- Because the Series 63 is a law exam, it is incumbent on Series 63 students to recognize the difference between several similar terms. For example, in which of these cases would a person not be defined as a broker-dealer?
- The person is excluded from the definition of the term.
- The person limits its securities business to one state.
- The person is exempt from registering in the state.
- The person trades stock that is listed on a market.
Correct answer: The person is excluded from the definition of the term.
An exclusion operates on the definition itself, so a person who is excluded is never a broker-dealer to begin with and none of the rules attached to that term ever reach them. Confining the securities business to a single state changes nothing about the definition; it bears only on where registration has to be sought. Being exempt from registering is the classic trap, because an exemption assumes the person does fit the definition and merely relieves the duty to register. The marketplace used is irrelevant as well, so dealing in stock that is listed somewhere neither creates nor removes broker-dealer status.
- Blue-sky laws pertain to all of the following except
- The trading of securities inside a foreign country
- The sale of securities to investors inside a state
- The registration of securities sold throughout a state
- The licensing of each agent who sells securities there
Correct answer: The trading of securities inside a foreign country
Blue-sky laws are the securities statutes of the individual states, and their reach stops at the state line, so dealing that takes place inside a foreign country falls to that country's own regulators instead. The other three are the core of every blue-sky statute. Sales made to investors located in the state are regulated there, which is why the place of the offer matters so much. Securities sold throughout the state must be registered unless an exemption is available. Agents who sell those securities must themselves be licensed in the state before they may take an order.
- An investment adviser registered with the state who maintains custody of customer funds and securities is generally required to provide the Administrator with a surety bond in the minimum amount of $35,000. The bond provides protection to advisory clients when
- The firm converts a client's cash and shares to personal use
- The client loses more in the markets than the fees and costs
- The firm is found by one state to lack a proper license
- The firm reports an operating loss in each of two years
Correct answer: The firm converts a client's cash and shares to personal use
A surety bond answers for dishonesty, so it pays advisory clients when the adviser or one of its people takes client cash or securities and applies it to personal ends. It is not insurance against the market, so a client whose account falls further than the fees and costs charged has no claim on it, because investment risk stays with the client. A licensing deficiency turned up by a state is handled through that Administrator's own orders and denials rather than through a payout to clients. An operating loss at the firm is simply a business result and gives clients nothing to claim.
- Which of the following is the best definition of a person who manages accounts or portfolios of clients of an investment adviser?
- An investment adviser representative
- A discretionary investment counselor
- Institutional portfolio administrator
- Professional investment administrator
Correct answer: An investment adviser representative
This is a law exam, so the answer has to be the term the Uniform Securities Act itself uses. Managing the accounts or portfolios of an investment adviser's clients is one of the functions the Act lists that makes an individual an investment adviser representative. Investment counselor is a marketing label the Act never defines, and holding discretion over an account does not turn a label into a registration category. Portfolio administrator describes a job inside a firm rather than a status under the Act. Investment administrator is the same kind of internal title; someone holding it may well have to register, but the legal name for that registration is investment adviser representative.
- As found in the Uniform Securities Act, which of the following would not be an issuer?
- A smelter that markets gold bullion bars to retail buyers
- A manufacturer whose shares actively trade in OTC markets
- A finance firm marketing its own notes to the public
- A bakery that has proposed but not issued securities
Correct answer: A smelter that markets gold bullion bars to retail buyers
An issuer is a person who issues or proposes to issue a security, so the question is whether any security is involved. Gold bullion is a commodity rather than a security, so a smelter that markets bullion bars issues nothing and falls outside the term. A manufacturer whose shares change hands over the counter plainly issued those shares at some point, and the nature of its business is beside the point. Promissory notes sit inside the Act's definition of a security, so a finance firm that offers its own notes is an issuer. One oddity of the Act is that merely proposing to issue is enough, so the bakery qualifies although nothing has been sold.
- When a security is sold in a manner that creates an exemption from registration in a state, it is
- An exempt transaction under that state's law
- A security needing no clearance in any state
- A federally covered security beyond state limits
- An unlawful offering under that one state's laws
Correct answer: An exempt transaction under that state's law
The exemption described arises from the way the sale is carried out rather than from anything about the instrument, and a sale that carries its own exemption is an exempt transaction. An instrument that needs no clearance anywhere describes an exempt security instead, and that status belongs to the instrument however and to whomever it is sold, which is not what the stem says produced the relief. Federal covered status comes from the National Securities Markets Improvement Act and marks securities a state may not require to be registered, again a quality of the instrument. The sale is also entirely lawful, since selling under an exemption is a recognized alternative to registering.
- If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within
- Within 15 days of receiving the written application
- Within 30 days counted from the filing date instead
- Within 5 days of the hearing plea being mailed
- Within 45 days of the paperwork being received
Correct answer: Within 15 days of receiving the written application
A summary order bites at once, so the Act gives the registrant a quick route to be heard: once the written application for a hearing arrives, the matter must be set down within 15 days. Thirty days is a real figure in the Act, but it belongs to a different rule, the one under which an uncontested application becomes effective at noon of the thirtieth day. Five days is shorter than anything the Act provides in this setting and appears nowhere in it. Forty-five days is not one of the Act's deadlines at all; the sixty-day period students often reach for is the window for appealing a final order of the Administrator to court.
- One of the distinguishing characteristics of a stock exchange is that
- Prices there are set by an auction among the bids
- Prices there are set by talks between two dealers
- Trading there is active around the clock on most days
- Trading there is limited to securities not yet listed
Correct answer: Prices there are set by an auction among the bids
An exchange is an auction market: orders are brought to one place and the price comes from the highest bid meeting the lowest offer. Bilateral talks between dealers are the defining feature of the over-the-counter market instead, which is the very contrast this question draws. Around-the-clock dealing is not an exchange characteristic either, since an exchange keeps stated hours, traditionally 9:30 am to 4:00 pm Eastern. Securities not yet listed are exactly what an exchange does not handle, because an exchange trades the issues listed on it and unlisted issues change hands over the counter.
- The term used by the Uniform Securities Act to describe a person applying for registration as a securities professional is
- The registrant
- Representative
- The applicant
- Correspondent
Correct answer: The registrant
The Uniform Securities Act calls the person seeking registration in any capacity, whether as a broker-dealer, agent, investment adviser, or investment adviser representative, the registrant, and the same word covers an issuer that files a registration statement with the Administrator. Representative is part of a job title the Act defines for someone already registered to advise clients, not for someone still seeking registration. Applicant is the ordinary English description that sounds right and is exactly the trap, since the Act does not use it. Correspondent describes a firm that clears or carries business for another and has nothing to do with seeking registration.
- The federal act that essentially eliminated the dual system of state and federal registration of certain securities is
- The National Securities Markets Improvement Act of 1996
- The Uniform Securities Act of 1956 and later amendments
- The State Securities Registration Elimination Act of 2001
- The Securities Exchange Act of 1934 plus later amendments
Correct answer: The National Securities Markets Improvement Act of 1996
The 1996 statute known as NSMIA created the federal covered security, an instrument a state may not require to be registered, and that is what ended the double registration many offerings had faced. The uniform act carrying a 1956 date is a model law drafted for the states to adopt, so it is the source of state law rather than a federal act. No federal statute eliminated state securities registration in 2001; both the title and the year are invented. The 1934 statute set up federal regulation of the exchanges and the secondary market and left the state registration system untouched.
- The term used in legal literature to refer to a number too small to be of significance is
- De minimis
- Quid pro quo
- Sine qua non
- Ipso facto
Correct answer: De minimis
De minimis comes from a Latin maxim about matters too slight for the law to trouble itself with, and on this exam it names the small number of clients an adviser or its representatives may serve in a state before registration there is required. Quid pro quo means something given for something received and describes an exchange of value, which says nothing about size. Sine qua non means an indispensable condition, so it points at something essential rather than something negligible. Ipso facto means by the fact itself and marks a consequence that follows automatically.
- One of the important definitions in the Uniform Securities Act is that of a security. That term would include which of the following?
- Shares of preferred equity
- Uncirculated antique coins
- Bars of refined bullion
- Term insurance policies
Correct answer: Shares of preferred equity
Stock appears by name in the Act's definition of a security, and preferred shares are stock exactly as common shares are, so preferred equity is covered. Antique coinage is valued for its metal and its scarcity and is tangible property rather than an investment in a common enterprise, which is why collectibles sit outside the definition. Refined bullion is a commodity for the same reason, and dealing in it is governed by commodities law instead. Fixed insurance is carved out as well, so a term policy that pays a stated death benefit and builds no investment account is not a security.
- Under the Uniform Securities Act, an exempt security is one that
- Does not have to register with the state's Administrator
- Cannot lawfully be sold without a registration statement
- Does not fall within that state's set of securities
- May not be purchased by individual retail investors
Correct answer: Does not have to register with the state's Administrator
Calling something exempt means it does not have to comply, so an exempt security may be offered and sold in the state without ever being registered with the Administrator. Requiring a registration statement before any lawful sale states the ordinary rule, which is precisely the burden the exemption lifts. The instrument also remains a security in full: it is not carved out of the state's definition, and that matters because the antifraud provisions continue to apply to it. Nor does exempt status say anything about who may buy, so individual retail investors may purchase exempt securities on the same footing as institutions.
- Which of the following characteristics is not included in the definition of an investment adviser?
- A person who executes trades in shares for the accounts of others
- A person who is in the regular business of advising on securities
- A person who is paid to provide advice about a client's own securities
- A person who is paid to publish reports about the values of securities
Correct answer: A person who executes trades in shares for the accounts of others
Executing trades for the accounts of others is the business of a broker-dealer, and it appears nowhere in the Act's definition of an investment adviser. The remaining choices are the three elements that definition is built from. Carrying on advice about securities as a regular business supplies the business element. Being paid to advise a client about that client's own securities supplies both the advice and the compensation elements. Being paid to publish reports or analyses about the value of securities is written into the same definition in so many words, which is why a paid securities newsletter can be caught by it.
- The term qualified client would include a natural person who has
- A net worth over $2.7 million, excluding a primary home
- A net worth over $1.5 million, adding the house as well
- An income over $200,000 in each of two prior years
- At least $5 million in bonds or stocks of any kind
Correct answer: A net worth over $2.7 million, excluding a primary home
A natural person is a qualified client on either of two showings: at least $1.4 million already under that adviser's management, or a net worth above $2.7 million, which may be counted together with a spouse but must be figured without the equity in a primary residence. A net worth of $1.5 million that adds the house in fails on both counts, because the figure falls short and the residence may not be counted at all; the older accredited investor test is the one that used $1 million with the home included. Income above $200,000 in each of the two prior years is likewise an accredited investor test, drawn from federal Rule 501. Holding $5 million in bonds or stocks belongs to the qualified purchaser definition instead, which is a separate and considerably higher bar.
- A natural person would find it most challenging to meet the standards to be considered
- A qualified purchaser
- A professional client
- Sophisticated investor
- Nonaccredited investor
Correct answer: A qualified purchaser
A natural person becomes a qualified purchaser only by owning not less than $5 million in investments, and no other status on this list sets a bar anywhere near that high. Professional client is a category used in foreign regimes and carries no meaning under United States securities law, so it imposes no standard here at all. A sophisticated investor is judged on knowledge and experience rather than on any dollar figure, which is why no wealth test has to be cleared. A nonaccredited investor is simply someone who fails the accredited tests of $200,000 in income or $1 million in net worth, so that description is the easiest of all to satisfy.
- A program under which a client is charged a specified fee or fees, not based directly on transactions in the client's account, for investment advisory services and execution of client transactions is
- Wrap fee program
- Mutual fund plan
- Managed account
- Trading account
Correct answer: Wrap fee program
One bundled charge that is not tied to the trades placed, covering the advice and the execution of the resulting transactions together, is a wrap fee program. These are offered by firms registered as both broker-dealer and investment adviser, and the fee is generally set as a percentage of assets. A mutual fund charges its shareholders an expense ratio for running a pooled portfolio and never wraps in a client's own brokerage executions. A managed account describes who exercises discretion, and its advisory fee and its transaction costs are ordinarily billed separately. A trading account is charged per transaction, which is the opposite of a fee not based on transactions.
- On the Series 63 exam, in most cases, solicitors
- Must be registered as investment adviser representatives
- Must be registered as agents for licensed broker-dealers
- Must be registered as state-supervised investment counselors
- Must be registered as commissioned securities trading agents
Correct answer: Must be registered as investment adviser representatives
A solicitor refers prospective clients to an investment adviser and is paid by that adviser for the referral, and on this exam that person registers as an investment adviser representative. Registration as an agent belongs to someone who represents a broker-dealer in effecting securities transactions, which is not the work a solicitor does. Investment counselor is not a registration category at any level of government, so no state supervises anyone under that name. Nor is the solicitor a securities salesperson earning transaction commissions; the compensation comes from the adviser for sending business its way, not from trades.
- A membership organization offering a facility to trade stocks for its members is
- A registered stock exchange
- National dealer association
- The main federal agency
- Overall equities market
Correct answer: A registered stock exchange
An exchange is owned by its members and gives them a facility on which the securities listed there are bought and sold, the New York Stock Exchange being the familiar example. A national association of dealers describes FINRA, which does have members but writes and enforces conduct rules instead of providing a place to trade. The main federal agency describes the Securities and Exchange Commission, which administers the federal securities laws and operates no trading facility of its own. The equities market as a whole is a loose expression covering every venue where shares change hands, so it names no organization at all.
- The federal act that essentially eliminated the dual system of state and federal registration of certain investment advisers is
- The National Securities Markets Improvement Act of 1996
- The Federal Advisers Registration Reduction Act of 2001
- The Securities Exchange Act of 1934 plus later amendments
- The Uniform Securities Act of 1956 and later restatements
Correct answer: The National Securities Markets Improvement Act of 1996
NSMIA, passed in 1996, divided advisers between the two levels of government by creating the federal covered adviser, a firm that registers with the SEC and is not required to register with the states as well. No federal statute cut adviser registration in 2001; that title and that year are both invented. The 1934 statute built federal regulation of the exchanges and the secondary market and left the question of who registers an adviser untouched. The uniform act dated 1956 is a model statute the individual states adopt, so it is the source of state law rather than the federal act the question asks about.
- One thing that banks, insurance companies, and investment companies have in common is that, under the Uniform Securities Act, they are all included in the definition of
- Institutional investors
- Sophisticated investors
- Accredited fund buyers
- Qualified stock buyers
Correct answer: Institutional investors
This exam tests statutory wording, and banks, insurance companies, and investment companies are the very examples the Uniform Securities Act lists when it defines an institutional investor. Sophisticated investor is an industry description that the Act never defines, so nothing can be included in it. Accredited status is a real definition, but it belongs to Rule 501 under the federal Securities Act of 1933 and turns on the wealth or income of a buyer rather than on the character of the firm. Qualified status is federal as well, coming from the Investment Company Act, and it likewise measures the investments a buyer owns.
