Review of Section G of the NASAA Test Specifications

Disclosures and Capacity for Broker Dealers

1. Broker vs. Dealer Capacity

   • In any transaction, a broker-dealer acts as either a broker (agent) or dealer (principal).
   • Broker/Agent: Contacts another firm for trades, charges commissions.
   • Dealer/Principal: Trades from their own inventory, charges markup/markdown.
   • Disclosure of capacity is required on every trade confirmation.
   • Cannot be both broker and dealer in the same transaction.

2. Investment Advisors

   • Requires written disclosure when acting as principals or agents.
   • Fiduciary Nature: Paid typically by fees, not transactions.
   • Cross-Transactions: Written disclosure needed before completing the trade.

Conflicts of Interest

1. Proprietary Products

   • Brokers must disclose if promoting their own firm's products.
   • Sales Contests: Must be disclosed and are often frowned upon.
   • Research Reports: Must disclose any banking relationships with the company being reported on.

2. Investment Advisor Conflicts

   • Ownership: Advisors must disclose if they own recommended securities.
   • Incentives/Gifts: Advisors must disclose any gifts or incentives received.
   • Dual Role Disclosure: If an advisor is also an agent of a broker-dealer, this must be disclosed.

Model Fee Disclosure

1. Broker Dealer Fee Disclosures
   • Must cover all potential fees like stock issuance, account transfer, wiring funds, margin interest, etc.
   • Does not include commissions or markups/markdowns on the disclosure document (these appear on trade confirmations).

Unlawful Representations

1. Approval by Regulatory Bodies

   • Cannot imply approval of qualifications by any regulatory body (SEC, FINRA, state administrators).
   • Registration is not approval; cannot be represented as such.

2. Performance Guarantees

   • Unethical to guarantee investment performance.
   • Permitted only in very specific circumstances (e.g., parent company guaranteeing subsidiary's debt).

Client Contracts and Agreements

1. Contract Details

   • Must specify services, duration, fees, and if fees are refundable.
   • No Waiver for Underperformance
   • Assignment: Requires client consent.
   • Change in control requires client notification and/or consent.
   • Written form required under the Uniform Securities Act.

2. Brochures/Form ADV

   • Usually Form ADV Part 2A (firm) and 2B (personnel).
   • 48-hour advance delivery required, otherwise a five-day free look period applies.
   • Material changes in the brochure must be communicated within 120 days.
   • For fees over $500 paid six months in advance, a balance sheet is required.

3. Wrap Fee Programs

   • Specific brochure required for wrap fee programs detailing included/excluded services.

4. Solicitor Brochures

   • Third-party solicitors must provide specific brochures detailing relationships and compensation.

Correspondence and Advertising

1. Regulatory Concerns

   • Focus on content over delivery.
   • Firms must have WSPs (Written Supervisory Procedures) for these communications.
   • Communications cannot be deceptive or misleading.
   • No highlighting or altering of prospectuses.

2. Social Media, Emails, and Websites

   • Content must be clear about whether materials are recommendations or just informational tools.

Test Tips

• Section G covers about 10-11 questions on the NASAA exams for the Series 65/66.
• Be familiar with regulatory distinctions between broker-dealers and investment advisors.
• Know the specifics of disclosure requirements, conflict of interest rules, and unlawful representations.
• Understand the different client contract and agreement requirements, including wrap fee and solicitor disclosures.
• Regulatory emphasis on content integrity for all forms of client communication and advertising.