Try 10 Series 31 Disclosure Documents sample questions with explanations, then continue with the full Securities Prep practice test.
Series 31 Disclosure Documents questions help you isolate one part of the NFA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.
| Item | Detail |
|---|---|
| Exam | NFA Series 31 |
| Official topic | Part 4 - CPO/CTA Disclosure Documents |
| Blueprint weighting | 17% |
| Questions on this page | 10 |
A branch supervisor reviews a CTA webpage before use. The CTA’s disclosure document states a 2% management fee and a 20% incentive fee on net new profits above each account’s high-water mark. The draft says, “Clients often paid incentive fees exceeding 35% of account equity last year.” The supervisor cannot tell whether that figure reflects all accounts, selected accounts, or proper fee calculations. Which action best aligns with Series 31 standards?
Best answer: C
Explanation: An unusually high incentive-fee claim may reflect unsupported or miscalculated performance, so the supervisor should verify it from underlying records before approval.
The supervisor should withhold approval until the claim is substantiated. An unusually high incentive-fee statement is tied to performance and fee methodology, so it warrants review of the supporting books and records to ensure the communication is fair, balanced, and accurate.
The core issue is supervisory verification of a performance-related fee claim. If promotional material says clients often paid unusually large incentive fees, that statement depends on actual trading results, correct fee computations, and proper use of the disclosed high-water-mark methodology. Because the claim could reflect calculation errors, selected-account reporting, or an unbalanced presentation, the supervisor should require underlying worksheets, account statements, and performance records before approving the piece. If the records do not fully support the statement, the material should be revised or not used. A disclosed fee formula or a generic disclaimer does not cure an unsupported claim. The key takeaway is that unusually high incentive-fee claims deserve closer review because they can misstate both fees and performance.
An AP of a CTA plans to use the following draft website excerpt to solicit new discretionary managed-account clients. Which action is most appropriate before it is used?
Exhibit: Draft disclosure excerpt
Program fees for new clients:
- 2% annual management fee, charged monthly
- 20% incentive fee on new net profits
Performance shown:
- 2023 composite return: +18.0%
- Returns are gross of management and incentive fees
- Composite includes several legacy accounts that paid no incentive fee
Best answer: A
Explanation: The excerpt pairs a 2%/20% fee offer with gross performance from a mixed-fee composite, so the performance presentation must be aligned to the fees prospects would actually pay.
The problem is not merely disclosure of fee differences; it is that the advertised performance does not reflect the fee structure being offered to new clients. When prospects are shown a 2% management fee and 20% incentive fee, the related performance should be net or otherwise presented in a way that is consistent with that fee arrangement.
Performance records for a CTA or managed-futures program should be presented so that the results are fair in light of the fees being described to the prospect. Here, new clients are being offered a 2% management fee and a 20% incentive fee, but the displayed 2023 return is gross of those fees and the composite includes legacy accounts that paid no incentive fee. That creates a mismatch: the shown return may overstate what a new client under the stated fee schedule would have experienced.
A proper fix is to present net performance reflecting the offered fees, or to separate performance by materially different fee arrangements so the comparison is not misleading. Simply disclosing that some accounts had different fees does not cure an inconsistent performance presentation. The key takeaway is that fee disclosure and performance presentation must work together, not point to different economic results.
A CTA’s disclosure document was accepted for use last month. This week, compliance learns that one of the CTA’s principals entered a final NFA disciplinary settlement that is a current event required to be disclosed. An AP wants to use the existing document tomorrow to solicit a new managed account. Assume the amended disclosure document must be submitted for NFA review before it may be used. What is the best next step?
Best answer: A
Explanation: Once the firm knows the document omits a current required disciplinary event, it should stop using the stale version and update and review it before reuse.
A disclosure document cannot stay in use once the firm knows it omits a current required disciplinary event. The proper sequence is to stop using the stale version, amend the disciplinary disclosure, complete supervisory review, and submit it for the required NFA review before using it again.
The core concept is that a CPO or CTA disclosure document must be current and accurate, including required disciplinary events involving the firm or its principals. Here, the firm already knows the existing document is outdated because it omits a current disciplinary settlement. That means the firm should not continue soliciting with the stale document.
The proper workflow is:
Verbal disclosure is not a substitute for a current written disclosure document, and delivering corrected pages only after solicitation reverses the required sequence. The key takeaway is that once a material disciplinary event is known, update and review first, then resume solicitation with the corrected document.