- Which of the following could become registered as an investment adviser representative?
- A natural person
- A business trust
- Limited partnership
- Holding corporation
Correct answer: A natural person
An investment adviser representative must be a natural person, because the registration exists for the individuals who give the advice, solicit the clients, or supervise those who do. A business trust is an entity, and an entity can hold a firm registration but can never be the individual that this registration is written for. A limited partnership is in the same position: it may itself register as an investment adviser, yet the people acting for it are the ones who register as representatives. A holding corporation is likewise an entity, and incorporating changes nothing, since the Act ties this particular registration to a human being.
- ABC Advisers is in the business of providing investment advice to retail customers. ABC's only office is in State A. Three of ABC's customers are residents of State B, but ABC is not required to register in that state. The most probable reason is because ABC Advisers
- Is exempt from state registration in State B
- Is open to accredited clients inside State B
- Is a registered FINRA member firm today
- Is excluded from the adviser term there
Correct answer: Is exempt from state registration in State B
An adviser with no place of business in a state may serve a small number of retail clients there before registration is required, and three clients sits inside that de minimis allowance, so the firm is exempt from registering in State B. Restricting the clientele to accredited individuals would not help, because accredited individuals are still retail clients and count toward the same limit. FINRA membership belongs to broker-dealers and gives an adviser no relief from a state registration requirement. The firm is not excluded from the adviser term either, since it gives advice about securities for compensation as a business and must register in State A.
- Rule 501 of the federal Securities Act of 1933 defines certain investors who are capable of making investments involving higher risk than normal. The term used to describe them is
- Accredited investors
- Qualified purchasers
- Wealthy fund purchasers
- Exempt stock purchasers
Correct answer: Accredited investors
Rule 501 is where the federal Securities Act of 1933 defines the accredited investor, the person whose income, net worth, or professional standing is treated as evidence of the capacity to carry the risk of a privately sold offering. Qualified purchaser is defined by the Investment Company Act and rests on owning at least $5 million in investments, so it is a different standard living in a different statute. Wealth alone defines nothing, because Rule 501 sets specific income and net worth figures rather than a general description. Exempt status attaches to a security or to a transaction under state law and is never a category of buyer.
- The ABC Banking Corporation owns a controlling interest in the stock of the ABC Bank, the ABC Mortgage Company, and the ABC Trust Company. Which of the following terms most likely describes the ABC Banking Corporation?
- Bank holding company
- Retail banking chain
- Large mutual fund group
- Small bank service firm
Correct answer: Bank holding company
A corporation that takes a controlling stake in the voting stock of other companies is a holding company, and where the subsidiaries are a bank and bank-related businesses such as a mortgage company and a trust company, it is a bank holding company. Control comes from owning that voting stock, generally with seats on each subsidiary's board. A retail banking chain is wrong because the subsidiaries stay separately incorporated companies rather than branches of one bank. A mutual fund group pools investor money into redeemable shares, which is nothing like taking control of operating companies. A bank service firm sells processing or back-office work to banks and holds no ownership in them at all.
- Under both state and federal laws, when a broker-dealer wants to offer wrap fee programs,
- it must also register as an investment adviser
- it must cap commissions below the advisory fee
- it must invoice clients one uniform amount
- it must sell plans to accredited investors
Correct answer: it must also register as an investment adviser
A wrap fee program bundles advice with execution and custody for a single fee, and taking compensation for advice makes the firm an investment adviser. A broker-dealer offering one must therefore be registered as both a broker-dealer and an investment adviser under state and federal law. Nothing caps commissions against the advisory fee, because the appeal of a wrap program is that the one fee covers all costs and no separate commissions are charged. Firms are free to negotiate different fees with different clients, so a single uniform charge is not required. Accredited status governs who may buy a private placement and has no bearing on eligibility for a wrap fee program.
- Although most questions on the exam do not use abbreviations, one that does appear from time to time is SRO. Those letters stand for
- Self-regulatory organization
- State-appointed organization
- Securities review organization
- Sector regulatory organization
Correct answer: Self-regulatory organization
SRO stands for self-regulatory organization, a membership body that writes and enforces rules over its own members under SEC oversight. FINRA is the best known, and the MSRB and the CBOE are others. NASAA, whose members are the state Administrators, is not an SRO. The other expansions are invented: an SRO is not appointed by a state, it is not a body that merely reviews securities, and it is not organized around an industry sector.
- According to the Uniform Securities Act, which of the following is not considered a person?
- A child below legal majority
- A city issuing revenue bonds
- A court appointed guardian
- A newly formed partnership
Correct answer: A child below legal majority
The Act's definition of person is broad, but it leaves out three categories, and someone who has not reached the age of majority is one of them. A minor cannot enter a binding contract and so cannot open an account in his own name, which is why he falls outside the definition. A city is a political subdivision of a state and is expressly a person, and issuing bonds is exactly the kind of thing a governmental person does. A guardian appointed by a court is an adult individual acting for someone else and is a person in his own right. A partnership is one of the business structures the definition names, however recently it was formed.
- Alex Garrding owns 100 shares of Utopia Medical Supplies, Inc., a corporation whose stock trades on the New York Stock Exchange. If Garrding sells those shares to Rollins Westerfield, it would meet the Uniform Securities Act's definition of
- A nonissuer transaction
- A principal transaction
- An unlawful private sale
- A newly registered offer
Correct answer: A nonissuer transaction
A nonissuer transaction is one in which the proceeds of the sale do not go to the issuer of the security. Garrding owns the shares and keeps the money, so Utopia Medical Supplies receives nothing and the trade fits that definition. A principal transaction describes a firm trading out of its own inventory with a customer, not one investor selling to another. Nothing here is unlawful: an owner may sell securities he owns to a friend, a neighbor or a stranger without holding a license, just as a homeowner needs no license to sell his own house. Nor is this a newly registered offer, because the stock is already outstanding and trading on an exchange.
- Which of the following could be an agent of a broker-dealer?
- An individual over the age of majority
- Any entity that meets the person rules
- A firm trading for other investors
- A company selling its listed stock
Correct answer: An individual over the age of majority
An agent must be a natural person, so only a human being who has reached the age of majority can be one. Meeting the Act's broad definition of person is not enough, because partnerships, corporations and trusts all satisfy that definition and none of them can be an agent. A firm trading for the accounts of other investors is itself a broker-dealer, the entity an agent represents rather than the agent. A company selling its own stock is an issuer, and the company itself is never the agent, though the individuals who sell for it may be.
- The Uniform Securities Act is
- model legislation from 1956 aimed at unifying state securities statutes
- model legislation from 1956 supplanting the older state securities laws
- the exact pattern the SEC followed when drafting federal securities statutes
- a broad group of rules covering securities trades within interstate commerce
Correct answer: model legislation from 1956 aimed at unifying state securities statutes
The National Conference of Commissioners on Uniform State Laws drafted the Uniform Securities Act in 1956 as model legislation, offered to the separate states so their securities laws would resemble one another. It is a template only, and it supplants nothing: each state legislature still has to enact its own statute, and states remain free to depart from the model. Nor was it the pattern for federal law, since the federal acts came earlier and are administered by the SEC. Trades in interstate commerce are the province of those federal acts rather than of a model state law.
- Which of the following is not included in the Uniform Securities Act's definition of a state?
- New Brunswick
- New Hampshire
- Mississippi
- Connecticut
Correct answer: New Brunswick
New Brunswick is a Canadian province. The Act's definition of a state reaches the states of the United States together with the District of Columbia, Puerto Rico and the U.S. territories and possessions, and nothing across the border. New Hampshire, Mississippi and Connecticut are all states of the United States and are covered. Even a candidate who cannot name the Canadian provinces is expected to recognize the fifty states.
- Under the Uniform Securities Act, the definition of a broker-dealer includes
- any person trading securities for customers or its own accounts
- an agent handling principal trades for banks and pension trusts
- a trust company effecting trades in custody or nonfiduciary stock accounts
- a commissioned representative selling an issuer's own new stocks and bonds
Correct answer: any person trading securities for customers or its own accounts
The Act defines a broker-dealer as any person engaged in the business of effecting securities transactions for the account of others or for that person's own account, and both halves of that phrase belong to the definition. An agent is expressly excluded however large the customers or however the trades are handled, because an agent is the individual who represents a broker-dealer or an issuer. A trust company is excluded as well, and that exclusion does not turn on whether it happens to be acting in a fiduciary capacity. A commissioned representative selling the issuer's own securities is an agent of that issuer, which is again a separate defined term.
- Purchases and sales of publicly traded unlisted securities are made
- in the over-the-counter market
- through exchange floor brokers
- through private negotiations
- against federal prohibitions
Correct answer: in the over-the-counter market
Securities that are publicly traded but not listed on an exchange change hands in the over-the-counter market, a dealer network with no trading floor. Anything handled by brokers on an exchange floor is by definition a listed security, so that route is ruled out by the word unlisted. Private negotiation is ruled out by the word publicly, which tells you the security is available to the public at large. Trading an unlisted security breaks no federal rule, so nothing about these purchases and sales is prohibited.
- A customer of a broker-dealer has been trading securities for several years. She recently purchased $10,000 of newly issued U.S. Treasury bonds and asks why she never received a prospectus. The agent would reply,
- Treasury securities are exempt from federal and state registration rules
- Treasury securities include a prospectus and I should forward duplicates
- Treasury securities are outside the controls of state and federal regulators
- Treasury securities are excluded from the definition of stock and securities
Correct answer: Treasury securities are exempt from federal and state registration rules
U.S. government securities meet the definition of a security in full, but they belong to a group of issues exempt from registration at both the federal and the state level. No registration means no registration statement and therefore no prospectus, which is why the customer never received one and why none can be requested for her. Exempt and excluded are not interchangeable on this exam: something excluded from the definition, such as an automobile or a fixed annuity, is not a security at all, and a Treasury bond plainly is one. Treasuries also stay well within the regulators' control, because the antifraud provisions apply to them exactly as they apply to any other security.
- If, in the opinion of the Administrator, an agent is about to engage in a prohibited activity, the Administrator may
- issue a cease-and-desist order
- demand arrest and imprisonment
- confiscate and prosecute
- sentence and incarcerate
Correct answer: issue a cease-and-desist order
When the Administrator believes a prohibited act is about to occur, the tool for stopping it before it happens is a cease-and-desist order, which may be issued with or without a prior hearing. If the agent ignores it, the Administrator applies to a court for an injunction. What the Administrator cannot do is act as police, prosecutor or judge: it has no arrest power, it cannot seize property, criminal charges are brought by a prosecuting attorney on referral, and only a court can sentence anyone or send a person to prison.
- The term used to describe a security that may be sold legally in a state without the requirement to register is
- Exempt securities
- Listed securities
- Guaranteed bond issue
- Excluded public issue
Correct answer: Exempt securities
A security that may lawfully be sold in a state without going through registration is an exempt security, because the exemption attaches to the security itself rather than to the way any one sale is made. That is what separates it from an exempt transaction, where the relief attaches to the circumstances of a particular trade. Listing on an exchange is a marketplace fact and grants no relief from state registration by itself. A guarantee comes from a third party promising to pay and says nothing about registration. Excluded is the wrong word entirely: something excluded from the definition, such as an automobile, is not a security to begin with, and the question tells you this is one.
- In an effort to create uniformity among state securities laws, there is a template followed by most states known as
- The Uniform Securities Act
- The Federal Securities Act
- Model Securities Statute
- State Securities Statute
Correct answer: The Uniform Securities Act
The National Conference of Commissioners on Uniform State Laws drafted the Uniform Securities Act in 1956, and it is the template most states have followed in writing their own blue-sky laws. That is the version tested on this exam, and the exam expects the exact title. There is no statute called the Federal Securities Act; federal law is a series of separate acts beginning with the Securities Act of 1933. Model Securities Statute and State Securities Statute are not the names of anything, however reasonable they sound.
- Under the Uniform Securities Act, the term nonissuer refers to
- any person other than the issuer
- any issuer of a listed debenture
- any adviser that is registered by law
- any place where the shares are traded
Correct answer: any person other than the issuer
Nonissuer means exactly what the word says: a person, as the Act defines person, who is not the issuer of the security in question. That covers an individual selling shares he owns and a dealer selling stock out of its own inventory alike. An issuer of a debenture is the issuer itself, which is the one thing a nonissuer can never be. A registered adviser is far too narrow, since the term turns solely on not being the issuer and not on what business the person is in. A trading venue is not a person at all, so it cannot be what the term describes.
- On the Series 63 exam, the term solicitor is used to describe persons who refer business to
- Registered investment advisers
- Registered insurance companies
- Independent broker-dealers
- Institutional shareholders
Correct answer: Registered investment advisers
In the Uniform Securities Act and the NASAA model rules, a solicitor is a person who refers or recommends prospective advisory clients to an investment adviser, usually for cash compensation and subject to a written disclosure requirement. The Act supplies no parallel term for someone who steers business to a broker-dealer or to one of its agents, and none at all for insurance business, which is regulated under separate state law. Referring an institution that already owns shares raises no solicitor question either. The label is reserved for the advisory relationship.
- As found in the Uniform Securities Act, the term issuer means
- any person who issues or proposes to issue securities
- a business which has issued and priced its securities
- any person acting for an issuer and its named underwriters
- any dealer buying and selling shares from its own accounts
Correct answer: any person who issues or proposes to issue securities
The Act defines an issuer as any person who issues or proposes to issue a security, and the words proposes to issue do real work: a company that has merely announced or planned an offering is already an issuer even if the securities are never actually sold or priced. Limiting the term to a business that has already issued and priced its securities therefore leaves out part of the definition. Someone acting on behalf of an issuer and its underwriters is an agent, not the issuer. A dealer buying and selling from its own accounts is a broker-dealer, which the Act defines separately.
- Securities transactions that take place otherwise than on a listed stock exchange are made
- in the over-the-counter market
- through the unlisted exchanges
- through exchange committees
- outside authorized sessions
Correct answer: in the over-the-counter market
Trades in securities that are not on any listed exchange take place in the over-the-counter market, an interdealer network with no central floor. There is no such thing as an unlisted exchange, since a security either carries an exchange listing or it does not. Exchange committees govern the affairs of an exchange and do not execute customer business. Nothing confines these trades to hours when the exchanges are closed; the over-the-counter market runs during the trading day and is open to institutions and retail investors alike.
- One of your customers has inherited 2,000 shares of Shortline Railroad guaranteed preferred stock. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain that
- the dividends are guaranteed by a business besides the issuer
- the dividends are guaranteed by the directors of the railroad
- the dividends are guaranteed to keep pace with the consumer prices
- the holders are guaranteed against any loss of their stock capital
Correct answer: the dividends are guaranteed by a business besides the issuer
The Act calls a security guaranteed when someone other than the issuer promises to make good on it, which means dividends for preferred stock and interest and principal for a bond. So the word tells your customer that a third party, typically a parent or an affiliate, stands behind Shortline Railroad's dividend. A promise from the railroad's own directors adds nothing, because the issuer is already the party obliged to pay. The guarantee is fixed in amount and does not rise with consumer prices. It also reaches the dividend only, so nothing protects the shareholder's capital if the stock falls in value.
