60 Series 66 Exam Concepts You Need to Know Before Test Day

NPV discounts every cash flow back at the required rate (cost of capital) and gives you a dollar figure; accept any project with a positive NPV. IRR is the discount rate that forces NPV to zero, so you accept when IRR exceeds the cost of capital. The two can rank competing projects differently because IRR implicitly assumes interim cash flows get reinvested at the IRR itself, which is often unrealistic, while NPV assumes reinvestment at the cost of capital. When NPV and IRR conflict on mutually exclusive projects, NPV wins because it measures actual value added in today's dollars.

Memory hook:NPV gives dollars, IRR gives a rate; when they fight, dollars win.

Duration measures how sensitive a bond's price is to interest rate changes: the approximate percentage price move equals duration times the change in yield, and prices and rates always move inversely. Three drivers extend duration: longer maturity, lower coupon, and lower market yield. A zero-coupon bond has no interim cash flows, so its duration equals its maturity, making it the most rate-sensitive bond for a given maturity. A high-coupon bond returns cash faster, shortening duration. For the exam, you rarely compute duration; you rank bonds. Given two bonds, the one with longer maturity and lower coupon will swing hardest when rates move.

Memory hook:Long maturity, low coupon, low yield: the three levers that stretch duration.

The current ratio divides current assets by current liabilities and includes everything, inventory included. The quick ratio strips out inventory and prepaid items, leaving only assets convertible to cash almost immediately, so it is the harsher test of short-term liquidity. A firm can show a healthy current ratio while the quick ratio reveals it is stuffed with slow-moving inventory. Debt-to-equity moves to the other side of the balance sheet: total debt divided by shareholders' equity measures leverage, how much the company is financed by creditors versus owners. Rising debt-to-equity means more fixed obligations and more risk in a downturn. Liquidity ratios answer can you pay next year; leverage answers who owns the risk.

Memory hook:Quick means quick cash: no inventory allowed. Debt-to-equity asks who financed the firm.

Standard deviation measures total risk, both market risk and the fund's own idiosyncratic risk; beta measures only systematic risk, the volatility that comes from moving with the market. A diversified fund's unsystematic risk is largely diversified away, so beta is the fair comparison tool there. Alpha is performance above what the fund's beta predicted, a measure of manager skill. Sharpe ratio divides excess return over the risk-free rate by standard deviation, so it rewards return per unit of total risk. The decision rule: compare Sharpe ratios across funds, higher is better, and use beta-based measures only when comparing to a market benchmark.

Memory hook:Standard deviation sees everything; beta only sees the market; Sharpe pays for risk taken.

P/E divides price by earnings per share and works only when earnings are positive and reasonably stable, so it suits established, profitable firms. P/B divides price by book value and stays usable when earnings are negative or cyclical, and it is the go-to multiple for banks, insurers, and other asset-heavy businesses. Earnings quality is the distortion to watch: a one-time gain inflates the E in P/E, making the stock look artificially cheap, while a one-time charge does the opposite. Book value can also be distorted, since buybacks shrink equity and write-offs gut book. Always ask what is inside the denominator before trusting the multiple.

Memory hook:No earnings, no P/E: fall back to book. One-time items poison the E.

Yield-to-maturity assumes you hold to the final date and receive par. Yield-to-call assumes the issuer calls the bond at the call date and call price, cutting the stream short. When a bond trades at a premium and is callable at par, the call is the issuer's rational move: they can retire a bond paying above-market coupons by paying only face value. That means yield-to-call is the lowest of the bond's yields and is the number that governs, because the prudent investor should underwrite the worst-case outcome. The yield ranking for a premium bond callable at par is: yield-to-call is lowest, then current yield, then yield-to-maturity.

Memory hook:Premium bond callable at par: the call is the worst case, and you buy the worst case.

The conversion ratio tells you how many common shares each convertible bond or preferred share converts into, and it is fixed at issuance. Conversion parity is the point where the convertible is worth exactly its stock value: multiply the conversion ratio by the current stock price to get the convertible's parity value in stock terms. A convertible almost always trades above parity because the investor pays a premium for the conversion option plus the bond's downside protection. The premium is the difference between the convertible's market price and its parity value, and the exam wants you to compute it: market price minus conversion value.

Memory hook:Ratio times stock price gives parity; what you pay above that is the option's premium.

Ratings from agencies like Moody's and S&P grade the likelihood of default, and the investment-grade line sits at BBB- or Baa3 and above. Anything below that is high yield, or junk. Credit spreads compensate for default risk, and they behave asymmetrically: in risk-off markets, investors flee to quality, Treasury prices rally, Treasury yields fall, and spreads over Treasuries widen on riskier bonds, so junk prices get hit from both directions. The key distinction is that a rating measures default probability, not market risk; a bond can lose value from rate changes without any downgrade. Ratings also lag reality, which is why spreads often move before agencies act.

Memory hook:BBB- is the fence; below it is junk. Flight to quality widens spreads and sinks Treasuries' yields.

