NASAA Series 65 Last-Minute Exam-Day Cheat Sheet
High-yield regulatory matrices, NSMIA AUM thresholds, Form ADV deadlines, custody rules, and ethical red flags for final review before walking into Prometric.
📌 Quick Summary / Core Test Principles:Quick Reference: Mandatory SEC >= $110M; State < $100M; Buffer floor $90M; Form ADV Annual Amendment to SEC = 90 days; Brochure to Clients = 120 days; Initial Brochure = 48 hrs before or signing + 5-day cancel; Custody 3-day safe harbor; Qualified Client = $1.1M AUM or $2.2M Net Worth; Federal Criminal = $10k / 5 yrs; State Criminal = $5k / 3 yrs; State Civil SOL = Earlier of 2 yrs discovery or 3 yrs transaction.
Registration Thresholds
1. Investment Adviser Registration Thresholds & NSMIA Demarcation
| AUM Category | Statutory Threshold | Governing Regulator | Regulatory Notes & Transition Safe Harbors |
|---|---|---|---|
| Small Adviser | Less than $25 Million AUM | State Administrator | Must register with state Administrator in each state where maintaining an office or having >5 retail clients. Barred from SEC registration. |
| Mid-Sized Adviser | $25 Million to $100 Million AUM | State Administrator (Standard) | Must register with state. Exceptions allowing SEC registration: principal office in Wyoming (no state statute) or multi-state adviser (15+ states). |
| Eligible Federal Covered | $100 Million to $110 Million AUM | Choice: State or SEC | Adviser has discretion: may choose to register with the SEC or remain registered with applicable state Administrators. |
| Mandatory Federal Covered | $110 Million or More AUM | SEC Exclusively | Registration with SEC is mandatory under NSMIA. Must notice file and pay fees to states where maintaining a physical office or place of business. |
| Grace Period (SEC to State) | Falls below $90 Million AUM | Transition to State | If AUM drops below $90M at annual updating amendment, firm has 180 calendar days after fiscal year-end to register with states and file Form ADV-W. |
| Grace Period (State to SEC) | Reaches $110 Million AUM | Transition to SEC | Firm reaching $110M AUM has 90 calendar days after filing its annual updating amendment to complete registration with the SEC. |
💡 Pro Tip:Memory Anchor: <$100M = State; $100M–$110M = Choice; $110M+ = Mandatory SEC. The buffer floor before forced return to state regulation is $90M.
Form ADV Matrix
2. Form ADV Disclosure Documents & Delivery Rules
| Form ADV Part | Document Name & Purpose | Filing & Regulatory Role | Client Delivery Timelines |
|---|---|---|---|
| Part 1A / 1B | Regulatory Organization & Ownership | Filed with SEC and/or state via IARD. Details business structure, ownership, disciplinary events. | Not delivered to clients; public inspection on SEC IAPD portal. |
| Part 2A | The Firm Brochure (Plain English) | Core client disclosure: advisory services, fees, conflicts, disciplinary history, custody, and method of analysis. | Initial: At least 48 hours before signing contract OR at signing with 5-day penalty-free cancellation. Annual: Within 120 days of fiscal year-end if material changes. |
| Part 2A Appendix 1 | Wrap Fee Program Brochure | Specialized brochure for wrap fee programs where advisory management and trade execution are bundled into a single unified fee. | Delivered to prospective wrap fee clients in lieu of standard Part 2A prior to or at enrollment. |
| Part 2B | Brochure Supplement | Individual profile for each supervised person formulating advice or having direct client contact: education, 5-yr business, 10-yr disciplinary history. | Delivered to clients prior to or at the time the specific supervised person begins advising the client. |
| Annual Updating Amendment | Annual Form ADV Maintenance | Refreshes regulatory AUM, employee counts, and material updates across all parts. | Must be filed via IARD within 90 calendar days after the end of the adviser's fiscal year. |
💡 Pro Tip:Memory Rule: Annual ADV update to Regulators = 90 days. Annual Brochure/Material Changes to Clients = 120 days.
Custody Regulations
3. Custody Rules & Safe Harbor Deadlines
| Custody Scenario | Statutory Definition / Trigger | Compliance Requirement | Safe Harbor Window |
|---|---|---|---|
| Direct Custody | Holding physical cash, stock certificates, or possessing client bank login credentials | Maintain assets at qualified custodian (bank/BD); notify Administrator on Form ADV; deliver quarterly statements | Must have independent CPA surprise examination annually with Form ADV-E filed within 120 days. |
| Indirect Custody (Fee Deduction) | Authority to directly debit advisory fees from client accounts at custodian | Client provides written authorization; adviser sends concurrent invoice to client showing calculation; custodian sends statements | Exempt from annual surprise CPA audit in most states if custodian sends quarterly statements directly to client. |
| Inadvertent Receipt (Securities) | Client mistakenly mails or delivers stock certificates or checks in client name to adviser | Adviser must return the securities or funds to sender promptly to avoid custody status | Must return within 3 business days of receipt. |
| Third-Party Custodian Checks | Check drawn by client payable to third-party qualified custodian (e.g. Schwab, Fidelity) | Adviser acts solely as a conduit to forward funds to the custodian | Must forward to third-party custodian within 3 business days of receipt. |
💡 Pro Tip:Safe Harbor Rule: 3 business days to forward third-party checks to custodian; 3 business days to return inadvertent client assets. Beyond 3 days = statutory custody!
