforce procedures (review, approval workflows, and recordkeeping), and a failure to supervise associated persons is itself treated as an unethical business practice.

This is about the firm’s supervisory responsibility, not just the individual agent’s misconduct.

Question 21

Topic: Topic II - Investment Vehicle Characteristics

An investment adviser representative (IAR) is helping a client compare two job offers. One offer letter says the client will receive “incentive stock options,” and the other says “nonqualified stock options,” but neither letter includes the grant agreement or plan details. The client asks the IAR to estimate the after-tax value of each offer.

What is the IAR’s best next step?

• A. Obtain the grant agreement to verify ISO vs NQSO tax timing
• B. Assume the options are ISOs if the employer uses that label
• C. Notice-file the issuer’s option plan with the state administrator
• D. Amend the adviser’s Form ADV to disclose the client’s option grant

Best answer: A

Explanation: ISOs and NQSOs can produce very different tax results and therefore different effective compensation value. Before estimating after-tax outcomes, the IAR should verify the option type and key terms from the actual grant agreement/plan documents rather than relying on a high-level label in an offer letter. This keeps the analysis accurate and properly documented.

The key distinction is the tax treatment tied to the option’s classification and holding requirements. At a high level, NQSOs generally create ordinary income (often with withholding) when exercised on the bargain element, while ISOs may avoid regular income tax at exercise and can receive more favorable capital gain treatment if holding-period rules are met (though other tax effects, such as AMT considerations, may apply). Because the client’s question is an after-tax comparison of compensation, the IAR’s workflow should start by obtaining and reviewing the grant agreement/plan documents to confirm whether the grant is actually an ISO or an NQSO and to capture terms like vesting, expiration, and exercise price. Only then can the IAR model outcomes and document assumptions appropriately. Relying on labels or making regulatory filings is not the right sequence for this client-specific planning task.

Question 22

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

An SEC-registered investment adviser hires a local “financial coach” to promote the firm on social media. The coach is paid $150 for each new client who schedules a consultation and is given sample posts highlighting “market-beating results.” The firm does not require the coach’s content to be reviewed or approved before posting, and the posts do not mention that the coach is paid.

What is the primary ethical/compliance risk the adviser must address?

• A. Improper allocation of trades among advisory client accounts
• B. Failure to meet suitability standards for specific securities recommendations
• C. Unsupervised advertising with undisclosed paid solicitation/endorsement
• D. Custody arising from third-party handling of client funds

Best answer: C

Explanation: Paid client referrals and social media promotions are compliance-sensitive because they are advertisements and create conflicts of interest. The adviser must oversee the promoter’s communications to prevent misleading performance claims and ensure appropriate disclosure that the promoter is compensated. Allowing unreviewed, undisclosed paid endorsements is the central risk in the scenario.

The core issue is advertising and solicitation oversight. When an adviser pays a third party based on leads or new clients, the communication is a paid promotion that can be both misleading (e.g., “market-beating results”) and conflicted because the promoter is financially incentivized to induce prospects to engage the adviser. A compliant approach centers on supervision and controls over marketing communications and on ensuring prospects receive clear, prominent disclosure of material conflicts (including that the promoter is compensated), along with procedures to prevent exaggerated or unsubstantiated claims. The other choices describe important advisory risks, but they are not triggered by the facts (no funds handled, no specific recommendations made, no trade allocation activity described).

Question 23

Topic: Topic II - Investment Vehicle Characteristics

An IAR at a state-registered investment adviser drafts a written recommendation for a retail client to buy a corporate bond that is both callable by the issuer (at 100 starting in 18 months) and convertible into the issuer’s common stock at a fixed conversion price. The draft highlights the bond’s yield-to-maturity and says the client gets “upside with bond-like protection,” but it does not explain how the call and conversion features affect the bond’s market price or potential return.

Under the firm’s policy, all written recommendations must be reviewed by compliance before being sent to clients. What is the best next step?

• A. Notice file the recommendation with the state Administrator before discussing it with the client
• B. Revise the recommendation to describe the call and conversion features and how they can cap or change valuation (for example, include yield-to-call and the conversion premium), then submit it to compliance for review before sending
• C. Send the recommendation now and provide details about call and conversion features only after the client places the order
• D. Replace yield-to-maturity with current yield since embedded options do not affect value unless exercised

Best answer: B

Explanation: Callable and convertible features are embedded options that materially affect a bond’s valuation and the investor’s likely return. A call feature can limit price appreciation and make yield-to-call more relevant than yield-to-maturity, while a conversion feature can add value through equity upside but also changes the risk profile. The appropriate workflow step is to update the written recommendation with this balanced discussion and route it to compliance as required by firm policy.