Cumulative preferred accrues any missed dividends as arrears; the company must clear them before paying common shareholders anything. Noncumulative preferred simply loses a skipped dividend forever, which is why cumulative features command more investor protection. Floating-rate preferred resets its dividend periodically off a benchmark rate, so its price stays relatively stable when rates move, unlike fixed-rate preferred whose price falls as rates rise. In liquidation, the seniority ladder runs secured bondholders first, then preferred shareholders, then common shareholders last. Preferred also lacks a maturity date in most cases and typically carries no voting rights, which distinguishes it from common on both ends.

Memory hook:Cumulative keeps a tab; noncumulative forgives and forgets. Bonds, preferred, common: that is the payout ladder.

An American Depositary Receipt is a U.S.-traded certificate representing shares of a foreign company held on deposit, so investors get U.S. market convenience with foreign economic exposure. The currency exposure does not disappear: dividends are declared in the foreign currency, converted to dollars by the depositary, and possibly subject to foreign withholding. The investor remains exposed to exchange rate moves on both price and income. Sponsored programs are created with the issuer's participation, so the company supports the program and typically covers depositary fees. Unsponsored programs are set up by a depositary bank without the issuer's involvement, and multiple unsponsored programs for the same stock can exist. Holders generally vote through the depositary rather than directly.

Memory hook:ADR trades in New York but earns in the foreign currency. Sponsored has the issuer's blessing; unsponsored does not.

Open-end funds are bought and redeemed directly with the fund at net asset value, and forward pricing applies: an order received today gets the next computed NAV, not the price you saw when ordering. Closed-end funds issue a fixed number of shares that then trade intraday on an exchange at whatever the market will pay, so they can persistently trade at premiums or discounts to NAV. ETFs also trade intraday, but the creation and redemption mechanism keeps their market price close to NAV. UITs hold a fixed, unmanaged portfolio; investors can redeem at NAV or sell in the secondary market. The exam tests which vehicles trade at NAV and which can trade away from it.

Memory hook:Open-end prices forward at NAV; closed-end floats free; ETFs hug NAV through creation and redemption.

Class A shares charge a front-end sales load but offer breakpoints: larger investments qualify for reduced or waived loads, and A shares carry the lowest ongoing asset-based fees, so they suit large investments and long horizons. Class B shares have no front load but impose a contingent deferred sales charge that declines over a schedule of years, then typically convert to A shares; they lack breakpoints, so big investments are penalized. Class C shares carry a small CDSC that usually applies only in the first year plus higher annual asset-based fees that never convert, making them economical for short to intermediate horizons but expensive for long ones. Match the class to the horizon and the dollar amount.

Memory hook:A for big and long, B for small and patient, C for short and out.

These private funds share a common structure: limited access and regulatory relief in exchange for restricting who may invest, typically accredited investors who meet income or net worth standards. Hedge funds often use leverage and short selling, and they impose lockups plus limited redemption windows, commonly quarterly, so money cannot leave on demand. Private equity buys entire companies or controlling stakes and locks capital up for years, often a decade, with capital called over time. Venture capital funds the earliest-stage companies, carrying the highest failure risk and the longest illiquidity. The common thread the exam wants: sophisticated investors accept lockups, illiquidity, and leverage in exchange for the potential of outsized returns.

Memory hook:Venture seeds, equity buys, hedge trades: all lock up money from accredited investors only.

Leveraged and inverse ETFs reset their exposure daily, which means compounding works for you in trending markets and against you in choppy ones, so a 2x fund held for a month will not deliver 2x the month's return. They are trading tools, not buy-and-hold investments. Exchange traded notes are debt obligations of the issuing bank: you own a promise, not assets, so issuer credit risk is the defining feature, and an ETN can default even if the index performed. Digital assets split by function: some are currencies or commodities, like Bitcoin, while others are sold as investments and can be securities depending on the facts. The exam wants you to separate the wrapper risk from the underlying exposure in each case.

Memory hook:Daily reset compounds daily, not long-term. An ETN is a promise, not a portfolio.

An option buyer pays a premium for a right, not an obligation, and can simply let the contract expire worthless; the seller, who collected the premium, is the one obligated to perform. Futures bind both parties, each posting margin, so either side can face unlimited obligation. Two option strategies anchor the exam. A covered call, long stock plus a short call, generates premium income but caps upside at the strike plus premium. A protective put, long stock plus a long put, acts as insurance: the premium is the cost, and the put strike sets a floor under losses while leaving upside intact. Know which side bears obligation and where each payoff flattens.

Memory hook:Option buyers hold a right; sellers hold a duty. Covered calls cap gains; protective puts build a floor.

A fixed annuity is a contract with the insurance company's general account promising a set return, so it is not a security and is regulated by state insurance departments. An indexed annuity credits returns tied to an index, often with caps and participation rates, but its guarantees generally keep it outside securities regulation as well. A variable annuity invests in a separate account the policyholder directs, so the value fluctuates and the contract is a security, requiring securities registration and a licensed seller, alongside state insurance oversight. Variable life insurance follows the same logic: separate account, security. Surrender charges lock money up for years, which makes any annuity suitable only for long-horizon money that will not be needed early.