- As defined in the Uniform Securities Act, an offer or an offer to sell
- includes each attempt to sell or to solicit any offer to buy securities
- includes each offer or sale of securities that has closed for real cash
- applies to any offer already approved by the state before each sale
- applies to any offer that is made by a currently registered adviser
Correct answer: includes each attempt to sell or to solicit any offer to buy securities
An offer, or offer to sell, covers the attempt rather than the result: every attempt or offer to dispose of a security for value, and every solicitation of an offer to buy one, is itself an offer under the Act. Once a transaction has actually closed it falls under a different defined term, sale, which is where the disposition or purchase happens. The definition draws no line at approved or registered securities, because an offer of an exempt security is still an offer. Nor does it depend on who speaks, since an offer made by someone holding no registration at all is still an offer, which is precisely why unregistered persons get into trouble.
- An individual eligible under federal law to purchase securities sold in a private placement is called
- An accredited investor
- A registered purchaser
- A big institutional buyer
- An entirely private buyer
Correct answer: An accredited investor
Rule 501 of the Securities Act of 1933 calls an individual accredited when he meets the income or net worth tests set out there, and accredited investors are the individuals eligible to buy into a private placement. That is the legal label the question is after. Registered purchaser is not a term federal law uses at all. An institutional buyer is accredited too, but the question asks about an individual, and an individual is never an institution. Buying privately describes the offering rather than the buyer, so it names no eligibility standard.
- Which of the following is included in the Uniform Securities Act's definition of a person?
- An unincorporated society of investors
- A retiree declared legally incompetent
- An unemancipated minor grandchild
- A recently deceased schoolteacher
Correct answer: An unincorporated society of investors
The Act's definition of person is deliberately wide and names the unincorporated association outright, alongside individuals, corporations, partnerships, trusts, joint-stock companies and governments, so a society of investors that never incorporated is squarely inside it. Set against that breadth are only three exclusions, and the other choices are all of them. Someone a court has declared mentally incompetent cannot contract and is therefore not a person under the Act, whatever his age. A minor cannot contract either. Someone who has died is no longer a person, and any business is then done by the estate rather than by the individual.
- As found in the Series 63 examination, which of the following terms is synonymous with retail client?
- Noninstitutional investors
- Nondiscretionary customers
- An institutional shareholder
- A nonprofessional speculator
Correct answer: Noninstitutional investors
On this exam, retail client and noninstitutional investor mean the same thing: individuals buying for themselves rather than banks, insurance companies or investment companies buying as institutions. Whether an account is discretionary describes the trading authority the customer has given the firm and says nothing about retail status, since institutions and individuals both hold accounts of either kind. An institutional shareholder is the opposite of the term being asked about. Speculating is a description of how someone trades, and a retail client may be a long-term investor just as easily, so that label is not a synonym either.
- One of the important definitions in the Uniform Securities Act is that of a security. That term would include all of the following except
- An office property
- A junior debenture
- Convertible bond
- Preferred shares
Correct answer: An office property
Real property is not a security. Office property is real estate, and buying it directly gives the owner a deed rather than an investment contract or an interest in someone else's enterprise. Everything else listed sits inside the definition: a debenture is unsecured corporate debt, a convertible bond is debt that can be exchanged for stock, and preferred shares are equity. Learn the Act's definition of a security alongside the short list of things it leaves out, because that list is where the exam finds its answers.
- Which of the following would be included in the Uniform Securities Act's definition of institution?
- A corporation with $800,000 in yearly sales
- An individual with $9 million in his own portfolio
- An employee benefit plan with $1 million in assets
- An investment club with $200,000 in capital
Correct answer: An employee benefit plan with $1 million in assets
The act's institutional list reaches an employee benefit plan, such as a pension or profit-sharing plan, once the plan holds at least $1 million in assets. No natural person is ever an institution, however large the portfolio, so the individual sitting on $9 million is still a retail investor. An operating corporation is not an institution merely because it books sales, and an investment club is a person under the act but never an institutional investor.
- Under the Uniform Securities Act, the definition of person includes which of the following? I. An unincorporated investment club II. An individual who buys and sells securities only for his own account III. Associations and partnerships whether or not they issue certificates IV. The U.S. government
- Items I, II, III, and IV
- Items II, III, and IV only
- Items I, II, and IV only
- Items I, III, and IV alone
Correct answer: Items I, II, III, and IV
All four belong. The act's definition of person reaches an unincorporated investment club, an individual who buys and sells only for a personal account, associations and partnerships whether or not they issue certificates, and a government, which takes in the United States itself. Any choice that leaves one of the four out is therefore wrong. The only parties the act refuses to call persons are minors, deceased individuals, and those judged mentally incompetent.
- Magnum Manufacturing Company (MMC) wishes to raise capital through a public offering of its common stock. When filing the required paperwork with the Administrator, MMC is legally referred to as
- The filer, the party sending the paperwork
- The applicant, the party seeking a license
- The petitioner, the party that seeks a hearing
- The registrant, the party that is filing forms
Correct answer: The registrant, the party that is filing forms
A person who files registration papers with the Administrator is called the registrant, and the label fits an issuer registering securities exactly as it fits a broker-dealer, an investment adviser, an agent, or an investment adviser representative registering itself. Petitioner, applicant, and filer are ordinary English descriptions of someone who submits paperwork or asks a regulator for something, but the act uses none of the three for the party named in a registration statement.
- A registered broker-dealer committing which of the following would be most likely to face criminal charges?
- Employing an agent before the paperwork is filed
- Committing fraud against a firm customer
- Engaging in a practice the rules have prohibited
- Treating clients in an unethical fashion
Correct answer: Committing fraud against a firm customer
Series 63 tests the law, so the legal label decides the answer. Fraud is the one item here that is prosecuted as a crime, and the act provides fines and imprisonment for it. Treating clients in an unethical fashion, and engaging in a practice the rules have prohibited, draw administrative discipline such as censure, suspension, or revocation rather than a criminal charge. Employing someone before the paperwork is filed is a registration failure, again handled administratively.
- Which of the following can only be a natural person?
- An incorporated city or town government
- A business trust owning rental property
- An agent employed by a broker-dealer or issuer
- A limited liability company held by one member
Correct answer: An agent employed by a broker-dealer or issuer
The act defines an agent as an individual, so only a natural person can hold that role. Everything else here is a legal person: a city is a political subdivision, a business trust is an entity created by state law, and a limited liability company stays an entity even when a single member holds it. Legal persons are fully subject to the act, and a firm can register as a broker-dealer or an investment adviser, but no firm can ever register as an agent.
- Mammoth Corporation owns a controlling interest in five different corporations in diversified industries. Mammoth is most likely
- A holding company, parent of operating firms
- A mutual fund, a pooled portfolio of small stakes
- A hedge fund, a private pool for affluent clients
- A bank, taking deposits from ordinary savers
Correct answer: A holding company, parent of operating firms
A company that exists to own controlling stakes in other businesses is a holding company, which is what the parent of five unrelated subsidiaries is. A mutual fund takes small, diversified, non-controlling positions, so control runs against its whole design. A hedge fund likewise invests for return rather than to run the companies it buys. A bank takes deposits and lends them out, and large banks are themselves owned by holding companies.
- The Financial Industry Regulatory Authority functions as
- A marketplace for listed corporate stock
- A federal agency with countrywide powers
- An educational charity for retail stock investors
- A self-regulatory organization run by its members
Correct answer: A self-regulatory organization run by its members
FINRA is the securities industry's principal self-regulatory organization: a membership body that writes rules for its member firms and disciplines them. Congress authorized it, but it is not a government agency and its staff are not federal employees. It runs no trading floor and lists no securities, so it is not a marketplace, though the exchanges are themselves self-regulatory organizations. It does publish investor education, yet regulation is what it exists to do.
- Which types of accounts are billed a single fee that includes a group of services such as, execution of transactions and advice?
- A margin account billed interest on the debit balance
- A wrap fee account billed one combined charge
- A discretionary account the adviser can trade at will
- An option account cleared to write naked puts
Correct answer: A wrap fee account billed one combined charge
A wrap fee account is the account that bundles execution, advice, asset allocation, portfolio management, and administration into one stated fee, and such an account is generally treated as an advisory account. A margin account is a lending arrangement priced by interest on the debit balance. A discretionary account describes who decides what to trade, not how the client is billed. An option account describes the strategies the client has been cleared to use.
- Under the Uniform Securities Act (USA), a person is best defined as
- An adult human being who has now reached legal majority
- A person required to pay federal or property taxes
- An individual or entity able to form a binding contract
- A living human being who resides within this state
Correct answer: An individual or entity able to form a binding contract
Under the act a person is any individual or entity with the legal capacity to enter an enforceable contract, which is why corporations, partnerships, trusts, associations, and governments count alongside competent adults. Tax liability is beside the point: the American Red Cross owes no federal income tax and is still a person. Residence is beside the point as well. Limiting the term to human beings would throw out every entity the act plainly regulates.
- A broker-dealer would most likely hire an agent to
- Sell securities to the firm's customers
- Set up the firm's newest recordkeeping system
- Plan marketing campaigns for the branch
- Solicit new clients for the advisory division
Correct answer: Sell securities to the firm's customers
The act defines an agent as an individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities, so selling to customers is the function the license exists for. Setting up a recordkeeping system is clerical and technical work, and planning marketing campaigns is promotional work; neither effects a trade. Soliciting clients for advisory services is the job of an investment adviser representative.
- A natural person with at least $5 million in investments meets the definition of
- An accredited investor under the federal test
- A qualified client under advisory rules
- An institutional investor under the act
- A qualified purchaser under the federal rules
Correct answer: A qualified purchaser under the federal rules
The $5 million in investments figure is the natural person test for a qualified purchaser, and that is the only one of these categories keyed to $5 million. Such an investor would very likely also clear the accredited investor standard and the qualified client standard, but each of those rests on a different and lower threshold, so neither is the definition the figure identifies. An individual is never an institutional investor, however large the portfolio.
- XYZ Partners, Ltd., is in the business of providing advice on securities for compensation. Under the Uniform Securities Act, this firm would be considered
- A broker-dealer in the business of trading shares
- An investment adviser paid to give advice
- An agent who represents a broker-dealer or issuer
- A limited partnership formed in the state
Correct answer: An investment adviser paid to give advice
A firm in the business of advising others about securities, and compensated for that advice, meets the act's definition of an investment adviser. A broker-dealer is in the business of effecting transactions rather than selling advice. An agent must be an individual, so no firm can be one. Whether the entity is a general or a limited partnership tells us nothing, because the act does not define partnerships and it is the advisory business that fixes the firm's status.
- As defined in the Uniform Securities Act, the term person includes all of the following except
- A city issuing bonds for school buildings
- A limited partnership that owns farm land
- A minor child below the age of legal adulthood
- A corporation formed under the laws of a state
Correct answer: A minor child below the age of legal adulthood
The act names three parties that are not persons: minors, deceased individuals, and individuals judged mentally incompetent. The child below the age of majority is the one that appears here. Everything else on the list sits squarely inside the definition, since a city is a political subdivision, a limited partnership is an association or partnership, and a corporation is the clearest example of a legal entity the act regulates.
- The regulators recognize that certain investors need more protection than others. Those investors are generally called
- Retail investors, or individual buyers
- New investors, or brand-new account customers
- Accredited investors, or the rich individuals
- Institutional investors, or huge banks
Correct answer: Retail investors, or individual buyers
Regulators use retail investor, or retail client, for the individual customers presumed to need the larger measure of protection, and the label holds no matter how long the person has invested or how big the account is. It has nothing to do with being new: a thirty-year client with $20 million in the account is still retail. Accredited status and institutional status point the other way, marking investors the rules treat as needing less protection.
- Under the Uniform Securities Act, a broker-dealer is defined as any person who
- Buys securities from time to time privately
- Is holding a license from the state Administrator
- Sells securities sometimes to a few friends
- Is in the business of effecting securities trades
Correct answer: Is in the business of effecting securities trades
The definition turns on being in the business of effecting securities transactions, whether for the accounts of others, which is the broker function, or for the firm's own account, which is the dealer function. Holding a license follows from meeting that definition rather than creating it, so no firm becomes a broker-dealer by appearing on a register. Someone who buys now and then, or sells to a few friends, is simply an investor, because the trading is not that person's business.
- The Uniform Securities Act would consider an agent's deliberate attempt to deceive a customer to be
- Deceit, a deliberate wrong done to the customer
- Fraud, the deliberate attempt to deceive
- Unethical sales conduct aimed at clients
- A prohibited deal that misleads a firm customer
Correct answer: Fraud, the deliberate attempt to deceive
The act's own term for an intentional or willful effort to deceive is fraud, and a deliberate attempt to mislead a customer is exactly that. Deceit is a common-law description the act never defines, so it is not the label the statute supplies. Unethical conduct and prohibited practices name broad categories the Administrator disciplines, and neither identifies what this particular act of deception is called. On a law exam the answer is the exact statutory term, and here that term is fraud.
- If you were reading a legal document and saw the term de minimis, it would be referring to
- The number of days that a filing lasts
- The sum of the cash, net of tax
- The insignificant, immaterial quantity
- The paperwork's complete length
Correct answer: The insignificant, immaterial quantity
De minimis comes from the Latin for the smallest things and means an amount too slight to matter. On this exam it marks the small number of clients an investment adviser or an investment adviser representative may have in a state before registration there is required. It says nothing about how long a filing stays alive, how many pages the paperwork runs, or how much cash a particular sale produced.
- Certain securities may be sold without registration because of the way the sale takes place. When that is the case, it is
- An exempt transaction under the act
- An excluded transaction not in the statute
- An exempt security under state laws
- An excluded security not in state statutes
Correct answer: An exempt transaction under the act
When registration is unnecessary because of the way the sale is made or who the parties to it are, the act calls the sale an exempt transaction, and the relief attaches to that particular sale rather than to the instrument. An exempt security is exempt because of what it is, which is a different route to the same result and not what the stem describes. The act uses no category called an excluded transaction or an excluded security, so neither term describes anything at all.
- A discussion referring to blue-sky laws would include all of the following except
- Filings that an issuer makes within every state
- Laws that let each state Administrator revoke a license
- Statutes that guard a state's public from fraud
- Statutes that the Congress of the United States enacted
Correct answer: Statutes that the Congress of the United States enacted
Blue-sky law is the traditional name for the securities law of a state, so everything a blue-sky discussion covers is state material: the statutes that guard the investing public against fraud inside a state, the filings an issuer makes within each state before it sells there, and the grant of power that lets a state Administrator deny, suspend, or revoke a registration. The Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted by Congress and belong to federal law, not to any state's blue-sky regime.