Prohibited Practices
4. Fiduciary Obligations & Prohibited Advisory Practices
| Prohibited Practice | Statutory Description | Legal Rule & Governing Standard | Allowable Exceptions |
|---|---|---|---|
| Borrowing from Clients | Borrowing money or securities from an advisory client | Strict breach of fiduciary duty and unethical business practice under USA Model Rules | Permissible ONLY if client is a financial institution / BD in the business of lending, or an immediate family member. |
| Lending to Clients | Loaning money or securities to an advisory client | Strict conflict of interest and prohibited practice under USA Model Rules | Permissible ONLY if adviser is an affiliate of a bank/BD in the business of lending, or client is immediate family. |
| Front-Running | Trading personal account ahead of a pending large client block order | Market manipulation and breach of duty of loyalty under IAA Section 206 | None. Client orders always receive absolute priority over firm or access person trades. |
| Scalping | Recommending a security to clients while secretly selling personal shares into the price rise | Antifraud violation (SEC v. Capital Gains Research Bureau) | Permissible only if fully disclosed in writing beforehand (extremely rare in practice). |
| Sharing in Client Profits/Losses | Taking a percentage of trading profits or guaranteeing against loss | Strictly prohibited for investment advisers and IARs under all circumstances | NONE. (Unlike BD agents who may share with prior written firm and customer approval). |
| Unauthorized Discretion | Trading without prior written discretionary authority | Oral discretion permitted for 10 business days after initial trade under USA for IAs only | After 10 business days, trading must cease until written discretionary authorization is signed. |
💡 Pro Tip:Crucial Exam Distinction: BD agents may share in customer accounts with joint ownership and firm consent. Investment advisers and IARs NEVER share in client profits/losses under any circumstances!
Performance Fees
5. Performance-Based Advisory Fees & Qualified Client Standard
| Element | Statutory Rule (IAA Section 205) | Qualified Client Dollar Threshold | Special Conditions |
|---|---|---|---|
| General Prohibition | Section 205(a)(1) bans fees based on a share of capital gains or capital appreciation | N/A | Protects retail clients from advisers taking excessive speculative risks. |
| Qualified Client Exception | Rule 205-3 allows performance fees for sophisticated institutions and wealthy individuals | $1,100,000 AUM with the adviser OR $2,200,000 Net Worth (excluding primary residence) | Net worth excludes primary residence and associated mortgage debt. |
| Fulcrum Fee Mechanism | Fee increases or decreases proportionately against an appropriate securities index benchmark | Qualified clients only | Performance must be measured net of all fees over a multi-year period (minimum 12 months). |
💡 Pro Tip:Qualified Client Threshold: $1.1M AUM or $2.2M Net Worth (excluding primary residence). Note: Different from Accredited Investor ($200k income / $1M net worth).
Statutory Sanctions
6. Statutory Penalties, Liabilities, and Statute of Limitations
| Category | Federal Law (IAA of 1940) | State Law (USA of 1956) | Procedural Enforcement Limits |
|---|---|---|---|
| Criminal Maximum Penalties | $10,000 fine, 5 years imprisonment, or both (IAA Section 217) | $5,000 fine, 3 years imprisonment, or both (USA Section 409) | Imposed exclusively by judicial criminal courts; regulatory agencies cannot imprison individuals. |
| Criminal Statute of Limitations | 5 years from date of offense | 5 years from date of offense (the 5-3-5 rule: $5k / 3 yrs / 5 yrs) | Criminal charges must be filed by state or federal prosecutors within 5 years. |
| Civil Liability Recovery | Restitution of advisory fees paid + actual damages | Consideration paid + 6% legal interest + court costs & attorney fees MINUS income received | Civil suits brought by injured clients against adviser, firm, or controlling persons. |
| Civil Statute of Limitations | Earlier of 2 years from discovery or 5 years from violation | Earlier of 2 years from discovery or 3 years from transaction date (2/3 Rule) | Action is permanently barred if brought after the earlier statutory deadline. |
| Customer Rescission Offer | Allows firm to buy back unsuitable security or refund advisory fee | Customer has 30 calendar days to accept or reject the written rescission offer | If customer fails to respond within 30 days, right to sue in civil court is permanently forfeited. |
💡 Pro Tip:Key Mnemonics: Federal Criminal = $10,000 / 5 Years. State Criminal = $5,000 / 3 Years. State Civil SOL = Earlier of 2 years from discovery or 3 years from transaction. Rescission response = 30 days.