Memory hook:Separate account means security. General account means insurance. Surrender charges demand a long horizon.

When the client is an entity, the adviser must take instructions from the person legally authorized to act for it: the trustee for a trust, the executor or administrator for an estate, the general partners for a partnership, the managing members for an LLC, and the officers or board for a corporation or charity. The critical layer is that the authorized person is a fiduciary for someone else, and the adviser's recommendations must respect that duty. A trustee owes loyalty to the trust's beneficiaries, so an adviser working with a trust is indirectly serving the beneficiaries, not the trustee's personal interests. Document who holds authority before accepting instructions or opening the account.

Memory hook:Trustee speaks for trusts, executor for estates, partners for partnerships, members for LLCs, and beneficiaries stand behind them all.

Risk tolerance is the client's emotional willingness to watch balances fall without panic selling; risk capacity is the objective financial ability to absorb losses and still meet goals. They can point in opposite directions, and capacity is the binding constraint: a retiree with modest assets cannot prudently run an aggressive portfolio no matter how brave the questionnaire answers. Data gathering runs through identification documents, questionnaires, and interviews covering goals, cash flow, balance sheet, tax situation, and time horizon. Behavioral overlays matter because biases like loss aversion and anchoring distort decisions. ESG and values-based criteria are legitimate nonfinancial considerations the adviser must honor when the client states them, even when they narrow the opportunity set.

Memory hook:Tolerance is the stomach; capacity is the wallet. The wallet sets the limit.

CAPM prices systematic risk only: expected return equals the risk-free rate plus beta times the market risk premium, where the premium is the expected market return minus the risk-free rate. Beta of 1 means the asset moves with the market; above 1 amplifies market moves in both directions, so a beta of 1.5 should rise roughly 15 percent if the market rises 10 percent, and fall harder when it drops; below 1 dampens moves, and a portfolio heavy in low-beta assets will lag rallies but cushion declines. CAPM assumes unsystematic risk is diversified away, which is why only beta gets rewarded with expected return. Compare the CAPM expected return to actual forecasts to judge whether an asset looks cheap or rich.

Memory hook:Risk-free plus beta times the premium. Beta over 1 is a lever on the market, up and down.

MPT's engine is correlation: combining assets whose returns are not perfectly correlated reduces portfolio risk without necessarily reducing return, and the lower the correlation, the greater the diversification benefit. Perfectly correlated assets offer no risk reduction at all. The efficient frontier is the set of portfolios delivering the maximum expected return for each level of risk; anything below it is inefficient because another portfolio offers more return for the same risk. The Efficient Market Hypothesis comes in three strengths: weak says past price data is already reflected, semi-strong says all public information is, and strong says even insider information is. Accepting a stronger form pushes you toward passive indexing, since active management cannot systematically win in a fully efficient market.

Memory hook:Low correlation builds the frontier. Weak is history, semi-strong is public, strong is everything.

Strategic asset allocation sets long-term target weights for stocks, bonds, and cash based on the client's goals, risk tolerance, and time horizon, then rebalances back to those targets whenever market moves push the portfolio away from them. Tactical allocation deliberately departs from those targets to exploit shorter-term market views, such as overweighting a sector expected to outperform. The style decision is separate: active managers try to beat a benchmark through selection and timing, while passive managers track an index at lower cost. When evaluating a fund, check manager tenure, since a long-tenured manager's record is actually attributable to that manager, and watch for style drift, where a small-cap fund quietly fills with mid- and large-cap names and no longer plays its intended role in the client's plan.

Memory hook:Strategic sticks to targets; tactical takes temporary detours.

Dollar-cost averaging invests a fixed dollar amount on a schedule, so the same dollars buy more shares when prices fall and fewer when they rise, lowering average cost per share without forecasting. Sector rotation shifts holdings toward industries expected to lead the next phase of the business cycle, moving from defensive names toward cyclicals as a recovery begins, for example. Volatility management uses diversification, position sizing, and hedging to smooth returns. Leveraged and inverse strategies need special care: leveraged funds use derivatives to multiply daily index returns, and inverse funds profit when the index falls, but both are built around daily resets, so compounding can distort results over longer holding periods. Because these products can deviate sharply from client expectations, their risks must be clearly disclosed before any recommendation.

Memory hook:DCA buys more when prices are low; leverage resets every day.

Growth investors pay high price-to-earnings and price-to-book multiples for companies with rapidly expanding earnings, betting momentum continues. Value investors hunt for cheap stocks trading below intrinsic worth, low multiples, often with turnaround stories. Income-oriented clients need current cash flow from dividends and interest with principal stability, while capital appreciation clients accept volatility now for a larger future nest egg, which suits younger investors with long horizons. The benchmark must match the mandate: judge a value manager against a value index and a growth manager against a growth index. Comparing a small-cap value fund to the S&P 500 measures the style gap rather than manager skill, and it can make a good manager look bad or a weak one look brilliant.