- A retail customer of an investment adviser has at least $1.4 million under management with that adviser. That would make this individual
- A qualified purchaser of a large portfolio
- A qualified client of this adviser
- An institution under the state act
- An accredited investor under a wealth test
Correct answer: A qualified client of this adviser
A natural person with at least $1.4 million under the management of the adviser is a qualified client, the test that lets that adviser charge a performance fee. A qualified purchaser is measured by the investments a person owns rather than by the assets left with one adviser, and the bar is far higher. Accredited investor status rests on net worth or income, and $1.4 million placed with an adviser does not by itself establish either. A retail individual is never an institution.
- Who receives the proceeds from a nonissuer transaction of a bond?
- The issuer selling these original bonds
- The Administrator of the seller's state
- The selling security holder who owns the bond
- The beneficiary who is named in the indenture
Correct answer: The selling security holder who owns the bond
A nonissuer transaction is one in which the proceeds go, directly or indirectly, to someone other than the issuer, so the money reaches the owner who parted with the bond. That is the ordinary secondary market trade. An issuer selling its own bonds would be an issuer transaction, the opposite of what the stem describes. The Administrator regulates such trades and takes no part of the price, and a beneficiary named in the indenture holds a claim under the bond rather than the proceeds of this sale.
- Which of the following is responsible for the administration of the Uniform Securities Act in a state?
- The state securities Administrator
- The Securities and Exchange Commission
- The state's legislative leadership
- The state's principal appellate courts
Correct answer: The state securities Administrator
Each state's securities law is administered by its Administrator, the chief securities regulator of that state, whatever local title the office happens to carry. The Securities and Exchange Commission administers the federal securities statutes and has no role in running a state act. The legislature writes the statute but does not administer it, and the appellate courts review the Administrator's orders rather than carrying the law out.
- Walter Mattingly is employed by a nationally known broker-dealer. Mattingly's job function is the filing of customer account forms. Mattingly is not registered with the state as an agent. The reason for this is most likely because he
- Qualifies for an exemption that the act grants
- Is a part-time employee of the brokerage
- Is still studying for the licensing exam
- Is excluded from the act's definition of agent
Correct answer: Is excluded from the act's definition of agent
Clerical and administrative employees are written out of the definition of agent, so someone whose job is filing customer account forms is not an agent at all and has nothing to register. An exemption is relief granted to someone who does fall inside a definition, which is not this situation. Hours worked are irrelevant, because registration follows function rather than schedule, and studying for a licensing exam excuses nobody from registering.
- As defined in the Uniform Securities Act, which of the following is not a state?
- Missouri
- Ontario
- Nebraska
- Wyoming
Correct answer: Ontario
Ontario is a Canadian province and falls outside the act's definition of a state. The act defines state to mean any state, territory, or possession of the United States, together with the District of Columbia and Puerto Rico, so Missouri, Nebraska, and Wyoming all qualify.
- As defined in the Uniform Securities Act, the term used to describe an agent of a broker-dealer attempting to dispose of a security to a customer is
- An offer to sell
- A sale for value
- An assignment
- A disposition
Correct answer: An offer to sell
Under the Act the words offer and offer to sell take in every attempt or solicitation to dispose of a security for value, so an agent who is still trying to place shares with a customer has made an offer to sell. A sale for value is not reached until the customer accepts. An assignment hands an existing interest to a new holder and is not what an agent does in soliciting a customer. A disposition describes the completed transfer of the security, which has not happened here.
- Each of the following statements is true except
- NSMIA compels the states and the SEC to adopt identical registration standards
- NASAA alone determines the content covered by the Series 63 qualification exam
- The Administrator of a state is the one who enforces all the securities laws of that state
- The Uniform Securities Act is a model for state legislation and not the statute of a state
Correct answer: NSMIA compels the states and the SEC to adopt identical registration standards
NSMIA divided jurisdiction between the states and the SEC so that the same adviser or security would not have to register twice; it never obliged the two levels of government to write matching registration standards, which is why that statement is the false one the question asks for. The Administrator really does enforce the securities laws of the state that created the office. NASAA really does own the content of the Series 63 examination. And the Uniform Securities Act really is model legislation that a legislature must enact before it carries any force.
- A client of a broker-dealer discovers that the agent handling the account has forged the customer's signature on several checks and taken the money. In the event the agent cannot provide the funds to repay the customer, protection is offered in the form of
- A surety bond carried by that broker-dealer
- A garnishment that reduces the agent's wage
- Insurance on the firm's bank deposits
- A judgment against the agent's assets
Correct answer: A surety bond carried by that broker-dealer
Firms carry a surety bond precisely so that a customer cheated by an employee can be made whole when the employee cannot pay, and forgery is the classic claim against one. A garnishment that reduces the agent's wage recovers little from someone who has already spent the money and is not the protection the industry provides. Insurance on the bank deposits of the firm covers the firm's own banking relationship and reaches no brokerage customer. A judgment against an agent who has no assets leaves the customer with nothing to collect.
- As defined in the Uniform Securities Act, every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value is
- A sale of the security
- A gift of the security
- An offer to buy some shares
- A pledge of the same shares
Correct answer: A sale of the security
The Act defines a sale as every contract of sale, every contract to sell, and every disposition of a security for value, so the completed arrangement the question describes is a sale of the security. A gift moves the security without value passing, and value is what the definition requires. An offer to buy is a bid from the other side of the trade and forms no contract on its own. A pledge hands shares over as collateral and transfers no ownership at all.
- A broker-dealer has offered a security to a customer. If the customer accepts the offer, the broker-dealer has made
- A sale of the security to the client
- A purchase of the shares by the firm
- An offer to sell to the client
- A gift of shares to the client
Correct answer: A sale of the security to the client
Once the customer accepts, a contract exists and the firm has made a sale of the security to the client. A purchase of the shares by the firm reverses the direction of the trade the question describes. An offer to sell to the client was the earlier step, and it ended the moment the customer said yes. A gift of shares would pass no value, and value is exactly what the statutory definition of a sale requires.
- Which of the following is not a person as defined by the Uniform Securities Act?
- A nine-year-old actor whose earnings are large
- An investment club that has never incorporated
- A corporation whose shareholders all work on the premises
- A township investing its surplus cash through a brokerage
Correct answer: A nine-year-old actor whose earnings are large
The Act treats a minor as legally unable to enter a contract, so the nine-year-old actor is not a person no matter how large the earnings are, and an adult must open a custodial account instead. A corporation appears by name in the definition, and the fact that its shareholders work on site changes nothing. A township is a political subdivision of a government and is expressly included. An investment club that never incorporated is an unincorporated organization, which the definition also lists.
- An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than
- Once during a calendar quarter
- Once during a six-month period
- Once each calendar month
- Once every calendar year
Correct answer: Once during a calendar quarter
An adviser holding client money or securities must account for them at least every three months, so a statement once during a calendar quarter is the least frequent schedule the rule allows. Once during a six-month period and once every calendar year both leave the client without an accounting for far longer than that. Once each calendar month is more often than the rule demands, and the question asks for the minimum standard rather than a schedule that exceeds it.
- In instances where an investment adviser has custody or possession of clients' funds or securities, it must comply with
- The NASAA Model Rule on Custody
- The SEC Rule on Margin Accounts
- The SEC Rule on Reserves for Customers
- The NASAA Model Rule on Bonding Levels
Correct answer: The NASAA Model Rule on Custody
An adviser that holds client cash or certificates is governed by the model rule NASAA wrote for exactly that situation, the Model Rule on Custody. The model rule on bonding levels sets minimum financial requirements for advisers and says nothing about how client property is held. The two SEC rules listed, one on margin accounts and one on reserves for customers, reach broker-dealers rather than advisers, so neither one governs an adviser that has taken possession of client assets.
- Under the NASAA Model Rule on Custody, it is unlawful for an investment adviser to have custody of client funds and securities in all of these cases except
- The client's cash and certificates are held by an affiliated broker-dealer
- The adviser withholds the quarterly list of holdings and their whereabouts
- A rule of the Administrator bars advisers from holding custody
- The adviser never tells the Administrator it has taken custody
Correct answer: The client's cash and certificates are held by an affiliated broker-dealer
The model rule treats assets left with an affiliated broker-dealer as custody by the adviser, yet permits the arrangement so long as that broker-dealer meets the SEC rules on customer property and the Administrator has been told. Each of the other three describes conduct the model rule forbids: withholding the quarterly list of holdings and where they sit, taking custody in a state whose Administrator has barred custody by rule, and never notifying the Administrator at all.
- If the press carried an article about a broker-dealer found guilty of commingling by the SEC, it would likely be in reference to violating
- The Customer Protection Rule
- The Limit Order Display Rule
- The Insider Trading Sanctions Act
- The Securities Registration Rules
Correct answer: The Customer Protection Rule
Commingling means a firm mixed customer cash and securities with its own, and the rule written to keep the two apart is the Customer Protection Rule. The Limit Order Display Rule governs how a customer limit order must be shown to the market. The Insider Trading Sanctions Act sets penalties for trading on material nonpublic information. The rules on registering securities govern what must be filed before an offering rather than how customer property is held.
- Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? I. When the investment adviser is not bonded II. When the Administrator has not prohibited custodial arrangements III. When the investment adviser does not have discretionary authority over the account IV. When the investment adviser has notified the Administrator that it has custody
- II and IV
- I and III
- I and II
- III and IV
Correct answer: II and IV
An Administrator may adopt a rule forbidding custody outright, so an adviser may hold client property only where no such rule is in force, and the adviser must then notify the Administrator that it has custody. Statement I fails because being unbonded does not open the door; a bond or a minimum net worth is what jurisdictions require of an adviser with custody. Statement III fails because discretion over an account is a separate authority that neither permits nor bars custody.
- The Administrator may, by rule,
- Require registered advisers to give notice before taking custody
- Allow agents to waive statutory protections for retail customers
- Suspend the registration of any federal covered adviser using oral contracts
- Suspend a federal statute whenever the Administrator thinks the public gains
Correct answer: Require registered advisers to give notice before taking custody
The Act lets the Administrator adopt a rule requiring advisers registered in that state to give notice before they take custody of client money. A waiver of any protection the Act confers is void, so no rule of the Administrator can hand an agent that power. No state official can suspend an act of Congress. And after NSMIA a state may not police the contract terms of a federal covered adviser, so it cannot pull that adviser's registration over an oral advisory contract.
- Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not I. have physical custody over its clients' monies and certificates. II. manage client accounts on a discretionary basis. III. examine customers' stock certificates.
- I but not II and not III
- II but not I and not III
- I and II but not III
- I and III but not II
Correct answer: I but not II and not III
A state rule barring custody stops the firm from holding client money and certificates, and that is the whole of what it stops. Discretionary management rests on a written authorization or a power of attorney from the client, so a custody ban leaves it untouched. Looking over a certificate a client brings in is not the same as possessing it, so that activity remains open to the firm as well.
- An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if
- A state rule bars this kind of custody
- A client has not opened a wrap account
- The adviser has not registered as a dealer firm
- A client has not told the adviser about custody
Correct answer: A state rule bars this kind of custody
Where the Administrator has adopted a rule barring custody, no adviser in that state may hold client money or securities on any terms. Notice of custody runs from the adviser to the Administrator and to the client, so nothing turns on a client telling the adviser what the adviser is already doing. Custody is not reserved to advisers that are also registered as dealers. And a wrap arrangement is a way of billing for advice, not a precondition for holding client property.
- An agent may determine which securities to purchase or sell for a client when
- Written authority reaches the broker-dealer in advance of the first trade
- Written authority reaches the broker-dealer within ten days of that trade
- Oral authority reaches the broker-dealer before the first trade
- Oral authority reaches the broker-dealer after ten trading days
Correct answer: Written authority reaches the broker-dealer in advance of the first trade
An agent may exercise discretion only after written authorization from the customer is in hand, and it has to be in hand before the first discretionary order is entered. Oral permission never suffices for an agent of a broker-dealer, whether it arrives before that order or ten trading days later. The ten-day allowance belongs to investment advisers and their representatives, so written authority that turns up that late leaves the earlier trades unauthorized.
- According to the North American Securities Administrators Association's (NASAA's) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is not unethical?
- An agent picked the moment of day for the authorized sale
- An agent sold shares below the price the client had named
- An agent sold every share when the client had authorized only some
- An agent took spoken discretion and bought shares for a new client
Correct answer: An agent picked the moment of day for the authorized sale
Choosing the moment during the trading day at which an already authorized sale is executed is time discretion, and decisions about time and price are not treated as discretion at all, so no written authority is needed for them. Selling every share when the client authorized only some of the position is discretion over amount. Selling below the price the client named departs from the client's own instruction. And spoken discretion is available to investment advisers and their representatives, never to an agent, so taking it from a new client is unethical however soon the trade follows.
- If an investment adviser maintains custody of customer funds and/or securities, an itemized list of all securities and funds in the adviser's possession must be sent to the client not less frequently than
- Once in every three months
- Once in each twelfth month
- Once every fourth week
- Once every eighth week
Correct answer: Once in every three months
An adviser with custody must send an itemized list of the client's funds and securities at least every three months, so once in every three months is the outer limit the rule allows. Once every fourth week and once every eighth week are both more frequent than the rule demands, and the question asks for the least frequent schedule permitted rather than a stricter one. Once in each twelfth month would leave the client with no itemized accounting for a full year.
- Under industry regulations, when may an agent be given discretionary power to buy or sell securities for a client?
- When the client has signed a written authorization
- When the client has telephoned an approval instead
- When the client has confirmed every order one week afterward
- When the client has established the size and type beforehand
Correct answer: When the client has signed a written authorization
Discretionary authority has to be granted in writing, so an agent may act on it only once the client has signed a written authorization. A telephoned approval carries no weight for an agent of a broker-dealer. Confirming an order a week after it was placed comes too late, since the authority must already exist when the trade is entered. And where the client has established the size and type beforehand, nothing is left for the agent to decide, so that describes an ordinary order rather than a grant of discretion.
- Which of the following constitutes a discretionary account?
- An account whose owner gives the firm written trading power
- An account whose owner delegates the timing and price alone
- An account holding the personal trades of the agent
- An account holding the principal trades of the firm
Correct answer: An account whose owner gives the firm written trading power
An account is discretionary when the investor has given the firm written power to decide what to buy or sell and how much. An account whose owner delegates the timing and price alone is not discretionary, because decisions about time and price sit outside the definition. The agent's own trading account and the firm's principal account each hold the trader's own money, so no authority over anyone else's assets has been granted in either.