The core issue is that embedded options change how a bond should be described and evaluated. An issuer call option generally benefits the issuer and can cap the bond’s price, making yield-to-call (and call risk) central when the bond is trading above par or is likely to be called. A conversion option generally benefits the investor and can cause the bond to trade at a premium because part of its value is “equity optionality,” so the client should understand the conversion terms and that the bond may behave more like the underlying stock.

In a written recommendation, these are material features that should be disclosed and tied to valuation/expected return (for example, YTC versus YTM, and the conversion premium/value). Since the firm requires pre-use compliance review of written recommendations, the next step is to revise for balanced disclosure and then submit it for review before sending.

Question 24

Topic: Topic IV - Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practice

A state-registered investment adviser (not registered as a broker-dealer) wants to help several retail clients buy interests in a private REIT offering. The firm plans to (1) solicit client subscriptions, (2) forward subscription paperwork and investor checks to the issuer, and (3) receive a selling concession from the issuer for each completed purchase. The CCO wants to proceed while keeping the firm “advisory only” and avoiding broker-dealer registration. What is the single best compliance decision?

• A. Proceed, because the investment adviser exclusion covers securities transactions for advisory clients
• B. Do not proceed unless the activity is conducted through a registered broker-dealer (or the firm registers as one)
• C. Proceed, but disclose the selling concession as a conflict
• D. Proceed, because being paid by the issuer is not brokerage activity

Best answer: B

Explanation: Broker-dealer registration is generally triggered when a person is in the business of effecting securities transactions for others, especially when compensation is tied to completed transactions. Here, soliciting subscriptions and receiving a selling concession are classic broker-dealer indicators. To satisfy the CCO’s constraints, the activity must be done through a registered broker-dealer (or the firm must register).

The core concept is the broker-dealer registration trigger: being in the business of “effecting transactions” in securities for others. In practice, the strongest indicator is transaction-based compensation (such as a selling concession) combined with solicitation, handling subscription paperwork, or otherwise participating in the sales process.

An investment adviser’s registration does not exempt the firm from broker-dealer requirements when it switches roles from giving advice to distributing securities for compensation. Proper disclosure of the conflict is important, but disclosure does not replace required registration. The clean way to proceed is to run the offering through a properly registered broker-dealer (or register the firm as a broker-dealer and the individuals as agents, as applicable).

Series 66 combined adviser and agent map

Use this map after the sample questions to connect individual items to state law, investment adviser fiduciary duties, broker-dealer conduct, portfolio concepts, client recommendations, and registration decisions these Securities Prep samples test.

    flowchart LR
	  S1["Client advice or state law scenario"] --> S2
	  S2["Classify adviser agent broker-dealer or security issue"] --> S3
	  S3["Check registration exemption and jurisdiction"] --> S4
	  S4["Analyze portfolio suitability and fiduciary duty"] --> S5
	  S5["Apply disclosure ethics and prohibited-practice rule"] --> S6
	  S6["Choose compliant action and documentation"]

Quick Cheat Sheet

Mini Glossary

• Investment adviser: Person or firm that provides securities advice for compensation.
• Fiduciary duty: Obligation to act in the client’s best interest where the standard applies.
• Suitability: Assessment that advice or a transaction fits client facts, objectives, risk, and constraints.
• Disclosure: Clear communication of material risks, conflicts, costs, and limitations before the client relies on the advice.
• Form ADV: Investment adviser registration and disclosure form, including client-facing brochure information.

In this section

• Series 66: Economic Factors
  Try 10 focused Series 66 questions on Economic Factors, with explanations, then continue with the full Securities Prep practice test.
• Series 66: Investment Vehicles
  Try 10 focused Series 66 questions on Investment Vehicles, with explanations, then continue with the full Securities Prep practice test.
• Series 66: Client Recommendations
  Try 10 focused Series 66 questions on Client Recommendations, with explanations, then continue with the full Securities Prep practice test.
• Series 66: Laws and Ethics
  Try 10 focused Series 66 questions on Laws and Ethics, with explanations, then continue with the full Securities Prep practice test.
• Free Series 66 Full-Length Practice Exam: 100 Questions
  Try 100 free Series 66 practice questions across the official topic areas, with answers and explanations, then continue with the full Securities Prep question bank.