Memory hook:Judge each manager against its own mirror: value vs value, growth vs growth.

The holding period sets the rate: gains on assets held one year or less are short-term and taxed as ordinary income, while assets held more than one year qualify for preferential long-term rates. Basis is what you paid plus commissions, and it adjusts upward when you reinvest dividends or capital gain distributions, so skipping that adjustment means paying tax twice on the same money. The wash-sale rule disallows a loss when you sell a security and buy a substantially identical one within 30 days before or after the sale. The loss is not destroyed, it is deferred by adding it to the replacement shares' basis, and the old holding period carries over to the replacement shares as well.

Memory hook:One year and a day for long-term; wash sales defer, not delete.

Qualified dividends are taxed at the same preferential rates as long-term capital gains, but only if the stock met the holding-period requirement around the ex-dividend date; otherwise they are ordinary income. Marginal bracket thinking means every additional dollar is taxed at your top rate, and extra income can push you across thresholds. The alternative minimum tax is a parallel calculation with its own rates: preference items such as interest on certain private-activity municipal bonds get added back, so a client safe from regular tax can still owe AMT. For Medicare beneficiaries, IRMAA surcharges on Part B and Part D premiums are set by modified adjusted gross income from two years earlier, and they work in tiers, so one extra dollar of income can jump you into the next premium bracket.

Memory hook:IRMAA looks back two years; AMT reaches tax-exempt bonds.

Traditional IRA contributions may be deductible depending on income and whether the client or a spouse is covered by a workplace plan; growth is tax-deferred, and withdrawals are taxed as ordinary income with required minimum distributions beginning at the mandated age. Roth contributions are never deductible, but qualified distributions, including all earnings, are tax-free, and the original owner never faces RMDs. A conversion moves traditional money into a Roth by recognizing ordinary income now at the client's marginal rate, which makes sense when current brackets are lower than expected future ones. Two five-year clocks exist: one establishing the account for tax-free earnings, and separate clocks on each conversion affecting the early-distribution penalty. Run the bracket arbitrage math before converting.

Memory hook:Deduct now, pay later (traditional); pay now, never again (Roth).

Defined benefit plans promise a specific pension based on a formula involving salary and years of service, so the employer bears the investment risk. Defined contribution plans such as 401(k)s deliver whatever contributions plus investment results accumulate, shifting risk to the employee. A 403(b) serves employees of schools and nonprofits, typically through annuities or mutual fund custodial accounts. Governmental 457(b) plans carry a signature advantage: distributions after separation from service avoid the 10% early-withdrawal penalty. SIMPLE IRAs suit small employers with employee salary deferrals plus a required employer contribution, while SEPs are funded only by the employer, up to a set percentage of each eligible employee's compensation, with minimal paperwork. A solo 401(k) lets a self-employed owner contribute as both employee and employer, maximizing contributions and allowing plan loans and Roth buckets.

Memory hook:DB promises the check; DC rolls the dice; 457 exits penalty-free.

ERISA fiduciaries must act prudently, diversify plan investments to minimize the risk of large losses, follow the plan documents, and act solely in participants' interest. The QDIA is what a plan places money in when a participant makes no investment election, with target-date funds, balanced funds, and managed accounts qualifying, which protects the fiduciary from imprudence claims on those default dollars. Diversification is a duty, not a suggestion, though employer stock in company plans receives special treatment. Nonqualified deferred compensation is fundamentally different: it is an unfunded, unsecured promise to pay later, so the employee is a general creditor if the employer fails. It is selective rather than broadly covering employees, and taxation is generally deferred until the money is paid.

Memory hook:QDIA covers silence; NQDC is a promise, not a pot.

A 529 plan offers tax-free growth and tax-free withdrawals for qualified education expenses, with the contributor retaining control and the ability to reclaim funds, though earnings on nonqualified withdrawals face tax and penalty. Financial aid formulas treat it favorably as a parent asset. A Coverdell ESA also permits tax-free education spending, including K-12 costs, but carries a low annual contribution limit, income phase-outs, and an age limit. UTMA/UGMA accounts are irrevocable gifts: the child controls the assets at majority, and aid formulas assess student-owned assets more heavily than parent assets. HSAs deliver a triple benefit: deductible contributions, tax-free growth, and tax-free qualified medical withdrawals, with no use-it-or-lose-it rule. After age 65, nonmedical withdrawals avoid the penalty but are taxed as ordinary income.

Memory hook:529 keeps the keys; UTMA hands them over at majority; post-65 HSA cash is penalty-free but taxed.