- According to the Uniform Securities Act's rules for an investment adviser with custody of customer assets, which of the following statements are true? I. The Administrator must give written approval before the investment adviser may hold customer assets in custody. II. Customer assets must not be commingled with assets of the investment adviser. III. An investment adviser who has discretion over customer accounts is deemed to have custody. IV. Every three months, the investment adviser must send an itemized account statement to each customer whose assets are held in custody.
- II and IV
- I and III
- I and II
- III and IV
Correct answer: II and IV
Assets held in custody must be kept apart from the adviser's own property, and the client must receive an itemized statement every three months, so those two statements are the true ones. Statement I fails because the Administrator has to be notified that an adviser has taken custody, not asked for written approval in advance. Statement III fails because discretion is authority to trade an account, which is not the same as holding the client's money or certificates.
- Over which of the following would the investment adviser representative have discretionary authority?
- An account in which the representative picks the securities to be held
- An account in which a trustee exercises a relative's power of attorney
- An order naming the security and the quantity but not price
- An account where a client uses a parent's power of attorney
Correct answer: An account in which the representative picks the securities to be held
An order is discretionary when the representative decides at least one of the security, the size, or whether to buy or sell, so the account where the representative picks the securities to be held is the one under discretionary authority. An order that fixes the security and the quantity leaves only price to the representative, and price is excluded from the definition. A power of attorney held by a trustee or by a client over someone else's account gives authority to that person, not to the representative.
- The NASAA Model Rule on Custody applies to certain
- Investment advisers
- Broker-dealer firms
- Adviser representatives
- Securities salespersons
Correct answer: Investment advisers
The model rule reaches investment advisers, and among them only those that hold client funds or securities. Broker-dealer firms are covered instead by the SEC rules on customer property. Adviser representatives and securities salespersons act on behalf of their firms and do not take custody of client assets in their own right, so the model rule does not apply to them.
- The SEC's Customer Protection Rule is found in
- The Securities Exchange Act of 1934
- The Investment Advisers Act of 1940
- The Glass-Steagall Act of 1933
- The Sarbanes-Oxley Act of 2002
Correct answer: The Securities Exchange Act of 1934
The Customer Protection Rule is Rule 15c3-3, adopted by the SEC under the Securities Exchange Act of 1934, the federal statute that governs broker-dealer conduct in the trading markets. The Investment Advisers Act of 1940 reaches advisers rather than the handling of brokerage customer property. The 1933 banking statute separated commercial banking from investment banking, and the 2002 reform statute addressed issuer reporting and auditor independence.
- An account where a securities professional may invest the client's money without consulting the client about the amount or type of security for the trades that are placed for the account is known as
- A discretionary account
- A correspondent account
- A fee-based advisory account
- An unrestricted cash account
Correct answer: A discretionary account
An arrangement that lets the professional choose the amount and the type of security without consulting the client on each trade is a discretionary account. A correspondent account is a relationship between two firms for clearing and execution. A fee-based advisory account describes how the client is billed and does not by itself hand over any decision. An unrestricted cash account simply means the client pays in full and faces no trading restriction.
- The SEC rule designed to safeguard customer securities and funds held by a broker-dealer and to prevent investor loss or harm in the event of a broker-dealer's failure is
- Known as the Broker Insolvency Reserve Rule
- Known as the Customer Account Transfer Rule
- Known as the Customer Protection Rule
- Known as the Liquidation Reserve Rule
Correct answer: Known as the Customer Protection Rule
SEC Rule 15c3-3, which the industry calls the Customer Protection Rule, is the rule that safeguards customer securities and cash held at a broker-dealer so that a firm forced into liquidation can still meet its obligations to customers. It works in two directions: the firm must keep possession or control of customers' fully paid securities, and it must hold customer cash in a special reserve account maintained solely for the benefit of customers. The broker insolvency reserve rule and the liquidation reserve rule are invented titles; no SEC rule carries either name. The customer account transfer rule is about moving an account from one firm to another, not about protecting assets when a firm fails. The exam never asks for the rule number, only for what the rule does.
- All of the following are prohibited actions except
- Omitting exempt transactions from the firm's own records
- Buying a registered nonexempt security in a discretionary account
- Moving a conservative client into speculative new issues
- Splitting the profits of a customer account without authorization
Correct answer: Buying a registered nonexempt security in a discretionary account
Discretionary accounts may hold nonexempt securities, and because a discretionary trade is treated as solicited, that security should be registered. Buying a registered nonexempt security in a discretionary account is therefore an ordinary permitted transaction, not a violation. Splitting the profits of a customer account without authorization is prohibited; profit sharing is allowed only when both the customer and the employing broker-dealer have consented, and no such consent appears here. Omitting exempt transactions from the firm's own records is prohibited because every transaction, exempt or not, must be recorded on the broker-dealer's books. Moving a conservative client into speculative new issues is unsuitable and is a prohibited business practice no matter what trading authorization is on file.
- In the securities industry, the term discretionary refers to
- An account in which the agent picks trades without specific consent
- An account in which a guardian handles an incompetent adult's money
- An account in which the customer names the price and timing of purchases
- An account in which a custodian controls the securities of a young child
Correct answer: An account in which the agent picks trades without specific consent
An order is discretionary when the agent enters it without the customer's authorization for that particular order and the agent chooses at least one of three things: the security, the amount, or whether to buy or sell. That is exactly the account in which the agent picks trades without specific consent. An account in which a guardian handles an incompetent adult's money rests on a power of attorney and is far narrower than discretion, which has nothing to do with the customer's competence. An account in which a custodian controls the securities of a young child is a custodial arrangement, a different thing again. An account in which the customer names the price and timing of purchases is not discretionary at all: when the customer supplies the security, the amount and the side, and leaves only price or time to the agent, the order is a not-held order.
- Which of the following situations would require registration as an investment adviser? I. A broker-dealer provides investment research services to a customer and charges a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. An agent of a broker-dealer prepares a complete financial plan for a customer with a one-time charge of $950. The plan recommends specific securities transactions, which the customer orders. The agent earns commissions on the securities transactions. IV. A broker-dealer charges its customers a fee for collecting dividends and account maintenance, in addition to commission charges for transactions executed.
- I, II, and III
- I, III, and IV
- II and IV
- I and III
Correct answer: I and III
Charging a customer for research advice is charging for advisory services, so the broker-dealer in the first situation must register as an investment adviser. A one-time $950 charge for a complete financial plan is likewise a charge for investment advice, and the commissions earned on the resulting trades are indirect advisory compensation, so the third situation requires registration too, which makes I and III the pair that counts. Simply recommending a security and earning a commission on it is incidental to the brokerage business and requires no adviser registration, which is why II never belongs in the answer and II and IV names nothing that qualifies. Fees for collecting dividends and maintaining accounts pay for clerical work rather than advice, so IV does not qualify either, and that is what defeats both I, II, and III and I, III, and IV.
- Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser except
- A commercial bank located in the state
- A paid adviser on municipal bonds
- A trust company chartered in the state
- An adviser covered by federal law
Correct answer: A paid adviser on municipal bonds
Municipal bonds are exempt securities, but that exemption reaches only the registration of the security itself. Anyone in the business of advising others about securities for compensation meets the definition of an investment adviser, so a paid adviser on municipal bonds is the one person here who is not excluded and who must register. An adviser covered by federal law is written out of the state definition even though it does an adviser's work, which is why federal covered advisers make a notice filing instead of registering. A commercial bank located in the state and a trust company chartered in the state both receive a blanket exclusion under the Uniform Securities Act.
- An investment adviser need not register in a state if it has
- A place of business in the state and 40 institutional clients
- No place of business in the state and 12 individual retail customers
- No place of business in the state and just insurance company clients
- A place of business in this state and large pension customers
Correct answer: No place of business in the state and just insurance company clients
An adviser escapes registration in a state when it keeps no place of business there and every client it has in the state is institutional. Insurance companies are institutional, and how many of them there are makes no difference, so no place of business in the state and just insurance company clients is the situation that needs no registration. No place of business in the state and 12 individual retail customers breaks the de minimis allowance, which permits no more than five retail clients in any 12-month period. A place of business in the state and 40 institutional clients still requires registration, because the Uniform Securities Act requires any adviser with a place of business in the state to register whatever its clientele. A place of business in this state and large pension customers fails for that same reason.
- Under the Uniform Securities Act, an investment adviser is exempt from registration if it has no place of business in a state and its only clients are any of the following except
- Accredited individual investors
- Other registered investment advisers
- Federally chartered commercial banks
- Registered investment companies
Correct answer: Accredited individual investors
The exemption for an adviser with no place of business in a state runs to institutional clients only. Accredited individual investors are defined by income or by net worth above $1 million excluding the principal residence, and wealth does not turn a natural person into an institution, so an adviser whose clients are accredited individuals still has to register in that state. Other registered investment advisers, registered investment companies and federally chartered commercial banks are all institutional, and an adviser with no place of business in the state that deals exclusively with them is exempt.
- According to the Uniform Securities Act, which of the following statements is true?
- An agent moving to a new broker-dealer is reported by that employer and nobody else
- An adviser must register in that state and its representatives need not do so
- An adviser with a leased office and only bank clients need not register there
- An adviser with no office in the state and only insurance clients need not register
Correct answer: An adviser with no office in the state and only insurance clients need not register
An adviser that keeps no place of business in the state and deals there only with insurance companies is not required to register in that state, so an adviser with no office in the state and only insurance clients need not register is the true statement. An adviser with a leased office and only bank clients need not register there is false, because the size of a place of business is irrelevant and having one in the state triggers registration no matter who the clients are. An agent moving to a new broker-dealer is reported by that employer and nobody else is false, since the former broker-dealer, the new broker-dealer and the agent must each notify the Administrator. An adviser must register in that state and its representatives need not do so is false as well, because the Act treats advisers and their representatives as separate registrants and requires each of them to register.
- In response to an evolving marketplace, the SEC, through Release IA-1092, expanded the coverage of the definition of investment adviser to include
- Broker-dealers and life insurance sales agents
- Pension consultants and life insurance brokers
- Insurance underwriters and bank custodians
- Financial planners and pension consultants
Correct answer: Financial planners and pension consultants
Release IA-1092 was the SEC's answer to people who advised on securities without calling themselves advisers, and it drew financial planners, pension consultants, and sports and entertainment representatives into the definition of investment adviser. Insurance underwriters and bank custodians were not its subject. A life insurance agent is not an investment adviser unless the agent actually gives securities advice, so neither broker-dealers and life insurance sales agents nor pension consultants and life insurance brokers describes what the release did. The release also said nothing about wrap fee programs; the broker-dealer exclusion comes from the Investment Advisers Act of 1940, and it is lost the moment special compensation such as a wrap fee is taken.
- Under the Uniform Securities Act, investment advisers are exempt from registration in a state where they have no office if they direct business communications to fewer than six retail clients within any
- 30-day period.
- 24-month period.
- 90-day period.
- 12-month period.
Correct answer: 12-month period.
An adviser with no office in a state stays outside that state's registration requirement if it directs business communications to no more than five retail clients there within any 12-month period. That rolling twelve months is the de minimis window. A 30-day period and a 90-day period are far shorter than the measuring period the Act uses, and a 24-month period is longer than it. The same exemption also covers an adviser whose only clients in the state are other advisers or broker-dealers, financial institutions such as banks and trust companies, institutional investors such as insurance companies and investment companies, or government entities.
- Under the Uniform Securities Act, the Administrator can require a federal covered investment adviser to
- File copies of the papers it files with the SEC
- Keep its books and files longer than the SEC now requires
- Hold net worth above the level the SEC now sets
- Post a surety bond that is larger than the SEC prescribes
Correct answer: File copies of the papers it files with the SEC
A federal covered adviser sits outside the state Administrator's registration jurisdiction, and the most the Administrator may ask of it is a notice filing: copies of the papers the adviser files with the SEC, a filing fee, and a consent to service of process. Hold net worth above the level the SEC now sets is beyond the Administrator's reach, because the National Securities Markets Improvement Act bars a state from imposing its own financial requirements on a federal covered adviser. Post a surety bond that is larger than the SEC prescribes is barred by the same preemption. Keep its books and files longer than the SEC now requires fails as well, since recordkeeping for these advisers is set federally and a state may not extend it.
- Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of
- A trust company officer who oversees the investments held in client trust accounts
- An agent paid just by commission for the model portfolios he suggests
- An economics professor paid a small fee for evening lectures on portfolio analysis
- A tax attorney suggesting municipal bonds as part of his tax practice
Correct answer: An economics professor paid a small fee for evening lectures on portfolio analysis
Registration is required of anyone who holds himself out to the public as giving investment advice and is paid for doing it. An economics professor paid a small fee for evening lectures on portfolio analysis takes compensation for securities-related advice given to the public, and that fee is what makes him an investment adviser. A trust company officer who oversees the investments held in client trust accounts is covered by the exclusion the Act grants trust companies and their employees. A tax attorney suggesting municipal bonds as part of his tax practice advises incidentally to his profession and charges nothing separate for the advice. An agent paid just by commission for the model portfolios he suggests receives no special compensation for advice and so is not in the business of giving it.
- In which of the following cases would the Uniform Securities Act require registration of an investment adviser who had no place of business in the state?
- He advises large insurance companies all located in this state
- He has six noninstitutional clients living in this state
- His firm's website is regularly viewed by many state residents
- He has forty-two banking and trust company clients there
Correct answer: He has six noninstitutional clients living in this state
With no place of business in the state, an adviser may have no more than five noninstitutional clients there in any 12-month period, so he has six noninstitutional clients living in this state is the situation that forces registration. He has forty-two banking and trust company clients there does not, because there is no ceiling on institutional clients. He advises large insurance companies all located in this state is the classic institutional-only arrangement and remains exempt. His firm's website is regularly viewed by many state residents changes nothing either, since a website reaches every state and it is a place of business or a breach of the de minimis count that triggers registration.
- Under the Uniform Securities Act, the term investment adviser does not exclude
- An agent paid a commission for selling securities
- A lawyer whose counsel is incidental to his law practice
- A publisher of a widely read financial newsletter
- A person paid a separate fee for advice about securities
Correct answer: A person paid a separate fee for advice about securities
An investment adviser is a person who is in the business of advising others about securities and is paid a fee for it, so a person paid a separate fee for advice about securities is precisely the one the definition refuses to let go. A lawyer whose counsel is incidental to his law practice is excluded, as are accountants, engineers and teachers, so long as nothing separate is charged for the advice. A publisher of a widely read financial newsletter is excluded as a bona fide publication of general and regular circulation. An agent paid a commission for selling securities receives no special compensation for advice and is excluded as well.
- A pension fund manager who manages a $35 million dollar account must register with which of the following?
