Form ADV Part 2 is the investment adviser's brochure. Unless there have been no material changes, advisers must deliver an updated brochure or provide a summary of material changes and offer the updated brochure to existing clients within 120 days after the end of the adviser's fiscal year.

Why the Other Answers Are Incorrect

• It must always be delivered at least 48 hours before an advisory contract is signed is incorrect because the brochure may instead be delivered at the time the contract is signed, provided the client is given a five-business-day penalty-free right to terminate the contract.

• It is a supplement that must accompany the investment adviser's brochure is incorrect because Form ADV Part 2 is the brochure itself, not a document that accompanies it.

• It must be delivered only after the client's account has been funded is incorrect because the brochure delivery requirement applies before or at the time the advisory relationship is established, not after funding.

Series 63 Tip:
Remember these key brochure delivery rules:

• Form ADV Part 2 = the brochure.

• Deliver it at least 48 hours before signing the advisory contract or at the time of signing with a five-business-day penalty-free cancellation period.

• Existing clients receive an annual update within 120 days of the adviser's fiscal year-end if there have been material changes.

The annual brochure delivery requirement does not apply when the investment advisory contract is with a registered investment company, such as a mutual fund or unit investment trust (UIT). These entities are specifically exempt from the brochure delivery requirement.

Why the Other Answers Are Incorrect

• A registered broker-dealer receiving portfolio management services is generally entitled to receive the adviser's brochure unless another exemption applies.

• An individual who qualifies as an accredited investor is not exempt from brochure delivery merely because of accredited investor status.

• A registered investment adviser that hires another adviser for specialized investment advice is also generally entitled to receive the brochure unless another exemption applies.

Series 63 Tip:
The two primary exceptions to the brochure delivery requirement are:

• Clients receiving impersonal investment advice who pay an annual fee below the applicable threshold.

• Registered investment companies (such as mutual funds and UITs).

Do not confuse registered investment companies with registered investment advisers, broker-dealers, or accredited investors. Only the registered investment company receives this specific exemption.

Although there is no specific Uniform Securities Act requirement governing the timing of fee schedule delivery, industry practice is for a broker-dealer to provide its fee schedule when the account is opened. This allows the customer to understand the costs associated with the account before conducting transactions.

Why the Other Answers Are Incorrect

• Before any changes to the fee schedule take effect is incorrect because this describes how changes are generally communicated, not when the initial fee schedule is typically provided.

• Only after the customer requests a copy of the fee schedule is incorrect because customers are generally informed of fees during the account opening process.

• With the customer's year-end account statement is incorrect because fee disclosures occur much earlier, when the account is established.

Series 63 Tip:
For exam purposes, remember:

• Initial fee schedule → Typically disclosed at account opening.

• Fee changes → Customers are generally notified before the changes become effective, not afterward.

Although U.S. Treasury securities have very low credit risk because they are backed by the U.S. government, they are still subject to market (interest rate) risk. An agent may not guarantee that a client will make money or be protected from loss. Making such a guarantee is considered an unethical business practice under the NASAA Statement of Policy.

Why the Other Answers Are Incorrect

• Ethical because U.S. Treasury securities are backed by the full faith and credit of the U.S. government is incorrect because that guarantee applies to the payment of principal and interest, not to the market value of the securities before maturity.

• Ethical if the client intends to hold the bonds until maturity is incorrect because the agent still may not guarantee investment results or eliminate the possibility of loss.

• Unethical only if the bonds decline in value after the recommendation is incorrect because the unethical conduct is the improper guarantee itself, regardless of the investment's eventual performance.

Series 63 Tip:
Do not confuse credit risk with market risk.

• U.S. Treasury securities have minimal default (credit) risk.

• They do have market risk, especially when interest rates change.

An agent must never guarantee that an investment will produce a profit or that a client cannot lose money.

Form ADV Part 2 requires disclosure of material legal and disciplinary events that are relevant to evaluating the integrity of the investment adviser or its personnel. Events involving securities laws, investment-related businesses, or regulatory actions generally must be disclosed. Unrelated misdemeanors, such as local ordinance or traffic-related matters, are generally not material and do not require disclosure.

Why the Other Answers Are Incorrect

• A FINRA disciplinary action resulting in the individual being suspended from association with a member firm is a material disciplinary event that must be disclosed.

• A misdemeanor conviction involving securities fraud is investment-related and must be disclosed.

• An SEC administrative proceeding finding that the adviser violated an investment-related regulation is a material regulatory event that must be be disclosed.

