Addendum: for use with the Series 65 and 66 online courses and study guides version numbers 27385en (S65) and 27386en(S66) per NASAA exam outline updates effective 6/12/2023.
The following are the new topics on the exam content outlines. Please note that the passing score for the Series 65 exam has been lowered to 70% (previously, 72%)
Chapter II. Investment Vehicle Characteristics
Digital assets include any asset that exists in a digital form, and includes the right to use that asset. For example, a photo taken on your phone would qualify as a digital asset — the photo is stored digitally, and you have the right to use that photo.
Some popular examples of digital assets in the investment world are cryptocurrencies, non-fungible tokens (NFTs), and stablecoins.
Cryptocurrency is any form of digital currency that uses cryptography to secure transactions. Cryptography is a sophisticated encryption technique used to anonymously store and share information on a decentralized network. Cryptocurrencies do not have central issuing or regulating authority. They use a decentralized system to record transactions and issue new units. Bitcoin and Ethereum are examples of cryptocurrencies.
Non-fungible tokens (NFTs) are digital assets that represent ownership in digital collectibles like art, music, comic books, sports collectibles, trading cards, games, and more. Each token has a unique certificate — like a fingerprint — created by blockchain technology. So NFTs are used to authenticate ownership of digital assets. A blockchain is a method of recording information using a digital ledger. All computer networks that use this ledger can see the records, but they cannot corrupt or manipulate the ledger.
"Non-fungible" means that the token cannot be replaced or traded. By contrast, physical money and cryptocurrencies are fungible, which means they can be traded or exchanged for one another.
Stablecoin is a digital currency that pegs its value to another non-digital currency or commodity. For example, it can be pegged to a "stable" asset, like the U.S. dollar or gold. As a result, a stablecoin can be less volatile than unpegged cryptocurrencies, like Bitcoin.
Some of the key risks associated with digital assets include:
- Volatility — Digital assets can be extremely volatile, and many assets are deemed high risk. These assets are difficult to value and, as a result, market values rise or fall dramatically.
- Liquidity — It may be hard to sell digital assets that are not commonly traded. Lightly traded assets are also easier to manipulate.
- Regulation — Due to limited regulation, the risk of fraud is high.
- Fraud — Most digital asset scams begin on social media or messaging apps, where thieves pose as reputable people or entities and try to steal tokens and personal information. Also, bad actors try to lure unsuspecting investors into storing their information on fake trading platforms. For example, fraudsters might befriend investors and entice them to move their digital wallets to a different (fraudulent) platform. A digital wallet is a financial transaction application that operates on mobile devices, such as cell phones.
- Cybersecurity — Hackers may attempt to steal assets. Theft of digitally stored coins and tokens is a real risk, and some digital asset platforms are better at protecting against cybersecurity risks and theft than others.
Chapter V. Laws, Regulations, and Guidelines, Including Prohibition on Unethical Business Practices
Financial Exploitation of Vulnerable Adults
The NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation was adopted in 2016 to cover broker/dealer agents and investment adviser representatives who service customers aged 65 or older or those adults who would be subject to the provisions of a state's adult protective services statute. Some key provisions of the Model Act are:
- Mandatory Reporting — Qualified individuals (agents and IARs) who reasonably believe that financial exploitation may have occurred or is being attempted must promptly notify their state securities regulator.
- Notification — Disclosure to third parties (individuals other that the agent, IAR or the customer) is permitted if they were previously authorized by the customer. Of course, if the agent or IAR suspects that the third party is the one exploiting the customer, then notification may not be made.
- Delayed Disbursements — The act allows broker/dealers and investment advisers with the authority to delay disbursing funds from an eligible adult's account for up to 15 business days if the broker/dealer or investment adviser reasonably believes that a disbursement would result in the financial exploitation of the eligible adult. If the broker/dealer or investment adviser delays a disbursement, it must notify people authorized to transact business on the account (unless these individuals are suspected of the financial exploitation), notify the state securities regulator and the adult protective services agency, and undertake an internal review of the suspected exploitation. Under the Model Act, the securities regulator or adult protective services agency may request an extension of the delay for an additional 10 business days. Extensions beyond that could be ordered by a court.
Potential Fraud Schemes Using Social Media
Although investors often use online chatrooms, social media platforms, and websites for information about investing, there are potential scams that investors and investment advisers should avoid.
"Finfluencers," for example, are social media financial influencers who use their name recognition to persuade individuals to invest in the product they are touting usually without any expertise in the matter. Investors could be swayed by testimonials or celebrity endorsements when making an investment decision. Sometimes these individuals are paid for their promotion without disclosing the compensation.
Fraudsters may impersonate legitimate brokers or investment advisers or other sources of market information on social media. For example, fraudsters may set up an account name, profile, or handle designed to mimic a particular individual or firm. They may go so far as to create a web page that uses the real firm's logo, links to the firm's actual website, or references the name of an actual person who works for the firm. Fraudsters also may direct investors to an imposter website by posting comments in the social media account of brokers, investment advisers, or other sources of market information.
A common red flag investors should look for when presented with an investment opportunity whether through social media, email communications, or on websites is the promise of high returns with no risk.
Continuing Education Requirements for Investment Adviser Representatives
According to the NASAA Model Rule on IAR Continuing Education (CE), every investment adviser representative must complete the following IAR continuing education requirements each reporting period, which is defined as one 12-month period.
- IAR Ethics and Professional Responsibility Requirement: An investment adviser representative must complete 6 credits of IAR Regulatory and Ethics content offered by an authorized provider, with at least 3 hours covering the topic of ethics; and
- IAR Products and Practice Requirement: An investment adviser representative must complete 6 credits of IAR Products and Practice content offered by an authorized provider.
An IAR who fails to complete the CE requirements will be considered CE inactive, which means the individual will not be eligible for investment adviser representative registration or renewal of an investment adviser representative registration. However, once the CE obligations have been met, the CE inactive status will be removed.