SERIES 66: LAWS, REGULATIONS & GUIDELINES — CHEAT SHEET

REGULATORY FRAMEWORK

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INVESTMENT ADVISER vs. BROKER-DEALER

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FIDUCIARY DUTIES (IARs & IAs)

Two Core Duties:

Duty of Loyalty

- Act solely in client's best interest - Disclose all conflicts of interest - No self-dealing; no undisclosed commissions

Duty of Care

- Conduct adequate investigation (suitability, know-your-client) - Manage assets prudently - Maintain competence in services offered

Cannot waive fiduciary duty — any attempt to limit liability is void.

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REGISTRATION REQUIREMENTS

SEC Registration Thresholds

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State Registration (Uniform Securities Act)

• Notice filing — supplement federal registration in states where IA has clients

• State law supplement applies; state can impose stricter rules

• Brochure (Form ADV Part 2A) — must deliver to all clients before engagement

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ADV FORMS & DISCLOSURE

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Key Rule: Deliver brochure before or at engagement; client has right to refuse and cancel within 5 days.

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FEES & COMPENSATION RULES

Prohibited Fee Structures

• ❌ Performance fees (based on gains/losses) — PROHIBITED for non-qualified clients

• ❌ Soft dollars used to pay for services not connected to research/execution

• ❌ Undisclosed third-party compensation (kickbacks, revenue sharing)

Permitted Structures

• ✅ AUM fees (1–2% typical) — most common; may decline with assets

• ✅ Flat fees (e.g., $5,000/year) — transparent

• ✅ Hourly fees — straightforward

• ✅ Performance fees — ONLY for qualified clients (≥$750K AUM or ≥$1.5M net worth)

Disclosure: Must disclose fee structure, breakpoints, and any unusual charges in ADV Part 2A.

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CUSTODY & CLIENT ASSETS

Custody Rules (for Advisers Holding Client Money/Securities)

Separate account — Client assets segregated; never commingled with firm assets

Third-party custody — Best practice: custodian (bank/broker) holds assets; adviser has no physical custody

Quarterly statements — If adviser has custody, must send quarterly statements to clients

Surprise audit — Must undergo annual surprise audit by independent CPA if holding client assets

Net worth requirement — Adviser holding custody must maintain minimum net worth ($35K per location or $1M aggregate)

Red Flag: If adviser requires you to send checks directly to the firm (not a custodian), that's unusual and increases fraud risk.

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SUITABILITY & KNOW-YOUR-CLIENT (KYC)

KYC Information Required

• Age, investment experience, income, net worth

• Investment objectives (growth, income, safety)

• Time horizon and risk tolerance

• Other assets and liabilities

• Tax situation

• Must be documented and updated regularly (at least annually)

Suitability Standard

• Recommendation must be suitable given client's profile

• Not required to be the "best" option, but must have reasonable basis

• BD & IA must document basis for suitability

Fiduciary Standard (IAs Only)

• More stringent than suitability

• IA must recommend the best option for the specific client

• IA owes undivided loyalty

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PROHIBITED PRACTICES

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Regulator	Jurisdiction	Enforces
SEC	Federal	Investment Advisers Act of 1940, Securities Act of 1933, Securities Exchange Act of 1934
FINRA	Self-Regulatory	Broker-dealers, sales practices, conduct rules (Rule 2210, etc.)
State Regulators	State	Uniform Securities Act, state-level investment adviser rules, IARs
NASAA	Multi-state	Develops Model Acts; coordinates state enforcement
Criterion	Investment Adviser (IA)	Broker-Dealer (BD)
Primary Role	Fiduciary; gives investment advice for fee	Agent; executes trades (commission-based)
Duty	Loyalty & care to client always	Suitability + best execution
Compensation	Fee (AUM %, flat, hourly)	Commission per trade
Registration	SEC (≥$110M AUM) or State	FINRA member; SEC
Custody	May hold client assets under strict rules	Holds securities in client accounts
Key Conflict	Must disclose all conflicts of interest	Must disclose conflicts; fair pricing rule
AUM	Registration Authority
≥ $110 million	SEC (if advising US clients)
< $110 million	State regulators (or SEC if exemption applies)
Exceptions: Multi-state advisers, pension consultants, SEC may require federal registration below $110M
Form	Content	When
ADV Part 1	Regulatory, financial, criminal history	Filed with regulator
ADV Part 2A (Brochure)	Investment strategy, fees, conflicts, services	Must deliver before engagement
ADV Part 2B (Brochure Supplement)	Education, work history, compensation of individual IA	On request; updated annually
Practice	Rule	Why Prohibited
Churning	Excessive trading to generate commissions	Violates suitability; harm to client
Misrepresentation	False statements about credentials, returns, fees	Fraud; SEC/FINRA enforcement
Commingling	Mixing adviser/firm assets with client assets	Misappropriation risk
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