Series 63 Tip:
When evaluating brochure disclosure requirements, ask:

Would this event matter to a reasonable client deciding whether to hire the adviser?

Investment-related criminal, civil, or regulatory actions generally require disclosure. Personal matters unrelated to investments, such as traffic or local ordinance violations, generally do not.

It is lawful for an agent to accurately state that a security is exempt from registration. The fact that a security is exempt simply means it is not required to be registered under the applicable securities laws. It does not imply that the security is safe or that any regulatory authority has approved it.

Why the Other Answers Are Incorrect

• "Because this security is exempt from registration, the state has determined it is a low-risk investment." is incorrect because exemption from registration does not indicate that a security is safe or low risk.

• "Registration with the state means the Administrator has approved this investment." is incorrect because registration does not constitute approval or endorsement by any regulatory authority.

• "If the investment declines in value during the first year, I will reimburse your loss." is incorrect because guaranteeing a customer against loss is an unethical and prohibited practice.

Series 63 Tip:
Do not confuse registration or exemption from registration with approval.

The Administrator's role is to regulate compliance with securities laws, not to approve or recommend securities. Likewise, an exempt security is not automatically safer than a registered security.

As part of the account opening process, a broker-dealer is generally expected to provide customers with a schedule of its fees and charges. This enables customers to understand the costs associated with maintaining the account and executing transactions before conducting business with the firm.

Why the Other Answers Are Incorrect

• A biography of the firm's executive management team is not a standard disclosure required at account opening.

• A list of every office maintained by the firm nationwide is not information that generally affects the customer's brokerage relationship.

• The firm's complete organizational history is not a required account-opening disclosure.

Series 63 Tip:
A common exam point is that fee disclosure should occur no later than the time the account is opened. Customers should understand the costs of doing business with the broker-dealer before engaging in transactions.

An agent may not guarantee a customer against loss, regardless of whether the guarantee is made personally or on behalf of the broker-dealer. Promising to reimburse the client if the investment declines in value is an unethical business practice because it removes the risk of loss from the customer.

Why the Other Answers Are Incorrect

• Acted ethically because the guarantee is limited to a 90-day period is incorrect because the length of the guarantee is irrelevant. Any guarantee against loss is prohibited.

• Acted ethically because the guarantee comes from Ellis personally rather than the broker-dealer is incorrect because the prohibition applies regardless of who makes the guarantee.

• Committed an unethical business practice by recommending a wash sale is incorrect because a wash sale involves selling and repurchasing the same security for tax purposes and is unrelated to this scenario.

Series 63 Tip:
A guarantee against loss can take many forms, including:

• Promising to repurchase a security at the original purchase price.

• Promising to reimburse the client for any losses.

• Assuring the client that they cannot lose money.

Any such guarantee is an unethical business practice, even if the agent believes the recommendation is suitable or makes the guarantee personally.

The investment adviser brochure may be delivered at the time the advisory contract is entered into, provided the client is given the right to terminate the contract without penalty within five business days. Alternatively, if the brochure is delivered at least 48 hours before the contract is signed, the adviser is not required to provide the five-business-day termination right.

Why the Other Answers Are Incorrect

• The brochure may be delivered up to 48 hours after the advisory contract is signed if the client has a five-business-day cancellation right is incorrect because delivery after the contract is signed does not satisfy the rule.

• The brochure must always be delivered at least 48 hours before the advisory contract is signed is incorrect because delivery at signing is also permitted when the client receives the five-business-day cancellation right.

• The brochure must be delivered annually to all prospective clients within 120 days after the end of the adviser's fiscal year is incorrect because the annual delivery requirement applies to existing clients, not prospective clients.

Series 63 Tip:
Remember the two acceptable methods for initial brochure delivery:

• At least 48 hours before signing the advisory contract, or

• At the time of signing, provided the client has a five-business-day penalty-free right to terminate the contract.

Also remember that the 120-day annual brochure update applies to existing clients only.

An agent may accurately state that they are registered and that a security is registered. However, neither registration of an individual nor registration of a security implies that any regulatory authority has approved the person's qualifications or endorsed the security.

Why the Other Answers Are Incorrect

• II is incorrect because registration does not signify that regulators have approved an agent's qualifications or recommendations.

• IV is incorrect because registration of a security does not mean that the SEC or a state Administrator has approved or endorsed the investment.

Series 63 Tip:
The exam frequently tests the distinction between registration and approval.

• It is acceptable to say an agent is registered.

• It is acceptable to say a security is registered.

• It is never acceptable to suggest that registration means a regulator has approved, recommended, or endorsed either the individual or the security.