Enrolled Agent (EA)

Correct: Under the USA PATRIOT Act and the Customer Identification Program (CIP) rules, financial institutions (including investment advisers) must obtain specific identifying information from each customer. For non-U.S. persons, the minimum requirements include a name, date of birth, address, and one or more of the following: a taxpayer identification number, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard.

Incorrect: The requirement to obtain a U.S. Social Security Number is not absolute for non-U.S. persons, as they may not be eligible for one; alternative government-issued identification is permitted. Waiving identification requirements based on the source of funds (such as FATF member banks) is not permitted under CIP rules, which require independent verification of the customer’s identity. There is no regulatory requirement for a secondary attestation from a U.S. embassy or consulate to validate a foreign passport for CIP purposes.

Takeaway: For non-U.S. persons, a Customer Identification Program (CIP) allows for the use of foreign government-issued identification, such as a passport or alien ID card, in lieu of a U.S. Taxpayer Identification Number.

Correct: Under both the Investment Advisers Act of 1940 and the Uniform Securities Act, an Investment Adviser has a fiduciary duty to provide full and fair disclosure of all material facts regarding its services. When an IA adds a core service like behavioral coaching, it must update its Form ADV Part 2A (the firm’s brochure) to describe the service, how it is provided, and any associated fees. This ensures that clients can make an informed decision about the value and cost of the services being offered.

Incorrect: Replacing standard suitability questionnaires with proprietary psychological profiles is incorrect because suitability assessments are a regulatory requirement that cannot be bypassed. Restricting services to institutional clients does not exempt an adviser from recordkeeping requirements, as the Uniform Securities Act and federal law require diligent recordkeeping for all advisory activities. Guaranteeing that a service will prevent losses is a prohibited and fraudulent practice, as advisers are strictly forbidden from guaranteeing specific investment results or performance outcomes.

Takeaway: Any material change to an Investment Adviser’s service model or fee structure must be clearly disclosed in the Form ADV Part 2A to satisfy fiduciary disclosure obligations.

Correct: Under the Investment Advisers Act of 1940 and the associated Custody Rule, an investment adviser who has custody of client funds or securities must maintain them with a ‘qualified custodian.’ Qualified custodians are generally limited to regulated entities like banks, savings associations, registered broker-dealers, and certain foreign financial institutions. Because a DeFi protocol is a software program and not a regulated entity, it cannot serve as a qualified custodian. If the adviser holds the private keys, they have custody and must ensure the assets are actually maintained with a proper qualified custodian to remain compliant.

Incorrect: Registering a blockchain as an IAR is impossible as an IAR must be a natural person, and the protocol is software. While state Administrators may require surety bonds for advisers with custody, the amount is typically a fixed sum (such as $35,000) rather than the total value of the liquidity pool. The Investment Advisers Act does not prohibit the use of distributed ledger technology or require all trades to go through a centralized clearing agency, provided that recordkeeping and custody rules are satisfied.

Takeaway: Investment advisers using DeFi must still comply with the Custody Rule by ensuring client assets are held by a qualified custodian, as software protocols do not meet the regulatory definition of such an entity.

Correct: Investment advisers and their representatives are fiduciaries who owe a duty of loyalty and a duty of care to their clients. By accepting a significant gift and subsequently making investment recommendations that favor the gift-giver while ignoring the client’s stated investment objectives (capital preservation) and constraints (low risk tolerance), the IAR has committed a suitability violation and failed to manage a material conflict of interest. Fiduciary duty requires putting the client’s interests ahead of the adviser’s own interests or those of a third party.

Incorrect: The other options are incorrect because: discretionary authority (Option B) relates to the power to trade without specific client consent, not the receipt of gifts. The Prudent Investor Act (Option C) focuses on the performance of the entire portfolio rather than individual securities and does not set arbitrary age-based prohibitions. Form ADV Part 2B (Option D) provides information about the IAR’s background and compensation, but it does not require an immediate update for every individual gift or entertainment event; such items are typically handled through internal compliance logs and code of ethics disclosures.

Takeaway: Fiduciary duty requires that all investment recommendations strictly align with a client’s documented objectives and remain untainted by conflicts of interest arising from third-party incentives.

Correct: Under the Investment Advisers Act of 1940 and the fiduciary standards enforced by NASAA, an investment adviser has a duty of loyalty and care. If an adviser intends to prioritize non-financial objectives (like social impact) over financial returns, this constitutes a material fact. The adviser must disclose this strategy, including the potential for lower returns, in the Form ADV Part 2A (the Brochure) and ensure the strategy aligns with the client’s stated investment objectives and risk tolerance to fulfill their fiduciary obligation.

Incorrect: The idea that impact investments are exempt from fiduciary duties or best execution is incorrect; fiduciary duty is a fundamental obligation that cannot be bypassed by following third-party standards. Prioritizing social impact without disclosure is a breach of the duty of loyalty, regardless of whether the portfolio return is positive. Finally, fiduciary duties cannot be waived through general or specific client waivers; the adviser always maintains a responsibility to act in the client’s best interest based on the agreed-upon investment parameters.

Takeaway: Fiduciary duty requires that any investment strategy prioritizing social impact over financial performance must be clearly disclosed to clients and aligned with their specific investment objectives.