- The state securities Administrator
- Either the state or federal regulator
- The national securities commission
- Both the state and federal regulators
Correct answer: The state securities Administrator
A pension fund manager becomes eligible to register with the SEC only once it manages $200 million or more in plan assets, and the general line for advisers is $100 million in assets under management. A $35 million account falls under both figures, so this manager registers with the state securities Administrator. The national securities commission is wrong for the same reason: the manager is too small to be federal covered. Either the state or federal regulator is wrong because registration is not a matter of preference, and both the state and federal regulators is wrong because the two systems are deliberately built so that an adviser answers to one or the other, not to both.
- Under the Uniform Securities Act, which of the following are excluded from the definition of an investment adviser when providing investment advice solely incidental to the business? I. Lawyer II. Accountant III. Engineer IV. Teacher
- I, II, and III
- II, III, and IV
- I, III, and IV
- I, II, III, and IV
Correct answer: I, II, III, and IV
Certain professionals fall outside the definition of investment adviser when the advice they give is incidental to their profession and nothing extra is charged for it. Lawyers, accountants, engineers and teachers all qualify, which the acronym LATE is meant to fix in memory, so every one of the four listed occupations is excluded. Each shorter combination drops a profession the Act in fact excludes: I, II, and III leaves out the teacher, II, III, and IV leaves out the lawyer, and I, III, and IV leaves out the accountant. An Administrator also holds the power to exclude other persons from the definition by rule or order.
- Under the Uniform Securities Act, which of the following is excluded from the definition of investment adviser? I. A bank II. An investment adviser representative III. A lawyer giving suggestions to a client on where to invest the proceeds of a divorce settlement that he helped her obtain IV. An investment adviser with an office in the state whose only client is a closed-end investment company registered under the Investment Company Act of 1940
- I, II, and III
- I, II, III, and IV
- II, III, and IV
- I, II, and IV
Correct answer: I, II, III, and IV
Banks, investment adviser representatives, lawyers advising incidentally to their practice, and federal covered advisers are all written out of the Uniform Securities Act's definition of investment adviser, so every one of the four is excluded. Banks receive a blanket exclusion. The Act distinguishes an adviser from its representatives, so an investment adviser representative is not itself an investment adviser. Telling a client where to invest the proceeds of a divorce settlement the lawyer obtained for her is incidental to the practice of law. And an adviser under contract to manage a registered closed-end investment company must register with the SEC and is federal covered wherever its office happens to sit, which is what defeats I, II, and III. I, II, and IV omits the lawyer and II, III, and IV omits the bank, though both are excluded.
- Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction?
- An accountant delivering securities advice as part of his practice
- A commercial bank in this state advising customers on investment matters
- An investment subsidiary of a bank holding company managing $70 million
- A federal covered adviser managing $400 million for state clients
Correct answer: An investment subsidiary of a bank holding company managing $70 million
A commercial bank is excluded from the definition of investment adviser, but the investment subsidiary of a bank holding company is not, and at $70 million it sits below the $100 million line that would make it federal covered. It therefore remains an investment adviser under the Uniform Securities Act and within state jurisdiction. A commercial bank in this state advising customers on investment matters falls squarely inside the bank exclusion. A federal covered adviser managing $400 million for state clients does an adviser's work but is excluded from the state definition so that the same firm is not regulated twice. An accountant delivering securities advice as part of his practice is excluded because the advice is incidental to the profession and carries no separate charge.
- A federal covered investment adviser is a person
- Registered or exempted under the Exchange Act of 1934
- Registered or excluded under the Advisers Act of 1940
- Exempt from the antifraud provisions of the Uniform Securities Act
- Registered in every state and excluded from federal securities law
Correct answer: Registered or excluded under the Advisers Act of 1940
A federal covered investment adviser is a person or firm registered under the Investment Advisers Act of 1940, or excluded from the definition of investment adviser in that same act. Registration under the 1940 act is what relieves the firm of state registration and licensing, through the National Securities Markets Improvement Act and the Uniform Securities Act. Registered or exempted under the Exchange Act of 1934 names the wrong statute, since that act governs broker-dealers and the securities markets rather than advisers. Exempt from the antifraud provisions of the Uniform Securities Act is false, because those provisions continue to reach a federal covered adviser. Registered in every state and excluded from federal securities law inverts the whole arrangement.
- Which of the following statements describes a person who, while providing investment advice on a regular basis but not charging fees, would be considered an adviser under Release IA-1092?
- A planner who counsels pension plans for no fee but receives vacations and equipment from the managers he recommends
- A wealthy professor who gives free public lectures naming specific securities drawn from a model he created
- A retired investment officer who writes an unpaid newspaper column on equities that sends readers to his former firm
- A cabinet officer who discusses market conditions and their investment effects as part of her official work
Correct answer: A planner who counsels pension plans for no fee but receives vacations and equipment from the managers he recommends
Release IA-1092 treats any economic benefit as compensation, and the benefit need not come from the person who receives the advice. A planner who counsels pension plans for no fee but receives vacations and equipment from the managers he recommends is in the business of giving advice, actually gives it, and is paid for it in kind, so all three elements of the definition are satisfied. A wealthy professor who gives free public lectures naming specific securities drawn from a model he created receives nothing at all for the advice. A retired investment officer who writes an unpaid newspaper column on equities that sends readers to his former firm is not compensated for the column and is not in the business of advising. A cabinet officer who discusses market conditions and their investment effects as part of her official work is performing a public duty, not advising clients for pay.
- Under all of the following circumstances, the Uniform Securities Act requires investment advisers with no place of business in the state to register except
- When it advises eight retail investors who all live in the state
- When its customers are all 401(k) plans that hold $250,000
- When each of its clients is a registered investment company
- When it has many retail clients but a clean record of discipline
Correct answer: When each of its clients is a registered investment company
An adviser whose clients are all investment companies registered under the Investment Company Act of 1940 is a federal covered adviser, and a federal covered adviser never registers with a state, whether or not it keeps a place of business there. That is the one circumstance the registration requirement does not reach. When its customers are all 401(k) plans that hold $250,000 does require registration, because the threshold that lets an adviser treat an employee benefit plan as institutional is $1 million in plan assets, not $250,000. When it advises eight retail investors who all live in the state requires registration because more than five noninstitutional clients in a 12-month period exceeds the de minimis allowance. When it has many retail clients but a clean record of discipline requires registration too, since a spotless disciplinary history is no substitute for registering.
- Although most broker-dealers are SEC-registered and must adhere to those rules, the Uniform Securities Act does include recordkeeping requirements for those obligated to follow their state's regulations. For test purposes, record retention requirements are
- Three years, the first two readily accessible
- Two years, with the first year readily accessible
- Ten years, the first three readily accessible
- Six years, with the whole term readily accessible
Correct answer: Three years, the first two readily accessible
For Series 63 purposes the recordkeeping requirement under the Uniform Securities Act parallels the SEC's: records are retained for three years in total, and for the first two of those years they must be readily accessible to the Administrator. Two years, with the first year readily accessible understates both the retention period and the accessible period. Six years, with the whole term readily accessible overstates them; the SEC does impose a six-year retention on a few records, but that longer period is not tested on this exam. Ten years, the first three readily accessible is longer still than anything the Act asks for.
- Under the Uniform Securities Act, an investment adviser is exempt from registration if the person has no place of business in a state and does not direct communication I. to more than 5 noninstitutional clients. II. to more than 15 noninstitutional clients. III. within 9 consecutive months. IV. within 12 consecutive months.
- I and III
- II and III
- I and IV
- II and IV
Correct answer: I and IV
An adviser with no place of business in a state is exempt there if it directs communications to no more than five noninstitutional clients within any 12 consecutive months, which pairs the five-client limit with the twelve-month window. Fifteen clients is not the de minimis number, so every answer built on it fails, and nine consecutive months is not the measuring period the Act uses. This exemption belongs to investment advisers and investment adviser representatives; broker-dealers and their agents do not get it.
- Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which it has no place of business if it
- It served eight retail clients and two banks in this state
- It served five or fewer retail customers in this state last year
- It served ten retail clients and three banks in this state
- It served twenty retail customers and a small bank in this state
Correct answer: It served five or fewer retail customers in this state last year
An adviser with no place of business in a state is exempt there if it had no more than five retail clients in that state during the previous 12 months, or if it dealt only with institutional clients. It served five or fewer retail customers in this state last year is the only choice that stays inside the de minimis allowance. It served eight retail clients and two banks in this state, it served ten retail clients and three banks in this state, and it served twenty retail customers and a small bank in this state each break that limit. Bank clients are institutional and never count against the five, but the retail figure by itself is enough to require registration in every one of those three cases.
- Harrison, Certified Financial Planner (CFP), has an office in the state and a telephone directory listing under the category "Financial Planners." Harrison has, for fees, written more than 100 comprehensive financial plans for various individual clients. However, only 20% of the plans' content entails advice regarding securities and investments. Which of the following statements best describes Harrison's status as an investment adviser in the state under the Uniform Securities Act?
- Harrison need not register, since his planner credential covers all of the state adviser rules
- Harrison need not register, since securities advice fills a fifth of the plans he sells for fees
- Harrison must register as a broker-dealer, since his listing pulls in clients
- Harrison must register, since he is paid fees for securities advice inside his plans
Correct answer: Harrison must register, since he is paid fees for securities advice inside his plans
Harrison meets every element of the definition: he advises on securities in the regular course of business, he is paid fees for it, and his directory listing holds him out as a financial planner. No test measures how much of a plan concerns securities, so advice on investments filling a fifth of what he sells changes nothing. A recognized planning credential can excuse an applicant from the examination requirement, but it never stands in for registration or for the state's adviser rules. And nothing in the facts has him effecting transactions for customers, so broker-dealer registration is not what is at stake.
- Which of the following would have to register as an investment adviser under the Uniform Securities Act?
- A petroleum engineer who is paid to headline seminars promoting oil and gas programs
- An accountant whose comments on client holdings arise while she is preparing their tax returns
- A trust company that manages the securities inside its own fiduciary accounts
- An economics professor who now and then addresses business clubs about the market
Correct answer: A petroleum engineer who is paid to headline seminars promoting oil and gas programs
An engineer sits on the short list of professionals whose advice is excluded, but the exclusion reaches only advice that is incidental to practicing the profession. Being paid to headline seminars that promote oil and gas programs is securities advice sold as a business of its own, so that person falls inside the definition and has to register. The professor speaks to business clubs occasionally and is not paid to advise anyone about holdings. The accountant's comments come up while tax work is being done, which is the incidental exception. A trust company is a financial institution excluded from the definition outright.
- The Uniform Securities Act defines an investment adviser and specifies the conditions under which registration with the state is required. There are, however, cases where an exemption from registration is offered. For example, it is not necessary for an investment adviser to register when it
- Keeps its principal office in a nearby state and serves broker-dealers mostly
- Keeps no office in the state and takes savings and loan associations as its sole clients
- Keeps an office in the state and has just three individual clients there
- Keeps an office in the state and takes federal covered advisers as its sole clients
Correct answer: Keeps no office in the state and takes savings and loan associations as its sole clients
The exemption turns on two things at once: no place of business in the state, and clients there drawn from the institutional list, which includes savings and loan associations along with banks, insurance companies, broker-dealers and other advisers. Once the firm keeps an office in the state it must register no matter who its clients are, so neither a clientele of federal covered advisers nor a roster of three individuals rescues it. Keeping the principal office in a neighboring state is not enough either, because the question is where the office sits and who the clients in this state are, not where most of the business happens to be done.
- An investment adviser with no place of business in the state has 10 clients in the state. For which one of the clients would registration be required?
- A pension plan holding $5 million in plan assets
- A regional agency holding $8 million of the bond proceeds
- A natural person whose personal net worth tops $1 million
- An insurance company licensed to do business here
Correct answer: A natural person whose personal net worth tops $1 million
The client that forces registration is the natural person, and the size of that person's net worth makes no difference. An adviser with no place of business in the state keeps its exemption while its clients there are institutions, and the statutory list runs to banks, insurance companies, employee benefit plans holding at least $1 million, governmental agencies and instrumentalities, and other advisers. The licensed insurer, the funded benefit plan and the regional agency all sit on that list, so none of them costs the adviser its exemption. Wealth never moves an individual onto the list; the separate de minimis allowance for five or fewer retail clients is a different exemption from the institutional one this question tests.
- Under the SEC Release IA-1092, who of the following would be considered to be in the business of rendering investment advice?
- A retiree who suggests stocks to his grown children and to their spouses without any charge
- A teacher who leads a night class in market theory at the local community college
- An accountant whose remarks on a client's holdings arise while she is completing their tax filings
- A planner who waives the plan fee but earns commissions on the trades he suggests
Correct answer: A planner who waives the plan fee but earns commissions on the trades he suggests
Release IA-1092 treats commissions earned on recommended trades as compensation for the advice itself, so a planner who charges nothing for the written plan is still being paid to advise and is in the business of rendering investment advice. The teacher leads a class through market theory rather than advising identified clients about their own money. The accountant's remarks surface while the tax work is being done and carry no separate charge, which is the incidental exception. The retiree receives nothing at all, and compensation has to be present before the business test can be met.
- Which of the following is an investment adviser?
- A retired engineer who charges several clients a fee for his securities advice
- A lawyer with deep market experience who gives his clients free advice on securities
- A columnist for a weekly news-magazine who writes about the way banking institutions are run
- A commercial bank that buys and sells securities on behalf of the custodial accounts it holds
Correct answer: A retired engineer who charges several clients a fee for his securities advice
Selling securities advice for a fee puts the retired engineer squarely inside the definition. The exclusion for lawyers, accountants, teachers and engineers covers only advice that is incidental to practicing the profession, and advice sold on its own terms is not incidental, least of all by someone no longer practicing. The lawyer gives his advice away, so the compensation element is missing. The columnist writes general commentary for a publication of regular circulation rather than advice shaped to a reader's own situation. The bank is a financial institution excluded from the definition, and buying securities for custodial accounts is not selling advice.
- The Uniform Securities Act considers all of the following to be investment advisers subject to registration in the state except
- An adviser with an office in the state that collected $150 of advisory fees there
- An adviser with no office in the state whose advice there covers fixed annuities
- An adviser with no office in the state that charges wealthy retail clients a yearly fee
- An adviser with an office in the state advising on registered mutual funds
Correct answer: An adviser with no office in the state whose advice there covers fixed annuities
Fixed annuity contracts are insurance products rather than securities, so advising on nothing else leaves that firm outside the act altogether and nothing has to be registered. Every other firm here does have to register. An adviser with a place of business in the state registers regardless of what it advises on and regardless of who buys the advice, so limiting the advice to mutual funds does not help, and there is no minimum-revenue test, so $150 of fees in the state changes nothing. An adviser with no office in the state loses the exemption the moment its clients there are individuals, however wealthy those individuals happen to be.
- State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act?