Gift and estate taxes share a unified credit, meaning a single lifetime exemption that taxable gifts during life count against dollar for dollar, leaving less shelter available at death. The annual gift exclusion is separate: each donor can give each recipient that amount each year without touching the lifetime exemption or filing a gift tax return. Portability lets a surviving spouse inherit a deceased spouse's unused estate exemption, but only if the executor elected it on a timely filed estate tax return. Donor-advised funds work in two steps: the donor contributes irrevocably to a sponsoring organization and takes the charitable deduction immediately, then advises on grants to charities over time. No additional deduction occurs when grants are made, and the donor cannot direct the money back.

Memory hook:Annual exclusion is free; above it, lifetime credit pays; portability passes the rest.

Joint tenants with right of survivorship requires equal ownership shares, and the survivor automatically inherits the deceased owner's share, bypassing probate and overriding the will. Tenants in common can hold unequal shares, each owner can will their share, and there is no survivorship feature. Tenancy by the entirety is survivorship ownership for married couples only, with added protection: one spouse's judgment creditor generally cannot reach the property, and both spouses must consent to sell. Per stirpes on a beneficiary designation means a deceased beneficiary's share flows down to that beneficiary's own descendants. TOD and POD registrations transfer securities or bank assets directly to named beneficiaries outside probate. A QDRO is the court order in divorce that divides qualified plan assets without triggering a taxable distribution.

Memory hook:TIC splits and wills; JTWROS merges; TBE adds marriage armor.

A limit order sets a price boundary, buy at or below your limit or sell at or above it, guaranteeing price but not execution. A stop order sits dormant until the market trades at the stop price, then becomes a market order, guaranteeing execution but not price. Short selling means selling borrowed shares hoping to buy them back cheaper; it must be done in a margin account, losses are theoretically unlimited, and the short seller pays any dividends to the lender of the shares. Margin accounts let clients borrow against securities, magnifying both gains and losses. For settlement, regular-way equity trades settle on trade date plus one business day, options settle the next business day, and cash-account purchases must be paid for by settlement.

Memory hook:Limit locks price; stop locks action, only one guarantee each.

An introducing broker-dealer takes orders and services clients but contracts out the back office, while a clearing broker-dealer or custodian handles settlement, bookkeeping, and safeguarding of assets. Market makers stand ready to buy and sell for their own account, earning the spread while supplying liquidity. That distinction drives the compensation question: in a principal trade the firm sells from or buys into its own inventory and earns a markup or markdown embedded in the price, while in an agency trade the firm acts as the customer's agent and charges a commission. Best execution requires reasonable diligence to obtain the most favorable terms available considering price, speed, and likelihood of execution. Payment for order flow means the firm receives compensation for routing orders to a particular venue, and that arrangement must be disclosed.

Memory hook:Principal prices in a markup; agency adds a commission.

Time-weighted return compounds the returns of each subperiod between cash flows, ignoring deposits and withdrawals, which is why it measures manager skill and drives performance comparisons. Dollar-weighted return is the internal rate of return on the actual cash flows, so it measures the investor's experience; a manager can post strong time-weighted numbers while a client who bought high and sold poorly earns less. The Sharpe ratio adjusts for risk: excess return over the risk-free rate divided by standard deviation, so a higher number means more reward per unit of total volatility. Current yield is annual interest divided by the current market price, ignoring any gain or loss to par. For real comparisons, subtract inflation from nominal returns and apply the tax rate to get after-tax return.

Memory hook:Time-weighted tests the manager; dollar-weighted tests the investor.

An investment adviser meets three prongs, all of which must be present: giving advice about securities or making securities recommendations, for compensation, in the regular course of business. Miss any prong and the person is not an adviser. Firms with assets under management above the federal threshold, plus investment company advisers, register with the SEC and become federal covered advisers. States cannot register or examine them, but the adviser must notice-file in states where it has clients and pay fees, and states retain anti-fraud authority plus the power to investigate complaints. The de minimis exemption protects advisers with no place of business in the state who had fewer than six resident clients during the preceding twelve months; once the sixth resident client appears, state registration is required.

Memory hook:Advice, compensation, business: three prongs or no adviser; six clients ends de minimis.

Exempt reporting advisers do not register with the SEC but must still file reports. Two groups qualify: venture capital advisers and private fund advisers managing below the private fund AUM threshold. Being exempt from registration is not being exempt from rules. These advisers still file Form ADV through the IARD system, maintain books and records, pay filing fees, and remain fully subject to anti-fraud provisions. The exemption reflects a regulatory judgment that advisers to sophisticated, institutional private fund investors warrant less supervision than advisers serving retail clients. The exam wants you to recognize both halves: who qualifies for the status, and the fact that reporting and anti-fraud obligations survive the exemption intact.

Memory hook:Exempt from registration, never from reporting or fraud rules.

An investment adviser representative is a natural person who, for an adviser, makes recommendations or renders advice about securities, solicits or negotiates advisory services, or supervises those who do. Note what pulls someone in: soliciting for an adviser counts, and exercising discretionary authority over client accounts counts even without giving advice. Compensation matters in the solicitor context, since a person who solicits advisory clients for compensation registers as an IAR. The exclusions are narrow: attorneys, CPAs, engineers, and teachers whose advice is incidental to the practice of their profession and who receive no special compensation for the advice. The moment a lawyer charges separately for investment advice, the incidental shield disappears and IAR registration is on the table.