Correct: Under the Investment Advisers Act of 1940 and the Uniform Securities Act, an investment adviser has a fiduciary duty to act in the client’s best interest. This duty includes a suitability obligation, which requires the adviser to understand the client’s financial situation, including their tax status. When recommending a strategy that involves high turnover, the adviser must consider how short-term capital gains (taxed at higher ordinary income rates) will affect the client’s net return, especially for clients in high tax brackets.

Incorrect: Option B is incorrect because advisers are expected to understand a client’s tax profile to provide suitable advice, not avoid it. Option C is incorrect because suitability is a holistic concept that includes the tax efficiency of the strategy relative to the client’s needs. Option D is incorrect because the fiduciary duty to disclose material risks and consequences (including tax impacts of a strategy) applies to all registered investment advisers, regardless of whether they hold additional professional designations like CPA or JD.

Takeaway: Investment advisers must incorporate a client’s tax status into their suitability analysis to ensure that the recommended investment strategy aligns with the client’s after-tax return objectives.

Correct: Under the Investment Advisers Act of 1940 and NASAA Model Rules, an investment adviser must amend its Form ADV Part 2A (the brochure) promptly whenever information in the brochure becomes materially inaccurate. Furthermore, advisers must deliver to each client an updated brochure or a summary of material changes within 120 days of the end of the fiscal year, but material changes in fees or investment philosophy often require more immediate notification to ensure the adviser is fulfilling its fiduciary duty and disclosure obligations.

Incorrect: Option B is incorrect because material changes must be filed promptly, not just at the annual update, and the 2% threshold is not a regulatory standard for delaying disclosure. Option C is incorrect because Part 2A is the primary disclosure document for clients and must be updated for material changes in business practices or strategies. Option D is incorrect because the access equals delivery rule generally applies to prospectuses in the primary market, not to the delivery of the Form ADV brochure or summary of material changes to existing advisory clients.

Takeaway: Investment advisers must promptly amend Form ADV Part 2A for material changes and ensure clients are properly notified to maintain compliance with fiduciary disclosure standards.

Correct: According to the NASAA Model Rule on financial requirements, if a state-registered investment adviser’s net worth falls below the minimum required level (which is $10,000 for advisers with discretionary authority but no custody), the adviser must notify the state Administrator by the close of the next business day. After this notification is made, the adviser is required to file a report of its financial condition by the close of the business day following the notification date. This report typically includes a trial balance, a statement of client funds, and a summary of open ledger accounts.

Incorrect: The requirement for notification is specifically by the close of the next business day, not 48 hours or the end of the current business day. While Form ADV updates are required for material changes, they do not satisfy the specific financial reporting requirements triggered by a net worth deficiency. Furthermore, while the Administrator may require a surety bond if an adviser does not meet net worth requirements, the immediate regulatory obligation is notification and the filing of a financial report, not the automatic cessation of discretionary trading or a five-day bond deposit window.

Takeaway: State-registered investment advisers must notify the Administrator of a net worth deficiency by the next business day and submit a financial condition report by the following business day.

Correct: Under both the Investment Advisers Act of 1940 and NASAA Model Rules, investment advisers have a fiduciary duty to protect client assets and a regulatory requirement to supervise all aspects of their business, including automated systems. AI is considered a tool to assist in compliance, not a replacement for it. Therefore, the firm must have procedures in place for human intervention and review of flagged activities to ensure that potential fraud is addressed while fulfilling the duty of care to the client.

Incorrect: Bypassing alerts based solely on a confidence score without human review would likely be considered a failure of supervision and a breach of fiduciary duty. While some states allow for temporary holds on accounts of vulnerable adults, an immediate freeze and regulatory notification without further investigation is not a universal requirement for all flagged transactions. Finally, an investment adviser cannot delegate its ultimate regulatory and fiduciary responsibility for compliance and supervision to a third-party technology provider.

Takeaway: Investment advisers must maintain human oversight and robust supervisory procedures when using AI tools to fulfill their fiduciary duty to protect client assets from fraud.

Correct: Compensation received for lost profits is taxable as ordinary income because it serves as a substitute for the income the business would have earned and been taxed on had the disruption not occurred, following the principle that the taxability of a settlement depends on the nature of the claim it settles. Business-related rebates, such as those for transaction volume, are not considered non-taxable gifts under the Duberstein standard; instead, they represent an accession to wealth or a reduction in business expenses (like processing fees) that must be accounted for in the calculation of net profit under the broad definition of gross income in Internal Revenue Code Section 61.

Incorrect: The suggestion that damages for lost profits are excludable misapplies the rules for personal physical injury settlements under Section 104(a)(2), which do not apply to purely economic business losses. The idea that income is only recognized upon withdrawal from a digital platform ignores the doctrine of constructive receipt found in Treasury Regulation 1.451-2, which requires income to be recognized when it is credited to a taxpayer’s account or made available without restriction. Treating the settlement as a return of capital is also incorrect in this context because the payment was specifically calculated to replace lost earnings rather than to compensate for the permanent impairment of a capital asset or the total destruction of business goodwill.

Takeaway: Payments that substitute for ordinary business income or provide volume-based incentives are includible in gross income and do not qualify for exclusions related to physical injury or return of capital.