Client Types and Suitability Under the Uniform Securities Act

The Series 66 tests suitability in an advisory context, which is more nuanced than the broker-dealer suitability most candidates encountered when studying for the Series 7. Under the Uniform Securities Act and the Advisers Act framework, the type of client matters in multiple ways: it affects registration requirements, disclosure obligations, permitted fee structures, and how the adviser must approach the relationship.

This post covers the key client categories the Series 66 tests and how each affects the adviser's obligations.

Individual Clients: Retail vs. Accredited vs. Qualified

Retail Clients

A retail client is an individual investor who receives investment advice primarily for personal, family, or household purposes, and who is not otherwise classified as an institutional or sophisticated investor. Retail clients receive the strongest regulatory protections under the USA and federal law.

For retail clients:

• The full fiduciary duty applies
• Form ADV brochure delivery is required
• Performance-based fees are generally prohibited unless the client meets the qualified client standard
• Suitability requires a complete understanding of the client's investment profile

Accredited Investors

An accredited investor (as defined under SEC Regulation D) meets certain wealth or income thresholds:

• Individual income over $200,000 per year (or $300,000 jointly with a spouse) in each of the past two years with expectation of the same
• Net worth over $1 million, excluding the value of the primary residence
• Certain professional credentials (Series 7, Series 65, Series 82 license holders)

Accredited investor status matters primarily for eligibility to invest in private placements. It does not fundamentally change the adviser's fiduciary obligation to the client, but it does affect which investment opportunities the client can access.

Qualified Clients

A qualified client is a higher threshold than accredited investor. The qualified client standard applies specifically to performance-based fee eligibility under the Advisers Act:

• At least $1.1 million in assets under management with the adviser, or
• Net worth of at least $2.2 million (excluding primary residence)

Investment advisers can only charge performance-based fees to qualified clients. If the client does not meet the qualified client standard, the adviser cannot charge a fee tied to capital gains or appreciation.

Qualified Purchasers

A qualified purchaser is a higher standard still, relevant primarily for access to certain private investment funds. An individual qualifies as a qualified purchaser by owning at least $5 million in investments.

Institutional Clients

Institutional clients include banks, insurance companies, investment companies, pension funds, endowments, corporations, and government entities. Institutional clients receive fewer regulatory protections because they are presumed sophisticated enough to protect their own interests.

Key implications for institutional clients under the USA:

• Certain transactions with institutional clients are exempt from state securities registration requirements
• Many standard retail disclosure requirements do not apply
• The adviser still owes a duty of care and good faith, but the relationship is less heavily regulated

For the Series 66, know that a transaction with an institutional client (such as a bank or insurance company) may qualify for a transactional exemption from state registration. This does not mean the adviser can act fraudulently toward institutional clients. The anti-fraud provisions of the USA apply universally.

Pension Plans and ERISA Clients

Pension plans, 401(k) plans, and other employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) are a specialized client category. Advisers who work with ERISA plans take on fiduciary status under ERISA in addition to (and separately from) their investment adviser fiduciary status.

ERISA imposes significant obligations on plan advisers:

• Exclusive benefit rule: The adviser must act solely in the interest of plan participants and beneficiaries, not the plan sponsor or the adviser's own business interests
• Prudent investor rule: Investment decisions must be made with the care, skill, and diligence of a knowledgeable investor
• Prohibited transactions: Certain transactions between the plan and parties-in-interest (including the adviser) are prohibited unless specifically exempted

ERISA fiduciary status has serious consequences for violations: personal liability for losses, disgorgement of profits, and civil penalties. The Series 66 tests the basic concept that ERISA imposes additional obligations on advisers to retirement plans beyond those of the Investment Advisers Act.

Joint Accounts and Beneficiary Arrangements

When multiple individuals hold an account, the account structure affects who can give instructions:

Joint tenants with right of survivorship (JTWROS): Both (or all) joint account holders have equal rights to the account. Upon death of one, assets pass directly to the surviving joint tenant(s) without going through probate. Either party can give instructions, but both must sign account-opening documents.

Tenants in common: Each holder owns a specified percentage of the account. Upon death, that holder's interest passes through their estate, not directly to the other account holder. Either can give instructions for their own portion.

For an advisory account, if one joint account holder gives an instruction to liquidate securities, the adviser must understand which type of joint account is involved and whether both parties need to consent.

Trust Accounts

Trusts are legal entities that hold assets for the benefit of beneficiaries. The trustee manages the assets and makes investment decisions according to the trust document.

When an adviser manages a trust account:

• The client is the trust, not the beneficiaries individually
• The adviser owes the fiduciary duty to the trust and its purposes, not to individual beneficiaries
• The trustee has authority to instruct the adviser, within the parameters of the trust document

Trust accounts may have multiple beneficiaries with competing interests (current income beneficiaries vs. remainder beneficiaries). The adviser should understand these interests and balance them appropriately under the trust's terms.

Corporate and Business Accounts

Corporations and other business entities (partnerships, LLCs) can open advisory accounts. For corporate accounts:

• A corporate resolution typically authorizes specific individuals to act on behalf of the entity
• Only those authorized individuals can give trading instructions
• The account is in the entity's name, and the entity's investment objectives govern the relationship

The Series 66 may present a scenario where an individual calls claiming to represent a corporate client but is not listed as an authorized person. The adviser should not act on instructions from unauthorized persons regardless of how confident the caller sounds.

Building Client Profile Skills

For suitability questions, the Series 66 expects advisers in training to think holistically about each client type. The relevant questions are:

• What are this client's specific investment objectives?
• What are their time horizon and liquidity needs?
• Are there regulatory restrictions on what this client can hold or how they can be charged?
• What disclosure obligations apply?
• Does the client's category affect the regulatory treatment of this recommendation?

Understanding how client category intersects with adviser obligations gives you a complete picture that handles every suitability scenario the Series 66 presents.