- A broker-dealer that charges a wrap fee covering both advice and trade execution
- An economist whose commentary is incidental to her consulting work
- A natural person who represents a registered advisory company to its clients
- A subsidiary owned by a commercial bank that sells advisory services
Correct answer: A natural person who represents a registered advisory company to its clients
A person who represents a registered advisory firm in its dealings with clients is that firm's representative, and the act names such representatives among the persons excluded from the definition of investment adviser; the person registers in that separate capacity instead. A subsidiary is not the bank, and the exclusion belongs to the bank itself, so a bank-owned company in the advisory business is covered by the definition. Economists are not on the list of excluded professions, which runs to lawyers, accountants, teachers and engineers. A broker-dealer keeps its exclusion only while it takes no special compensation for advice, and a wrap fee that covers advice along with execution is exactly that.
- Under the Uniform Securities Act, which of the following is an investment adviser?
- A broker-dealer that takes no pay of any sort for the recommendations that it makes
- A person employed by an advisory firm to carry recommendations to clients
- A writer who posts general market commentary online for whoever wants to read it
- A firm with no office in the state that gives tailored advice to ten retail clients there
Correct answer: A firm with no office in the state that gives tailored advice to ten retail clients there
A firm with no place of business in the state may advise institutions without limit, but once it directs specific advice to more than five non-institutional clients in the state within twelve months the de minimis allowance is spent, and ten retail clients is well past that. A person employed to carry an advisory firm's recommendations to clients is a representative, excluded from the definition of investment adviser and registered in that separate capacity. A broker-dealer stays outside the definition while it takes no special compensation for its recommendations. General commentary posted for whoever cares to read it is not advice shaped to any particular client's situation.
- Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser?
- A partnership managing $385 million for its own investment clients
- A broker-dealer advising incidentally on $265 million of trades
- A bank trust department overseeing $505 million for its depositors
- A pension consultant advising plans that hold $145 million
Correct answer: A partnership managing $385 million for its own investment clients
Assets under management decide this, not the legal form of the firm: at $110 million or more an adviser must register with the SEC, and $385 million is comfortably past that line, so the partnership is a federal covered adviser. The pension consultant advising plans that hold $145 million falls short of the $200 million that opens federal registration to a pension consultant, so it stays with the state Administrator. The broker-dealer gives advice that is incidental to its trading business and takes no special compensation for it, so it is not an investment adviser at all, whatever the size of the business. A bank is excluded from the definition outright, so the reach of its trust division changes nothing either.
- An investment adviser would be exempt from registration under the Uniform Securities Act if it had no place of business in this state and its only clients were I. banks. II. insurance companies. III. registered investment companies. IV. other investment advisers.
- Drawn from the funds and the advisers and from no one else
- Drawn from each and every one of the four types named
- Drawn from the banks and the funds and from no others
- Drawn from the banks and the insurers and from no one else
Correct answer: Drawn from each and every one of the four types named
All four of the listed categories - banks, insurance companies, registered investment companies and other investment advisers - are institutional clients, so an adviser with no place of business in the state keeps its exemption when the clients it has there are drawn from any one of them. Stopping at the banks and the funds, at the banks and the insurers, or at the funds and the advisers leaves out categories the act treats exactly the same way, and each of those answers would strip the exemption from a firm that still qualifies. An adviser whose only clients are registered investment companies is in fact required to register with the SEC as a federal covered adviser.
- The National Securities Markets Improvement Act of 1996 (NSMIA)
- Set up the national market system for stocks listed on exchanges
- Removed the barriers to selling securities across the state lines
- Gave the term federal covered adviser its statutory meaning
- Introduced the concept of fraud that the state securities law now uses
Correct answer: Gave the term federal covered adviser its statutory meaning
NSMIA divided authority over advisers between the SEC and the states and supplied the meaning of federal covered adviser, the advisers that register with the SEC or are excluded from the definition under the Investment Advisers Act of 1940. The national market system traces back to the Securities Acts Amendments of 1975, well before NSMIA. Fraud was prohibited by state securities law and by federal law long before 1996, so no statute of that year invented the concept. Selling securities across state lines was never barred in the first place; interstate offerings are permitted so long as the registration and antifraud provisions are respected.
- Which of the following statements is not true of investment advisers under the Uniform Securities Act?
- An advisory contract between the adviser and its client has to be set down in writing.
- Advice about the value of securities is covered along with any buy or sell recommendation.
- The act captures a person only when compensation is received for advice.
- Advice about securities falls under the act only when it is put in writing.
Correct answer: Advice about securities falls under the act only when it is put in writing.
The act reaches investment advice whether it is spoken or written, so the statement that confines coverage to written advice is the one that is not true. The other three statements are accurate. Compensation is one of the elements that pulls a person into the definition of investment adviser. The advisory contract itself does have to be set down in writing. And advice about what a security is worth counts as investment advice just as a recommendation to buy or sell does.
- Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?
- Foster Advisers registers with the SEC and files a notice with the New Jersey Administrator.
- Foster Advisers registers in full with the SEC and with the New Jersey Administrator as well.
- Foster Advisers registers with the New Jersey Administrator and files nothing federally.
- Foster Advisers registers with the SEC and owes the New Jersey Administrator no filing.
Correct answer: Foster Advisers registers with the SEC and files a notice with the New Jersey Administrator.
With $135 million under management Foster Advisers is above the $110 million line, so registration with the SEC is mandatory and the firm is a federal covered adviser. Dual registration is what NSMIA was meant to end, so a full registration with the Administrator alongside the SEC misstates the arrangement, and state registration in place of SEC registration is not available at this size. The state is not left out entirely, though. The firm has to notify the Administrator in each state where it keeps an office or has clients, ordinarily through a notice filing with a fee, so owing the Administrator nothing at all is wrong as well.
- The sole proprietor of an insurance business that exclusively provides advice on fixed-income annuity contracts
- Owes a state registration as an investment adviser representative
- Owes no registration under either the state act or the federal securities laws
- Owes no state registration but must register with the SEC alone
- Owes a state registration as an agent who sells annuities and insurance
Correct answer: Owes no registration under either the state act or the federal securities laws
Fixed-income annuity contracts are insurance products, not securities, so a sole proprietor who advises on nothing else falls outside the Uniform Securities Act and outside the Investment Advisers Act of 1940 alike, and no securities registration of any kind is owed. Registration as an investment adviser representative, registration with the SEC as an investment adviser and registration as an agent all presuppose that securities are involved, and here none are. Selling and advising on these contracts is regulated under state insurance law instead.
- Under the Uniform Securities Act, which of the following is included in the definition of an investment adviser?
- An antiques dealer that charges a fee for appraising rare coins and silver
- A bank that offers investment counseling to its wealthiest local depositors
- A broker-dealer that assesses a single fee for reviewing goals and proposing a portfolio
- A publisher that takes a yearly subscription for a newsletter of broad market commentary
Correct answer: A broker-dealer that assesses a single fee for reviewing goals and proposing a portfolio
A broker-dealer is excluded from the definition of investment adviser only while its advice stays incidental to its brokerage and it takes no special compensation for that advice. A single fee assessed for reviewing a customer's objectives and recommending a portfolio is special compensation, so this firm is an investment adviser. The publisher sells broad market commentary on a subscription basis and shapes none of it to a particular subscriber's situation. The antiques dealer gives advice that has nothing to do with securities. A bank is excluded from the definition outright, even when it counsels its customers about investments.
- Under the Uniform Securities Act, which of the following are excluded from the definition of investment adviser, provided the advice is incidental to their profession? I. Banks II. Lawyers III. Broker-dealers IV. Teachers
- The persons named in items III and IV above
- The persons named in items I and III
- The persons named in items I and II above
- The persons named in items II and IV
Correct answer: The persons named in items II and IV
Lawyers and teachers are two of the four professions, with accountants and engineers, that keep their place outside the definition only while the advice stays incidental to the practice. Banks do not belong in the answer at all: financial institutions are excluded outright, with no requirement that any advice be incidental to anything. Broker-dealers do not belong either, because their exclusion turns on taking no special compensation for advice rather than on advice being incidental to a profession.
- Which of the following firms would be a federal covered adviser?
- A partnership that manages $112 million for advisory clients
- A corporation running an unregistered hedge fund of $20 million
- A sole proprietor whose clients have placed $74 million with him
- A pension consultant serving plans that hold $160 million in total assets
Correct answer: A partnership that manages $112 million for advisory clients
The threshold is $110 million of assets under management, and $112 million clears it, so that firm registers with the SEC and is a federal covered adviser; the partnership form of the business is beside the point. The sole proprietor with $74 million is below the line and registers with the state Administrator. A pension consultant becomes eligible for SEC registration only once plan assets reach $200 million, so $160 million is not enough. The adviser to a small unregistered hedge fund holding $20 million is nowhere near any federal threshold either.
- Under the Dodd-Frank Act of 2010, which of the following is required to register as an investment adviser at the state level?
- An adviser that manages one private hedge fund holding $400 million in assets
- An adviser whose client accounts hold less than $100 million in value
- An adviser acting as a pension consultant to plans with $200 million or more
- An adviser retained by an investment company registered with the SEC
Correct answer: An adviser whose client accounts hold less than $100 million in value
Under the Dodd-Frank Act an adviser holding less than $100 million of client assets registers with the state Administrator. Between $100 million and $110 million the adviser may choose either regulator, and at $110 million federal registration becomes mandatory. An adviser to an investment company registered under the Investment Company Act of 1940 must register with the SEC whatever its size. A private fund adviser holding $400 million is far above any state-level threshold and belongs with the SEC as well. A pension consultant reaching $200 million of plan assets becomes eligible for SEC registration rather than state registration.
- Under the Uniform Securities Act, the definition of an investment adviser does not include I. investment adviser representatives. II. lawyers and accountants whose investment advisory services are solely incidental to their practices. III. broker-dealers who offer investment advice on an incidental basis without special compensation for the advice provided. IV. federal covered investment advisers.
- Only the broker-dealers and the covered advisers fall outside the state act
- Only the representatives and professionals are outside the act
- All four of the listed persons fall outside the state definition
- None of the listed persons falls outside the state's definition
Correct answer: All four of the listed persons fall outside the state definition
Not one of the four is an investment adviser under the state act. Representatives are excluded by name and register in their own separate capacity. Lawyers and accountants are excluded while their advisory work stays solely incidental to their practices. Broker-dealers are excluded while their advice is incidental and carries no special compensation. Federal covered advisers answer to the SEC instead, because NSMIA ended dual registration of advisers by the states and the federal government. An answer that keeps only some of these groups, or none of them, leaves persons inside the state definition that the act itself removes.
- If an investment adviser is registered in another state and has no place of business within an Administrator's state, the adviser is exempt from registration under the Uniform Securities Act if
- It has advised accredited investors of very large net worth living in the state
- It has advised mostly municipalities and other public bodies in the state
- It has registered with three other state Administrators and given notice
- It has advised five or fewer retail clients living in the state in twelve months
Correct answer: It has advised five or fewer retail clients living in the state in twelve months
The de minimis exemption lets an adviser with no place of business in the state advise as many as five retail residents during twelve months before state registration is triggered, and this adviser stays within that allowance. Being accredited or wealthy does not turn a client into an institution, so state residents of very large net worth still count against the five. Advising mostly municipalities says nothing about the rest of the client base, and the exemption is lost as soon as the retail clients pass five. Registration in other states does nothing here, because the exemption depends on having no place of business in this state and on the count of retail clients in it.
- Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?
- A publisher who sells a weekly news-magazine on newsstands and prints stock picks
- A broker-dealer that bills a separate fee for advice and portfolio design
- A teacher who sells weekend seminars on comprehensive financial planning
- An attorney who advertises that he will place what his accident claimants recover
Correct answer: A publisher who sells a weekly news-magazine on newsstands and prints stock picks
A publisher of a bona fide magazine of general and regular circulation is excluded from the definition, and stock picks printed for every reader alike are not advice shaped to any subscriber's own situation, so the news-magazine publisher stays outside the act. A broker-dealer that bills a separate fee for advice and portfolio work is taking special compensation and loses its exclusion the moment it does. The attorney who advertises that he will place what his claimants recover is holding himself out as an adviser rather than giving advice incidental to the practice of law. The teacher is charging for advice, and on this examination comprehensive financial planning always includes advice about securities.
- Which of the following persons does not meet the definition of providing investment advice as a business outlined in SEC Release IA-1092?
- A planner paid fees for specific advice and also commissions as an agent of a dealer
- A consultant who once told two business clients to leave speculative securities
- A lawyer whose advertisements in the county bar journal offer investment advice
- An accountant who adds a separate charge to the annual bill for investment advice
Correct answer: A consultant who once told two business clients to leave speculative securities
Advice given once, in passing, to a couple of business clients reads as personal opinion rather than a business of rendering investment advice, so that consultant does not meet the business standard in Release IA-1092. The planner is paid twice over for advice, in fees for the specific recommendations and in commissions earned as an agent. The accountant adds a separate charge for the advice itself, which is the opposite of advice given incidentally to the tax work. The lawyer who advertises investment advice is holding himself out as being in the advice business, which the release treats as evidence that he is.
- Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives will be defined as
- A publisher that sells reports of general circulation to investors
- A broker-dealer that buys and sells securities for its own investors
- An investment adviser who must register with the Administrator
- An agent who takes securities orders from the customers of a dealer
Correct answer: An investment adviser who must register with the Administrator
Someone who sells subscription reports on particular securities, written around each subscriber's own objectives, is an investment adviser and registers as one. The definition expressly reaches any person who, as part of a regular business, publishes securities analyses or reports for individual investors on a paid subscription basis. The publisher exclusion covers reports of general and regular circulation whose contents are not tailored to the situation of any one investor, which is not what is happening here. Nothing in the facts involves effecting or taking orders in securities for the account of others, so neither the broker-dealer nor the agent description fits.
- An investment adviser with $100 million or more in assets under management may register with
- FINRA, which licenses broker-dealers and their agents
- NASAA, whose members are the state securities regulators
- The NYSE, whose listing rules bind the public issuers
- The SEC, which registers the largest advisory businesses
Correct answer: The SEC, which registers the largest advisory businesses
Once an adviser reaches 100millioninassetsundermanagement,federalregistrationbecomesavailabletoit,sotheansweristheSEC,whichregistersthelargestadvisorybusinesses.Between100 million and 110milliontheadviserchoosestheSECoritsstateAdministrator,andat110 million the SEC becomes the only choice. FINRA licenses broker-dealers and their agents and has no adviser registration function at all. NASAA coordinates the state securities regulators and drafts model rules, but it registers no one. The NYSE writes listing rules that bind the public issuers whose securities trade there, which has nothing to do with advisory registration.
- Investment advisers who manage investment portfolios that total less than $100 million must register with
- With a state Administrator under the state's law
- With the SEC under the federal Investment Advisers Act
- With both the SEC and a state securities Administrator
- With neither the SEC nor the state Administrator
Correct answer: With a state Administrator under the state's law
An adviser managing less than $100 million is barred from the federal rolls, so it registers with a state Administrator under the state's law unless that state exempts it. Registering with the SEC under the federal Investment Advisers Act is closed to an adviser of this size, since the threshold works as a floor for federal eligibility. Registering with both the SEC and a state securities Administrator misreads the scheme, which assigns each adviser to one level rather than stacking them. Registering with neither would leave an advisory business running without any regulator, which the Uniform Securities Act does not permit.