Memory hook:Solicit, advise, or control accounts: IAR. Incidental and uncompensated: not.

An agent is a natural person who effects securities transactions for a broker-dealer or solicits orders, typically for compensation. Effecting or soliciting for the firm's account or business is the trigger. The exclusions matter on the exam: a person who deals only in exempted securities and receives no commission or similar transaction-based compensation is not an agent, and issuers selling their own securities in exempt transactions generally are not agents either. The compensation test is the hinge, because someone handling exempted securities stays excluded only while no commissions flow. Once transaction-based pay appears, the exclusion vanishes and agent registration with the state Administrator is required. Read the question for both the securities involved and how the person gets paid.

Memory hook:Effect or solicit for a broker-dealer and you're an agent, unless exempt securities and no commission.

A broker-dealer is a natural person or firm in the business of effecting securities transactions: either for the account of others, the broker side, or for its own account, the dealer side. The regular-business element separates a broker-dealer from an isolated trader. The exclusions are the exam's focus: issuers selling their own securities are not broker-dealers, and neither are persons with no place of business in the state who deal only with institutional investors or other issuers, since retail contact would end that protection. Banks, savings institutions, and trust companies are also excluded. The place-of-business test is the hinge: an out-of-state firm with no office in the state that confines its dealing to institutions stays outside registration requirements.

Memory hook:Broker trades for you; dealer trades for itself; issuers and institutions stay out.

A security is broadly defined to include stocks, bonds, notes, and investment contracts, and the investment-contract test is how courts stretch the definition to new products: an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. Apply those four elements and you can classify almost anything. Fixed annuities fail the test because the insurance company, not the investor, bears the investment risk and the payout is guaranteed, so there is no profit expectation from a promoter's efforts. Variable annuities pass because the value depends on a separate account's performance, putting market risk on the investor. Life insurance policies and most commodities also fall outside the definition, though commodity pools and commodity-linked securities can be securities.

Memory hook:Money, common enterprise, profit, others' efforts: four prongs make a security.

Securities can reach a state market three ways. Notification applies to federal covered securities, such as exchange-listed stocks and investment company shares: the issuer simply tells the Administrator the security will be sold there, and the state cannot require registration, though antifraud authority survives. Coordination registers the security with the state at the same time it is registered federally, and state effectiveness follows the federal effective date. Qualification is for purely state-level offerings, where the Administrator actually reviews the filing and can deny effectiveness. Separately, transaction exemptions (isolated nonissuer transactions, institutional sales, unsolicited orders) and security exemptions (government, bank, and nonprofit issues) remove the need to register at all.

Memory hook:Notification is a courtesy call, coordination rides the SEC's coattails, qualification stands alone for state review.

Registration is not a one-time event. Form ADV must be updated annually within 90 days of the adviser's fiscal year end, and any material change, like a new address or a disciplinary event, must be amended promptly. Form U4 amendments work the same way for individuals: reportable events, including customer complaints, criminal charges, or outside business activities, must be reported promptly, not saved for renewal. IARs must complete 12 continuing education credits annually, split evenly between Products and Practice and Ethics and Professional Standards, with missed credits carried forward as a deficiency. Books and records are kept five years, with the first two in an easily accessible place.

Memory hook:90 days to refresh ADV, 12 credits to stay sharp, 5 years of records with 2 close at hand.

Supervision is a duty of process, not a guarantee of perfection. An adviser must adopt and enforce written supervisory policies reasonably designed to catch violations by its IARs; a supervisor with a reasonable basis for believing a representative is compliant, supported by actual follow-up, has done the job. What the Administrator punishes is the supervisor who ignored red flags: repeated customer complaints, unusual trading, or a rep who dodges review. Broker-dealers face the same structure with agents, including principal review of trades and correspondence. The exam tests the response duty: seeing a warning sign and doing nothing is itself a violation, even if the underlying abuse never occurred.

Memory hook:Reasonable system plus real response equals compliance; ignored red flags equal liability.

The Administrator's toolkit is broad. Subpoenas can compel testimony and document production. Cease-and-desist orders can issue before any hearing, stopping conduct immediately pending review. Registration can be denied or revoked for causes like a felony conviction, a false filing, or a securities law violation, and the order can extend to bar the person from the industry. Victims get remedies too: rescission offers, civil penalties, and criminal prosecution for willful violations. The critical exception to remember is that antifraud authority reaches everything. A security or transaction exempt from registration is never exempt from the antifraud provisions, so lying in an exempt offering still triggers the full enforcement apparatus.

Memory hook:Exempt from registration never means exempt from fraud; the Administrator's antifraud sword cuts everywhere.