A CTA’s disclosure document, last reviewed 8 months ago, describes a systematic trend-following program in exchange-traded futures. The CTA has since shifted most managed accounts to a short-term options-on-futures strategy with higher turnover and materially different risks, and an AP wants to solicit prospects using the old document plus a new slide deck that says only “enhanced tactical trading.” Firm policy requires solicitation materials to match the current disclosure document and fully describe material strategy changes before use. What is the best supervisory action?
Best answer: C
Explanation: Material changes to the trading program and risk profile must be accurately reflected in the current disclosure document before prospects can make an informed managed-funds decision.
The best action is to stop solicitation until the written disclosure is updated to match the actual trading program. In managed-funds sales, investors need an accurate description of strategy and risks in the disclosure document, not a vague marketing phrase or oral explanation.
Disclosure statements and trading-program descriptions are central because they tell a prospect what the manager actually does, what risks follow from that approach, and what information the prospect should rely on before investing. Here, the CTA moved from trend-following futures trading to a short-term options-on-futures program, which is a material strategy change with a different risk profile. Using an old disclosure document plus a vague promotional phrase would prevent prospects from evaluating the program on an informed basis.
A supervisor should require that:
Oral explanations or prior delivery of older risk materials do not cure a stale or incomplete written description of the actual program being offered.
A CTA’s current disclosure document describes a diversified trend-following futures program. The CTA now plans to move new client accounts into a concentrated short-options strategy with materially different risks. What is the best description of the effect on the existing disclosure document?
Best answer: A
Explanation: A material change in the trading program can make the existing disclosure document misleading, so it should not continue to be used until updated in compliant form.
A disclosure document must remain accurate about the trading program being offered. When strategy changes materially—especially to one with different risks, concentration, or return characteristics—the old document is no longer a sound basis for solicitation and must be updated before continued use.
The core concept is material change. A disclosure document is meant to describe the actual trading program a CTA or CPO is offering, including its principal risks and approach. If the firm shifts from a diversified trend-following program to a concentrated short-options strategy, the risk profile, volatility, leverage characteristics, and potential loss patterns are materially different. That makes the existing document stale or misleading for new solicitations.
The key question is not whether some other details stayed the same, but whether the trading program being offered still matches what the document describes. If it does not, the document should be amended and used only in compliant updated form. A normal update cycle does not excuse a material mid-period change.
A CTA branch wants to keep using an approved disclosure document in a digital solicitation campaign. The review file shows:
Which deficiency should block continued use of the disclosure document?
Best answer: B
Explanation: A disclosure document should not continue in use when it no longer accurately describes the program’s actual trading approach and material risks.
The decisive problem is that the disclosure document misstates both the trading program and the risks investors would face. If the program now uses concentrated natural-gas futures and options, a document describing diversified financial futures with no options use is materially inaccurate and should not remain in use.
The core concept is that a CTA or CPO disclosure document must stay accurate and current as to the trading program and its material risks. Here, the document says the program trades diversified financial futures and does not use options, but actual trading has shifted to concentrated natural-gas futures and exchange-traded options. That is not a minor wording issue; it changes the nature of the strategy and the risk profile being presented to prospects.
Updated performance tables, logged risk-disclosure delivery, and current registrations or approvals do not cure a materially stale disclosure document. The proper supervisory response is to stop using the document until it is amended or replaced so the strategy description and risk discussion match actual practice. The closest distractors may improve documentation, but they do not address the fundamental problem that investors are being shown outdated strategy and risk language.
A CTA’s website and webinar describe its managed-account program as a “short-term, fully systematic index-arbitrage strategy with tight stop-loss limits.” During supervisory review, the firm’s disclosure document describes the trading program only as “the Advisor may trade futures and options using discretionary and systematic methods in any markets it deems appropriate.” An AP wants to continue soliciting while compliance plans a later update. Which action best aligns with Series 31 standards?
Best answer: D
Explanation: Solicitation should stop until the trading-program description and related risk disclosures accurately reflect the strategy being marketed.
The issue is disclosure-document accuracy and fair, balanced supervision. If the marketed strategy is specific but the written trading-program description is vague or inconsistent, the firm should not keep soliciting until the materials are revised and properly reviewed.
