NASAA Series 66 Last-Minute Exam-Day Cheat Sheet
High-yield statutory matrices, State vs Federal IA cutoffs, IAR licensing triggers, custody rules, and Form ADV disclosure clocks for final review before walking into Prometric.
📌 Quick Summary / Core Test Principles:Quick Reference: State IA < $100M AUM; Federal IA >= $110M AUM; 5 retail client de minimis for State IA/IAR; 10 business days oral discretion for IA (0 days for BD); Qualified Client = $1.1M AUM or $2.2M net worth (excluding primary residence); Form ADV annual update within 90 days of fiscal year-end, brochure delivery within 120 days.
Most Heavily Tested Concept
1. State vs. Federal Covered Investment Advisers (NSMIA & AUM Tiers)
| Feature / Metric | State-Registered IA | Federal Covered IA (SEC) | Key Statutory Rule |
|---|---|---|---|
| AUM Threshold | Less than $100 Million | $110 Million or more ($100M-$110M has buffer choice) | Dodd-Frank Wall Street Reform Act / NSMIA 1996 |
| Registration Form | Form ADV Parts 1 & 2 with State Administrator | Form ADV Parts 1 & 2 with SEC via IARD | Investment Advisers Act of 1940 / Uniform Securities Act |
| State Touchpoints | Registers in each state where it has office or >5 non-institutional clients | Does NOT register with states; conducts 'Notice Filing' and pays state fee | NSMIA preemption: States cannot impose books/records or net capital exceeding SEC |
| Books & Records Requirements | Set by State Administrator of IA's principal place of business (home state) | Set exclusively by SEC (5 years total, first 2 in readily accessible location) | Rule 204-2 under Investment Advisers Act; Home-state rule protects state IAs |
| Financial / Net Worth Requirements | Custody: $35,000 net worth or bond; Discretion: $10,000 | No minimum statutory net worth; must maintain solvency and disclose insolvency | USA Model Rule 102(e)-1 vs SEC Form ADV Part 2A Item 18 |
💡 Pro Tip:Memory Hook: If an adviser reaches $110M AUM, it MUST register with the SEC within 90 days. If AUM drops below $90M, it MUST register with states within 180 days.
USA 1956 & 2002 Exclusions
2. The L.A.T.E. Exclusion & Professional Exemptions
| Entity / Professional | Exclusion Condition | When Exclusion is LOST | Regulatory Status |
|---|---|---|---|
| L.A.T.E. Professionals (Lawyers, Accountants, Teachers, Engineers) | Advice is SOLELY INCIDENTAL to professional practice and no separate fee is charged | Advertises as financial planner or charges a separate investment advisory fee | Must register as IA / IAR once separate fee is billed for securities advice |
| Broker-Dealers (BDs) | Advice is solely incidental to brokerage business and compensation is standard commission | Offers wrap fee programs or charges separate fee for financial planning / advice | Becomes an Investment Adviser if charging separate investment advisory fee or wrap fee |
| Banks, Savings Institutions & Trust Companies | Statutory absolute exclusion from definition of both BD and IA | Bank subsidiaries or bank employees selling non-deposit securities (e.g. mutual funds) | Exclusion applies to bank itself, NOT bank-affiliated broker-dealer subsidiaries |
| Publishers (Newspapers, Financial Magazines) | Bona fide publication of general and regular paid circulation | Publishes promotional material timed to specific market movements or individual inquiries | Lowe v. SEC: Impersonal, regular financial newspapers are excluded from IA definition |
💡 Pro Tip:If an accountant charges $250/hour for tax preparation and gives stock tips for free, EXCLUDED. If the accountant charges $500 for a written financial plan, MUST REGISTER.
IAR Licensing Drill
3. IAR Registration, State Touchpoints & De Minimis Rules
| Adviser Affiliation | Where IAR Must Register | De Minimis Exemption | Termination Notice Rule (Form U5) |
|---|---|---|---|
| IAR of State-Registered IA | Any state where IAR has a place of business OR has >5 retail clients residing in that state | Applies: 5 or fewer non-institutional retail clients in 12 months with NO place of business | BOTH the Investment Adviser firm and the IAR must promptly notify Administrator |
| IAR of Federal Covered IA | ONLY in states where the IAR maintains a physical 'Place of Business' | Not applicable: If IAR has NO place of business in state, NEVER registers in that state | ONLY the IAR must notify the Administrator (the SEC firm does not report to state) |
| Agent of Broker-Dealer | Any state where an offer or sale is directed; NO retail de minimis exemption exists! | Zero de minimis: A single retail customer in a state requires BD Agent registration | BOTH the Broker-Dealer firm and the Agent must promptly notify the Administrator |
💡 Pro Tip:Crucial Exam Trick: Federal Covered IAs do not register with states, but their IARs DO register with states where the IAR has a physical office!
