Ethical practices chapter recap

Ch 4-8 Exam Essentials — Ethical Practices and Fiduciary Obligations

Standards of care. IA owes fiduciary duty (ongoing); BD owes Reg BI (at recommendation) for covered recommendations to retail customers; FINRA Rule 2111 suitability governs recommendations that are not subject to Reg BI. Fiduciary = care + loyalty + full disclosure + conflict management. Reg BI has four obligations: Care, Disclosure (Form CRS), Conflict of Interest, Compliance.

Code of Ethics (SEC Rule 204A-1). Initial holdings within 10 days; quarterly transaction reports within 30 days; annual holdings reports. Pre-clearance only for IPOs and limited offerings.

Compensation. Performance fees only with qualified clients ($1.1M AUM or $2.2M net worth; rising to $1.4M / $2.7M for contracts entered on or after June 29, 2026). All compensation disclosed in Form ADV Part 2A and the advisory contract.

Pay-to-play. SEC 206(4)-5: 2-year time-out after political contribution exceeding $350 (vote-eligible) or $150 (not). MSRB G-37: parallel 2-year ban with $250/$0 de minimis.

Prohibited practices framework. Four categories: market manipulation (10b-5, §9), misrepresentation (17(a)), account abuse (FINRA 2111 + NASAA SoP), personal conduct (FINRA 3210/3270/3280, 10b-5).

NASAA SoP on Investment Company Shares. Breakpoint sales, share-class abuse, failure to offer a Letter of Intent — all prohibited.

AML thresholds. SAR for any suspicious transaction $5,000+; CTR for cash above $10,000 in a single business day; structuring triggers SAR regardless of amounts. Never tip the customer.

Custody. Triggers: holding funds, withdrawal authority, GP role, login credentials. SEC Rule 206(4)-2 requires qualified custodian, quarterly statements direct from custodian, annual surprise audit. Min net worth under NASAA 202(d)-1: $35,000 with custody, $10,000 with discretion.

Agency cross (NASAA 102(f)-1). Permitted with prior written consent, per-transaction confirmation, and annual itemization — but never where the adviser recommended the trade to both sides.

Vulnerable adults (NASAA Model Act). 15-business-day hold on disbursements (extendable to 25); trading not held under the Model Act (FINRA Rule 2165 separately permits holds on transactions or disbursements); notify trusted contact and compliance; report to state administrator and APS. Civil immunity for good-faith reporting.

Reg S-P. Initial and annual privacy notices; right to opt out of non-affiliated third-party sharing.

Ethics exam traps — consolidated

1. "Registration means approval." Always false. Registration is approval of paperwork, never of merit.
2. "Guarantees of return are permitted with disclosure." Always false. No level of disclosure cures a guarantee.
3. "Selling away requires compensation." False. FINRA 3280 requires prior written notice regardless of compensation.
4. "Discretion means custody." False. Discretion alone is not custody. The combined authority to decide AND to withdraw is.
5. "A $9,000 cash deposit is below CTR threshold so no action." False. Pattern suggests structuring — file a SAR.
6. "Notify the client when filing a SAR." Always wrong. Tipping is itself a federal crime.
7. "Refunding a pay-to-play contribution cures the violation." False if discovered after the fact. The 2-year time-out applies regardless.
8. "Suitability applies whenever the BD has a customer." False. Suitability and Reg BI attach at recommendation; without a recommendation, only anti-fraud duties apply.
9. "Soft dollars require client consent each time." False. The Section 28(e) safe harbor requires disclosure in Form ADV, not per-transaction consent.
10. "Agency cross is prohibited." False as stated. It is permitted with strict disclosure and consent — but never where the adviser recommended the trade to both sides.