A CTA or CPO cannot market a specific trading approach while relying on a disclosure document that is so broad or vague that a prospect cannot tell what strategy is actually being offered. The trading-program description should fairly describe the material features of the program being sold, along with the related risks. When marketing says “short-term, fully systematic index arbitrage” but the disclosure says the advisor may trade almost anything, using either discretionary or systematic methods, the mismatch creates a supervisory and disclosure-integrity problem.
The durable supervisory response is to stop using the inconsistent materials, revise the disclosure and promotional content so they match, and approve the corrected version before further solicitation. Oral explanations, internal notes, or generic catch-all language do not cure an inaccurate written description.
The key takeaway is that broad wording is not a substitute for an accurate description of the actual program being marketed.
A commodity pool disclosure document includes the following excerpt:
Principal purchases: Two principals purchased 200 of 4,000 units at inception.
Purchase price: Same $1,000 per unit paid by outside investors.
Fees on units: Principal-owned units pay the same management and incentive fees.
Liquidity: Principals may redeem quarterly on the same notice terms as investors.
Other interests: The CPO and its principals receive the disclosed management and incentive fees.
Based solely on this excerpt, which interpretation is best supported?
Best answer: B
Explanation: Because the principals invested on the same unit, fee, and liquidity terms, the excerpt shows some alignment while expressly preserving disclosed compensation conflicts.
The excerpt supports a limited alignment point: principals invested their own money on the same terms as outside investors. But it also expressly says the CPO and its principals receive management and incentive fees, so compensation-related conflicts still must be evaluated.
Principal purchases in a pool disclosure document matter because they help a prospective investor assess whether insiders share economic risk with the pool. Here, the principals bought units at the same price, their units bear the same fees, and they have the same redemption terms as outside investors. Those facts support an alignment-of-interests inference because the principals have capital at risk on comparable terms.
That said, the excerpt separately states that the CPO and its principals receive the disclosed management and incentive fees. That means the existence of a principal investment does not eliminate potential conflicts created by compensation and control of the pool. The supported reading is therefore a balanced one: some alignment exists, but disclosed fee conflicts remain relevant.
A CTA’s branch AP drafts an email to prospects soliciting a managed account program. The email highlights a 3-year composite return history and states that the program earned 18%, 11%, and 9%. The CTA’s current disclosure document says accounts are charged a 2% management fee and a 20% incentive fee, but the email does not show the effect of either fee. During principal review, the piece is flagged before any prospect receives it.
What is the best next step?
Best answer: B
Explanation: Because the performance presentation omits management and incentive fees, it must be corrected to fairly reflect investor results before supervisory approval and use.
Performance used to solicit CTA business cannot be misleading, and omitting the effect of management and incentive fees can overstate what a client would actually experience. The proper workflow is to stop the piece, revise the performance presentation to reflect fees fairly, and only then approve it for use.
The core issue is fair performance presentation in managed-funds solicitation. If a CTA marketing piece shows returns without reflecting management and incentive fees, prospects may reasonably take the numbers as closer to actual investor experience than they are. That makes the immediate supervisory step correction, not distribution. In the approval sequence, the firm should require the piece to be revised so the performance is presented on a fee-reflected basis or otherwise not misleading, confirm the supporting records, and then approve it before any use. A disclosure document or standard risk disclosure does not cure a misleading performance claim in a separate promotional communication. Recordkeeping matters, but records support the claim; they do not fix an improper presentation.
A registered CTA wants to email QEP prospects a one-page performance summary that has not yet received principal approval. The piece says the program charges a 2% management fee and a 20% incentive fee, and it highlights that clients paid incentive fees equal to 31% of beginning net assets in 2024. The figure comes from an internal spreadsheet prepared by the trading manager, but the branch supervisor cannot trace it to account statements or fee-calculation workpapers. What is the best supervisory action?
Best answer: D
Explanation: An unusually large incentive-fee claim is effectively a performance claim, so it should not be used until it is traced to actual results and fee-calculation records.
The best action is to stop the piece from being used until the unusually high incentive-fee claim is verified. A large incentive-fee figure implies unusually strong performance, so supervisors should confirm the number against underlying books and records rather than rely on disclosure language or internal assurances.
A claim that clients paid incentive fees equal to 31% of beginning net assets is not just a fee-description point; it strongly implies exceptional trading profits and therefore functions like a performance-related claim. In a managed-funds context, that kind of statement warrants closer supervisory review because an unsupported fee figure can mislead prospects about both returns and the reliability of the firm’s records.
Risk language, investor sophistication, or a preparer’s certification do not cure an unsupported numerical claim.
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