Under NASAA's Model Rule, an investment adviser may not lend money or securities to a client unless the loan is made through a regulated financial institution, such as an affiliated bank or affiliated broker-dealer that is in the business of making loans.

A direct loan from the investment adviser to the client creates a significant conflict of interest and is considered an unethical business practice.

Why the Other Answers Are Incorrect

• Permissible if the securities are pledged as collateral and the loan complies with Regulation T is incorrect because Regulation T applies to broker-dealers extending credit, not investment advisers making direct loans.

• Permissible if the securities are pledged as collateral is incorrect because collateral does not eliminate the prohibition.

• Permissible if the loan complies with Regulation T is incorrect because compliance with Regulation T does not authorize an investment adviser to make direct loans to clients.

Series 63 Tip

The exam distinguishes between investment advisers and broker-dealers regarding lending.

Investment advisers generally may NOT:

• Lend money to clients.

• Borrow money from clients.

Exceptions exist when the other party is in the business of lending, such as:

• An affiliated bank.

• An affiliated broker-dealer that regularly extends credit.

Memory aid:

Investment advisers give advice, not loans.

If you see an investment adviser directly financing a client's investment, the answer is usually unethical.

Investment advisers and their representatives must provide full disclosure of all material conflicts of interest, including compensation arrangements and affiliations with broker-dealers.

However, an IAR must never state or imply responsibility for guaranteeing investment results or reimbursing investment losses. Investment performance cannot be guaranteed, and advisers are not personally liable simply because investments decline in value.

Why the Other Answers Are Incorrect

• The IAR must disclose that commissions may be earned in addition to advisory fees. is incorrect because this disclosure is required due to the conflict of interest created by dual compensation.

• The IAR must disclose that trades will be executed through his broker-dealer unless the client chooses otherwise. is incorrect because clients should be informed about brokerage arrangements and any potential conflicts.

• The IAR must disclose that the financial planning services are separate from the broker-dealer's services. is incorrect because clients should understand when advisory services are separate from brokerage services.

Series 63 Tip

Whenever an IAR is dually registered as both an investment adviser representative and a broker-dealer agent, think disclosure.

Common disclosures include:

• Dual registration.

• Receipt of commissions.

• Advisory fees.

• Broker-dealer affiliation.

• Conflicts of interest.

• Brokerage execution arrangements.

What an adviser may never do:

• Guarantee profits.

• Promise to reimburse losses.

• Accept liability for normal market performance.

Memory aid:

Disclose conflicts. Never guarantee performance.

If an answer says the adviser is responsible for market losses or promises to make the client whole, it is almost always the wrong choice on the Series 63.

An investment adviser representative may state that a security is registered or exempt from registration. Registration means the security may legally be offered and sold in the state. It does not mean that the Administrator has approved, recommended, endorsed, or determined that the security is suitable.

Why the Other Answers Are Incorrect

Saying the Administrator has determined that the representative is qualified improperly implies state approval of the representative.

Saying an exempt security is safer than a nonexempt security is prohibited because exemption from registration does not indicate investment quality or safety.

Saying registration means the Administrator recommends the security improperly implies that the state has endorsed the investment.