Fiduciary Safeguards
4. Custody, Discretion & Surety Bonding Rules
| Operational Action | State IA Requirement | Federal Covered IA Requirement | Key Rule / Deadline |
|---|---|---|---|
| Oral Discretion (10-Day Grace Period) | Permitted for 10 BUSINESS DAYS following initial discretionary trade; written agreement required thereafter | Permitted for 10 business days under USA Model Rule; BDs NEVER get 10-day oral discretion | BDs must have written discretionary authority BEFORE entering the very first trade |
| Inadvertent Receipt of Client Funds/Securities | Must return or forward to third party within 3 BUSINESS DAYS to avoid having custody | Must return within 3 business days; third-party checks must be forwarded within 3 business days | Holding funds/securities > 3 business days triggers full custody requirements |
| Custody Notice & Financial Requirements | Must notify Administrator promptly; maintain $35k net worth or surety bond; file audited balance sheet | Subject to SEC Custody Rule 206(4)-2: Qualified custodian, quarterly statements, surprise annual audit | If net worth falls below minimum ($35k custody, $10k discretion), notify state by close of next business day |
| Direct Fee Deduction | Considered custody under state law UNLESS safe harbor met (written authorization, notice to custodian) | Treated as custody under SEC rule, but exempt from surprise independent audit if only custody touchpoint | State requires detailed invoice sent simultaneously to client and custodian with fee calculation |
💡 Pro Tip:If net worth drops below requirement: (1) Notify Administrator by close of next business day. (2) File financial report detailing condition by close of the following business day.
Disclosure Protocol
5. Form ADV Delivery & Brochure Rule (SEC Rule 204-3 & USA)
| Document / Disclosure | Initial Delivery Timing | Annual Delivery Timing | Exemptions from Delivery |
|---|---|---|---|
| Form ADV Part 2A (Firm Brochure) & 2B (Brochure Supplement) | State: >= 48 hours prior to signing contract, OR at signing if client can terminate penalty-free within 5 days. SEC: At or before signing. | Summary of material changes delivered within 120 days of fiscal year end (or brochure upon request); file ADV within 90 days | Contracts with registered investment companies (mutual funds) or impersonal advice costing < $500/year |
| Form ADV Part 3 (Form CRS - Client Relationship Summary) | Delivered to retail investors at or before the earliest of: recommendation, order placement, or account opening | Update within 30 days of material change; deliver updated version to existing retail clients within 90 days | Applies exclusively to retail investors; institutional clients do not receive Form CRS |
| Annual Financial Statement / Balance Sheet | Required in Part 2A if IA requires prepayment of fees > $500 (state) or > $1,200 (SEC) 6+ months in advance | Audited balance sheet must be included with ADV Part 2A Item 18 | Substantial fee prepayment triggers balance sheet disclosure to protect client unearned fees |
💡 Pro Tip:State 48-Hour Rule: If brochure is given at signing rather than 48 hours prior, client has 5 BUSINESS DAYS to terminate without penalty (firm may not charge penalty, but may charge earned fee).
Compensation Compliance
6. Performance Fees & Qualified Client Thresholds (Rule 205-3)
| Client Category | Performance Fee Eligibility | Statutory Criteria (Rule 205-3) | Special Restrictions |
|---|---|---|---|
| Retail Investor (General Public) | PROHIBITED | Net worth < $2.2M or AUM < $1.1M | Performance fees incentivize excessive risk-taking; strictly unlawful for general public |
| Qualified Client | PERMITTED | At least $1.1 Million AUM with the adviser, OR Net Worth > $2.2 Million (excluding primary home) | Contract must disclose that adviser may gain from unrealized gains and has incentive for risk |
| Fulcrum Fee (Mutual Funds) | PERMITTED | Fee fluctuates symmetrically based on fund performance relative to an appropriate index (e.g. S&P 500) | Bonus for outperformance must be exactly balanced by identical penalty for underperformance |
| Qualified Purchaser (3(c)(7) Fund) | PERMITTED | Natural person owning >= $5 Million in investments; institutional entities >= $25 Million | High-net-worth private equity and hedge fund standard under Investment Company Act |
💡 Pro Tip:Primary Residence Net Worth Test: When calculating the $2.2M net worth, EXCLUDE the value of the primary residence and mortgage up to market value. Any mortgage underwater is counted as a liability.
Ethics & Compliance
7. Fiduciary Duty vs. Suitability & Prohibited Practices
| Prohibited Practice | Statutory Definition | Governing Standard | Required Action / Legal Penalty |
|---|---|---|---|
| Agency Cross Transaction | Adviser acts as broker for BOTH advisory client and other party on same trade | Section 206(3) / USA Model Rule | Requires written client consent BEFORE transaction, annual disclosure of all cross trades; CANNOT recommend to both parties |
| Principal Transaction | Adviser sells securities from its own inventory to an advisory client | Section 206(3) / Advisers Act | Requires written disclosure and client consent BEFORE completion/settlement of EACH specific trade |
| Soft Dollar Compensation | Using client commission dollars to pay for research, market data feeds, and financial software | Securities Exchange Act Section 28(e) Safe Harbor | PERMITTED: Research reports, seminar attendance, Bloomberg terminals. PROHIBITED: Rent, travel, furniture, office computers |
| Borrowing from or Lending to Clients | Borrowing money or securities from advisory clients | USA Model Rule 102(a)(4)-1 | PROHIBITED unless client is a financial institution in the business of lending, or an affiliate/family member (broker-dealer only) |
💡 Pro Tip:Soft Dollar Golden Rule: Safe harbor covers products providing LAWFUL AND APPROPRIATE ASSISTANCE in investment decision-making. Furniture, hardware, and marketing expenses are strictly OUTSIDE safe harbor.