Series 65 & 66 Question on State-Registered Investment Advisers

Let’s kick off the new school year with a practice question that could easily show up on your Series 65 or Series 66 exam:

A state-registered investment adviser must do all of the following except:

A. file an audited balance sheet with the Administrator if the adviser uses a qualified custodian
B. file an audited balance sheet with the Administrator if the adviser maintains custody
C. file an unaudited balance sheet with the Administrator if the adviser has discretion but not custody
D. file an audited balance sheet with the Administrator if the adviser accepts prepayment in excess of $500 six or more months in advance

EXPLANATION: NASAA tends to pull some factoids from their own model rules and policy statements that no normal human could have expected. I could easily see them expecting you to have read their model rule called “Financial Reporting Requirements for Investment Advisers,” and, even though they swear their exams don’t reward memorization . . . well, whatever. Turns out, if the adviser has custody or accepts prepayment, they need to file an audited balance sheet, complete with an opinion by the CPA, with the Administrator. If the adviser has discretion but not custody, the balance sheet must be filed, but it does not have to be audited, saving the adviser the expense of paying a CPA firm to review the adviser’s books. If the adviser does not have custody, we assume it does not have to file an audited balance sheet.

ANSWER: a

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