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Section 4: Laws, Regulations, and Guidelines (30% of Series 65)

This is the most legal-heavy part of the exam. It covers the rules you must follow as an Investment Adviser.

1. The Key Laws

You must memorize these two laws:

  • The Securities Act of 1933: This law regulates the Primary Market (IPOs). It requires companies to give investors a document called a Prospectus, which contains all the facts about the company before they buy the new stock. It's the "paperwork" law.
  • The Securities Exchange Act of 1934: This law regulates the Secondary Market (trading). It created the SEC to police the stock exchanges and brokers. It's the "people and places" law.
  • The Investment Advisers Act of 1940: This law regulates people who get paid to give investment advice.

2. Who is an Investment Adviser (IA)?

You are an Investment Adviser if you pass the "ABC" Test:

  1. You give Advice about securities.
  2. You do it as part of a regular Business.
  3. You receive Compensation (you get paid for the advice). If you meet all three, you must register with the government as an IA.

3. The Fiduciary Duty

This is the most important ethical concept on the Series 65. As an Investment Adviser, you are a Fiduciary. This means you are legally required to put your client's interests above your own. You cannot recommend a stock just because it pays you a high commission; you can only recommend it if it is the absolute best thing for the client.

4. State vs. Federal Registration

Investment Advisers have to register either with the Federal Government (SEC) OR with the State Government (where their office is).

  • State-Registered IA: Small advisers (less than $100 million in client money). They register with their state Administrator.
  • Federal-Covered IA: Huge advisers (more than $110 million in client money). They register directly with the SEC.

5. Unethical Business Practices

Things that will lose you your license:

  • Churning: Buying and selling stocks in a client's account over and over again, just to generate commissions for yourself, without actually helping the client.
  • Borrowing Money: You are generally never allowed to borrow money from a client (unless the client is a bank).
  • Testimonials: Historically, Investment Advisers were totally banned from using client testimonials in their advertisements. (The rules have softened recently, but it remains heavily restricted).

Key Terms Glossary

  • Fiduciary: A person legally appointed and authorized to hold assets in trust for another person, required to act in their best interest.
  • Prospectus: A formal legal document required by the SEC that provides details about an investment offering to the public.
  • Churning: Excessive trading in a client's account to generate commissions.

Mini-Quiz

Q1. An Investment Adviser is legally bound to put their client's interests ahead of their own. What is this legal standard called?

  1. The Suitability Standard
  2. The Fiduciary Standard
  3. The Reciprocity Standard

Answer: B. Investment Advisers are held to a strict Fiduciary standard.

Q2. Which law created the SEC and regulates the secondary market (trading on exchanges)?

  1. The Securities Act of 1933
  2. The Securities Exchange Act of 1934
  3. The Investment Advisers Act of 1940

Answer: B. The Act of 1934 created the SEC to regulate the secondary markets.