Form ADV Part 2 is the brochure clients actually read, so delivery timing is heavily tested. A new client must receive the brochure before or at the time of entering into the advisory contract; a renewal client who received it within the prior 12 months does not need another copy. The adviser must amend the brochure within 90 days of fiscal year end whenever disclosure becomes materially inaccurate, and must deliver the updated brochure, or a summary of the material changes, to clients within 120 days of fiscal year end. Product-specific obligations layer on top: when recommending a specific product, the adviser must give the client or prospect the risks and costs involved before the recommendation, so the client can evaluate it.

Memory hook:Brochure before the deal, amend in 90, deliver in 120.

Two absolute prohibitions protect clients from misleading claims. First, no person may represent that a registration filed with the Administrator means approval. Registration only shows the paperwork was filed and the fee paid; the state has not vetted the person's competence or honesty. Telling a client that the state approved the registration is a dishonest practice, and the exam loves this trap because the statement sounds reassuring. Second, no adviser may guarantee performance or promise against loss, period. There is no disclosure, contract language, or client waiver that makes a performance guarantee legal. Even a sincere guarantee backed by real assets violates the rule, because future results can never honestly be promised.

Memory hook:Registration is a receipt, not a seal of approval; nobody can promise tomorrow's returns.

Under the NASAA model rule, testimonials are prohibited in adviser advertising; a client's praise, even a genuine one, cannot be used to sell. Presenting past performance is allowed but tightly constrained: it must be fair and balanced, cannot imply future results, and hypothetical or model performance must carry a disclaimer that it does not represent actual results. Broker-dealer advertising rules are similar, and the same supervision applies to electronic channels. Social media posts, email blasts, and websites are communications that must be reviewed and retained; a firm cannot claim a rogue tweet was unknowable when its procedures never covered the platform.

Memory hook:State rule: no testimonials, no implied future, and every platform needs a supervisor.

State law mandates what an advisory contract must say. It must prohibit assignment to another adviser without the client's consent, describe the services to be provided, and spell out how the adviser is compensated, including how fees are calculated, when they are payable, and whether they are negotiable. Performance-based compensation is the restricted item: charging a fee tied to account performance is allowed only if the adviser makes full disclosure and the client meets the qualified client standard, meaning sufficient assets under management or net worth. The exam's recurring trap is a performance fee charged to an ordinary retail client with no disclosure; that fails both prongs and is the clearest contract violation on the test.

Memory hook:Consent to assign, describe the pay, and performance fees need a qualified client plus disclosure.

Custody is defined broadly: an adviser has custody whenever it holds client funds or securities or has any arrangement giving it access to them, including authority to withdraw fees. That last part surprises people, but direct fee deduction is custody. The core obligation is placing assets with a qualified custodian, such as a bank or a registered broker-dealer, which must send account statements directly to the client at least quarterly; the adviser must have a reasonable belief, after due inquiry, that those statements were sent. An independent public accountant must verify the assets on a surprise basis at least once each calendar year, so the adviser never knows exactly when the auditor arrives.

Memory hook:If you can touch the money, even to grab your fee, you have custody; the surprise exam comes at least once a year.

Discretion and trading authorization are different powers. Discretion means choosing what to trade: which security, whether to buy or sell, or how much. That authority must be in writing, signed by the client, before the first discretionary order. Trading authorization is broader access to the account without decision-making power; it lets the representative act on the client's standing instructions but does not permit independent judgment. The exception everyone trips over is the time-and-price instruction: a client who says buy 200 shares of ABC at the open has specified everything, so no written discretion is needed. The moment the rep picks the security or the size, written discretionary authority is required.

Memory hook:Time and price, no writing; pick the stock or size, get the signature.

AML programs require firms to know their customers and report suspicious activity. A Suspicious Activity Report is filed when a firm knows or suspects a transaction of at least 5,000 dollars involves funds from illegal activity or has no apparent lawful purpose. Red flags include structuring deposits to stay under reporting thresholds, third-party wires, and customers who cannot explain the source of funds. The newer duty is protecting vulnerable adults: when an adviser or IAR reasonably believes an elderly or dependent client is being exploited, the firm must report the suspected exploitation to the appropriate state agency, such as adult protective services, and may temporarily delay the suspicious disbursement while reporting.

Memory hook:Five thousand in doubt, file a SAR; suspect elder exploitation, call protective services.

Firms hold sensitive client data, so regulators require protection before, during, and after a crisis. Cybersecurity duties mean written policies and safeguards for client information, plus procedures for responding to intrusions and notifying affected clients. Privacy rules require safeguarding personal information and controlling how it is shared. Business continuity planning requires procedures to keep the firm operating through an emergency; disaster recovery covers restoring systems and data afterward. Succession planning is the personal version: an adviser, especially a solo practitioner, must designate someone who can contact clients and access records if the key person dies or becomes disabled, so accounts are never orphaned.

Memory hook:Continuity runs through the storm, recovery rebuilds after it, succession answers who's next.

A fiduciary occupies a position of trust, and the law splits the duty into two parts. Duty of care requires competent, diligent advice suited to the client's objectives and profile; the adviser must gather the information needed to make a suitable recommendation and monitor it. Duty of loyalty requires the client's interest to come first, ahead of the adviser's compensation, relationships, and convenience. Conflicts are the pivot point: an adviser must either eliminate a conflict or fully disclose it and obtain the client's informed consent before proceeding. Half-disclosure does not qualify; the client must understand the conflict well enough to reject the arrangement if they choose.

Memory hook:Care means suitable advice; loyalty means client first; conflicts get eliminated or consented to, never hidden.

Soft dollars arise when an adviser directs client commissions to a broker in exchange for research or other services. Section 28(e) of the Exchange Act provides a safe harbor: paying a commission higher than the lowest available is permissible if the adviser determines in good faith that it is fair in relation to the value of both brokerage and research provided. The research must benefit the client whose commissions paid for it, not some other account or the adviser's general overhead. Items like office rent, computer equipment, or staff salaries fall outside the safe harbor. The adviser must disclose its soft dollar practices, including how it uses commissions, in the brochure.

Memory hook:Commission dollars buy research for the client who paid them, never the adviser's furniture.

Compensation creates conflicts, and the rule is disclosure, not prohibition. A dual-hatted representative must tell the client which role applies: advice given as an adviser carries fiduciary duties, while a brokerage recommendation earns a commission, and the client deserves to know the difference and the economics. Referral compensation is treated the same way; an adviser may pay or receive a fee for referrals, but only if the client is told about the arrangement at or before entering the contract. The unifying standard is that all material compensation connected to the engagement must be disclosed. If a payment would influence the adviser's behavior, or matter to a reasonable client, it belongs in the disclosure.

Memory hook:Every dollar that changes hands over the client must be disclosed; referral fees are legal only in daylight.

The law treats an adviser's personal dealings with client money as inherently conflicted. Borrowing from or lending to a client is prohibited, with narrow exceptions, such as a broker-dealer subject to regulatory lending rules extending margin credit, or loans between the firm and an affiliate; an individual representative cannot rely on any exception for a personal loan from a retail client. Sharing in a client account's profits and losses is also barred unless two conditions are met: the client gives written consent, and the sharing is proportional to the contribution made. A representative who shares profits must also have the firm's approval. The exam tests the pairing: consent plus proportionality, with both in writing, or the arrangement fails.

Memory hook:No personal loans with clients; share profits only in writing and only in proportion.

Insider trading rests on two elements: the information must be material, meaning a reasonable investor would want it before trading, and nonpublic, meaning it has not been released to the marketplace. Anyone who trades on it, or tips it in exchange for a benefit, is liable, including a representative who overhears a client's merger plans. Market manipulation is the other side of the coin: creating a false impression of the market. Churning trades a controlled account excessively for commissions. A wash sale sells and repurchases the same security to generate activity without changing beneficial ownership. Matched orders pair simultaneous buy and sell orders to paint false volume.

Memory hook:Material and nonpublic equals hands off; wash sales fake trades, matched orders fake demand.

Selling away is recommending securities outside the firm's approved shelf without the firm's knowledge or approval; the representative profits personally while the employer bears the supervisory risk. The counterweights are reporting duties. Outside business activity must be reported to the supervisor in writing before engaging in it, so the firm can assess whether it conflicts with client interests. Personal securities transactions follow the same logic: when a person joins the firm, an initial holdings report lists securities accounts in which the person has a beneficial interest, and quarterly transaction reports document subsequent trades. The exam pairs these with selling away: the violation is not owning securities, it is hiding them.

Memory hook:Report the outside activity before you start it; list holdings at hire, trades each quarter.

Pay-to-play rules cut the link between political money and government advisory contracts. Under the SEC rule that states commonly mirror, a contribution above 350 dollars to an official the person can vote for, or above 150 dollars to any other official of that government entity, triggers a two-year time-out: the adviser cannot receive compensation for advising that entity's assets, even if the adviser never solicited the contribution. The rule also restricts advisers from soliciting contributions for political committees and parties from certain persons, and it applies to covered associates, not just the firm. The exam's calculation move is simple: identify the recipient, apply the right limit, and start the two-year clock.

Memory hook:Vote for them, 350; can't vote for them, 150; either way, two years on the bench.

Churning requires three ingredients: the representative must control the account, through discretion or practical influence over the client; the trading must be excessive relative to the client's objectives; and the activity must be unsuitable. Without control, frequent trading is just an active client. Excessiveness is measured with turnover metrics: divide the lesser of total purchases or total sales by the average account value; a high ratio suggests the account's holdings are being rapidly replaced, generating commissions without a strategy. Cost-to-equity ratios show what percentage of the account is consumed by costs. Alongside this, remember that every client's information is confidential; it may not be revealed without consent or legal compulsion, regardless of the client's size.

Memory hook:Control plus excess equals churning; turnover uses the lesser side over average value.