- An investment adviser who has no office in a state is exempt from registration in a state if, during any 12-month period, he has no more than how many retail clients in the state?
- Two retail clients
- Five retail clients
- Nine retail clients
- Ten retail clients
Correct answer: Five retail clients
The de minimis exclusion keeps an out-of-state adviser with no place of business in the state unregistered so long as it has no more than five retail clients there during any 12-month period, so five retail clients is the ceiling the act sets. Two retail clients sits inside the allowance but is not the statutory limit. Nine retail clients and ten retail clients both break through the allowance, and an adviser at either level must register with that state's Administrator. Institutional clients such as banks, insurers, and investment companies are counted separately and never consume the allowance.
- Under the NSMIA, the term federal covered adviser includes a person I. registered with the SEC under the Investment Advisers Act of 1940. II. registered as an investment adviser in two or more states. III. excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. IV. required to register with the state Administrator.
- II and IV
- II and III
- I and III
- III and IV
Correct answer: I and III
The NSMIA makes a person a federal covered adviser when that person either registers with the SEC under the Investment Advisers Act of 1940 or is excluded from that act's definition of investment adviser, which is why I and III is the pairing. Statement II merely describes an adviser doing business across several states, and multistate activity creates state filing duties rather than federal covered status. Statement IV asserts the opposite of federal covered status, because a federal covered adviser is not required to register with any state Administrator. Any pairing that carries II or IV therefore rests on a person the definition does not reach.
- A fiduciary is
- A broker handling only the unsolicited agency orders
- A dealer trading securities for its own account book
- A principal in a firm devoted wholly to proprietary trades
- A person entrusted with acting for another party's benefit
Correct answer: A person entrusted with acting for another party's benefit
Fiduciary status rests on trust placed in one party to act in someone else's interest, so a fiduciary is a person entrusted with acting for another party's benefit, and the duty owed follows the nature of that relationship. A broker handling only the unsolicited agency orders is carrying out instructions the customer originated and exercises no discretion over another's affairs. A dealer trading securities for its own account book is acting for itself as principal, which is the opposite posture. A principal in a firm devoted wholly to proprietary trades is likewise committing house capital rather than managing anyone else's money.
- Under current law, who of the following would be required to register as an investment adviser in a state? I. A person who effects transactions exclusively with issuers of securities in that state while maintaining no office therein II. A person who has directed advice relating to securities to six individuals in that state within the past 12 months, even though he has no place of business within the state III. A person with an office in the state who manages less than $25 million in assets IV. A person who deals exclusively with broker-dealers in that state but maintains no place of business within the boundaries of the state
- II and III
- III and IV
- I, II, and III
- I, III, and IV
Correct answer: II and III
Statement II puts six individual clients in the state, which is one past the five-client de minimis allowance, and statement III puts an office in the state with assets far below the federal floor, so II and III are the two that must register. Statement I involves dealings only with issuers and no office in the state, which does not trigger state adviser registration. Statement IV involves dealings only with broker-dealers and no office in the state, an institutional relationship the act leaves alone. Any answer carrying I or IV therefore sweeps in a person the statute does not reach.
- Out-of-state investment advisers with no office in this state are not required to be registered if only giving advice
- On growth stocks traded on national exchanges
- To insurance companies and to no one but institutions
- To wealthy individual investors in this state
- On shares of open-end and closed-end management funds
Correct answer: To insurance companies and to no one but institutions
The exemption for an adviser with no office in the state turns on who the clients are rather than on what is advised upon, so advice given to insurance companies and to no one but institutions keeps the adviser outside state registration. Advice to wealthy individual investors in this state destroys the exemption, because natural persons are not institutional clients no matter how much money they have. Advice on growth stocks traded on national exchanges identifies a type of security and settles nothing about the client base. Advice on shares of open-end and closed-end management funds is likewise a subject matter, and retail clients would still force registration.
- Investment advisers who have less than $100 million in assets under management register at which of the following levels? I. State II. Federal
- Either I or II
- II only
- I alone
- Both I and II
Correct answer: I alone
An adviser managing under 100millionisprohibitedfromfederalregistrationandmustgotothestatesecuritiesAdministrator,soregistrationhappensatlevelIalone.IIonlyreversestherule,sincetheSECisclosedtoanadviserofthatsize.BothIandIIwouldmeansimultaneousfederalandstateregistration,whichthedivisionofauthoritydoesnotcontemplate.EitherIorIIdescribestheoptionalwindowthatopensat100 million and closes at $110 million, above which the SEC becomes the only permitted registrant.
- A broker-dealer with an office in this state must register as an investment adviser if it charges I. commissions for selling securities. II. commissions for selling securities while offering investment advice incidental to the sale of the securities. III. a fee for selling investment research and additional fees in the form of commissions for the sale of securities. IV. fees for investment research sold exclusively to institutions located in this state.
- II and III
- I and III
- II and IV
- III and IV
Correct answer: III and IV
A broker-dealer becomes an investment adviser once it takes pay for advice itself, so III and IV is the pairing: charging for research alongside commissions is separate compensation for advice, and charging institutions for research is still charging for advice. Statement I is bare commission business, which the act leaves as brokerage. Statement II adds advice incidental to the sale with no separate charge, which keeps the firm a broker-dealer. Selling research for a fee triggers the requirement no matter how sophisticated the buyer is, so the institutional limitation in statement IV changes nothing.
- Under the Uniform Securities Act, which of the following is considered a place of business of a registered investment adviser representative? I. An office from which the representative regularly provides advisory services to clients II. A location published in a professional directory, indicated on business cards, or found in a telephone book that identifies it as a place where the representative will be available to meet or communicate with clients III. A hotel or auditorium at which the representative has advertised to the public that he will be available to conduct advisory business IV. A hotel meeting room identified only to current clients as a place the representative will be available to conduct advisory business
- I, II, and III
- I and II
- I, III, and IV
- I and IV
Correct answer: I, II, and III
A place of business is any location where the representative regularly provides advisory services, plus any location held out to the public as somewhere clients may meet or communicate with him, so I, II, and III all qualify. Statement III counts because advertising a hotel or auditorium to the public holds it out, and how often the room is used is irrelevant. Statement IV fails because a meeting room mentioned only to existing clients is never held out to the public. Any answer that carries IV therefore turns a traveling adviser's private arrangements into a regulated office.
- Which of the following are not specifically excluded from the definition of an investment adviser under the Uniform Securities Act? I. An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation II. A temporary employee hired to assist in administrative responsibilities of an advisory firm III. Any person who is a federal covered investment adviser IV. A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities
- II only
- IV only
- I and IV
- I and II
Correct answer: IV only
The person in statement IV takes compensation for offering specific advice on the value of securities on a regular basis, which is the definition of an investment adviser rather than an exclusion from it, so IV only is the answer. Statement I describes an investment adviser representative, and a representative is excluded from the adviser definition the same way an agent is excluded from the broker-dealer definition. Statement II describes clerical help, and administrative staff fall outside both definitions whether the work is temporary or permanent. Statement III is a federal covered adviser, excluded to prevent duplicate state and federal regulation.
- Emmet opened an investment advisory service three years ago and raised $50 million in capital from family, friends, and contacts and then closed to new investors. If Emmet's stock picks expanded assets under management to $110 million, Emmet
- Must keep the state registration and only notify the SEC
- Must file the amended registration with the state agency
- Must complete SEC registration within ninety days
- Must drop its registration and stop giving advice
Correct answer: Must complete SEC registration within ninety days
Crossing $110 million in assets under management moves the firm into mandatory federal registration, and the annual updating amendment that reports the crossing starts the clock, so Emmet must complete SEC registration within ninety days. Keeping the state registration and only notifying the SEC treats a hard statutory line as a matter of courtesy. Filing the amended registration with the state agency keeps him at a level the size of his firm has now closed off. Dropping the registration and giving up advisory work is not required either, because growth of this kind changes the regulator rather than disqualifying the adviser.
- The sole proprietor of a retirement planning business that exclusively provides advice on fixed-income annuity contracts
- Must register with the SEC as a general broker-dealer
- Need not register with the SEC, only with a state agency
- Must register both as an adviser and a representative
- Need not register under state or federal securities laws
Correct answer: Need not register under state or federal securities laws
Fixed annuity contracts are insurance products, and both the Uniform Securities Act and the federal acts reach securities alone, so this proprietor need not register under state or federal securities laws. Registering with the SEC as a general broker-dealer would presuppose effecting securities transactions, and none occur in a fixed annuity practice. Registering both as an adviser and a representative would presuppose advice about securities, and a fixed contract is not one. Registering with a state agency but not the SEC fails for the same reason, since the subject matter never becomes a security at either level. Advice on variable annuities would reverse the outcome, because those contracts are securities.
- Peter Smith, a prominent securities lawyer living in Connecticut, conducts his securities law practice full time in New York state. He must register as an investment adviser in New York state if
- He gives advice on securities as an integral part of his work
- His law clients are New Yorkers seeking a trust document drawn
- He tells his spouse her technology holdings are much too large
- His law clients all reside in Connecticut and not in New York
Correct answer: He gives advice on securities as an integral part of his work
An attorney keeps the professional exclusion only while advice about securities stays incidental to the practice, so Smith must register in New York once he gives advice on securities as an integral part of his work. His place of business sits in New York, and that is what anchors the duty no matter where the clients live. Clients who are New Yorkers seeking a trust document drawn are buying estate structuring, which is legal work rather than securities advice. Telling his spouse that her technology holdings are much too large is uncompensated family conversation, not advisory business. Clients who all reside in Connecticut and not in New York change nothing, because the trigger is the character of the work he performs.
- An investment adviser has its home office in State C. Their only business is with registered investment companies, large employee benefit plans, and broker-dealers. They have no place of business in State D but provide investment advice to several registered investment companies in that state. State D recently adopted the Uniform Securities Act and the Administrator feels that the IA should be required to register there. Under the Uniform Securities Act,
- The Administrator is correct, so the firm has to register there
- No filing is due, since its clients in State D are investment funds
- No filing is due, since the firm carries on business in many states
- The Administrator may demand registration after a notice filing
Correct answer: No filing is due, since its clients in State D are investment funds
An adviser whose clients are registered investment companies is a federal covered adviser, and a federal covered adviser with no place of business in a state owes that state nothing, so no filing is due, since its clients in State D are investment funds. The Administrator is not correct, because state registration is preempted for a federal covered adviser and there is no office in State D to anchor a duty. Carrying on business in many states is no ground of exemption at all, since multistate activity ordinarily multiplies filings rather than removing them. A notice filing can be demanded of a federal covered adviser only where it keeps a place of business in the state, which this firm does not.
- Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives is defined as
- A broker-dealer, since the reports name a specific company
- A journalist, since the reports go out to the paid subscribers
- An investment adviser, since the advice is client-specific
- An agent, since these reports are sold to individual investors
Correct answer: An investment adviser, since the advice is client-specific
Publishing securities analyses for paying subscribers and matching them to each subscriber's own objectives is advising others about securities for compensation, so this person is an investment adviser, since the advice is client-specific. A broker-dealer effects securities transactions for others or for its own account, and no transactions are being effected here. An agent represents a broker-dealer or an issuer in effecting transactions, which a subscription report does not involve. The publisher exclusion would protect a journalist whose reports go out to paid subscribers if the publication were of general and regular circulation, but tailoring recommendations to individual objectives destroys it.
- Under the Uniform Securities Act, a person who exclusively provides advice on commodities is
- A registered agent of a broker-dealer in this state
- An investment adviser representative under this act
- A federal covered adviser governed by the federal acts
- A person outside the definition of adviser in this act
Correct answer: A person outside the definition of adviser in this act
The Uniform Securities Act reaches advice about securities and expressly keeps commodities outside the definition of a security, so someone advising only on commodities is a person outside the definition of adviser in this act. Being paid for the work does not make him an investment adviser representative under this act, because the subject matter never becomes a security. Nor is he a federal covered adviser governed by the federal acts, since the Investment Advisers Act of 1940 also reaches securities advice and leaves a pure commodity practice alone. Calling him a registered agent of a broker-dealer fails as well, because an agent effects securities transactions for a firm and none are involved here.
- Which of the following persons are investment advisers subject to state registration?
- A financial planner paid a fee for its advisory services
- A federal covered adviser with its main office elsewhere
- A publisher of a bona fide newspaper of general circulation
- Any other person an Administrator excludes by rule or order
Correct answer: A financial planner paid a fee for its advisory services
A person who provides investment advisory services for compensation is an investment adviser whether the advice stands alone or comes bundled with other financial services, so the answer is a financial planner paid a fee for its advisory services. A publisher of a bona fide newspaper of general circulation is expressly excluded so long as the publication is genuine and regular. A federal covered adviser with its main office elsewhere is excluded from the state definition to keep federal and state regulation from overlapping, leaving at most a notice filing. Any other person an Administrator excludes by rule or order is excluded by the terms of that exclusion itself.
- When, if ever, would a broker-dealer be required to register as an investment adviser?
- When it is not itself registered with the SEC as a dealer
- When it charges a separate fee for advice or account management
- When its agents recommend stock or bonds to retail buyers
- When it publishes market research reports for its own customers
Correct answer: When it charges a separate fee for advice or account management
A broker-dealer keeps its exclusion only while advice remains incidental and uncompensated, so it must register as an investment adviser when it charges a separate fee for advice or account management, the wrap fee program being the familiar case. When its agents recommend stock or bonds to retail buyers the firm is doing ordinary brokerage work paid for by commissions, which the exclusion covers. When it publishes market research reports for its own customers the research is part of the brokerage service so long as no separate charge attaches. Whether it is registered with the SEC as a dealer is a different registration question and settles nothing about adviser status.
- An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following except
- An endowment fund held by a large private research university
- A commercial bank chartered and operating in the state
- An accredited individual investor living in this state
- An issuer asking about the quality of its likely underwriters
Correct answer: An accredited individual investor living in this state
The institutional exemption for an adviser with no place of business in the state never extends to natural persons, however wealthy, so the exemption is lost with an accredited individual investor living in this state, and it stays lost even where the securities recommended are themselves exempt from registration. A commercial bank chartered and operating in the state is a named institutional client and is covered. An endowment fund held by a large private research university is a nonprofit institution and is covered as well. An issuer asking about the quality of its likely underwriters wants an opinion on investment bankers rather than on securities, which falls outside the adviser definition entirely.
- Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of
- Rare convertible automobiles sold at collector auctions
- Gold and silver coins struck by foreign governments
- Apartments in a building converting to condominiums
- Convertible bonds issued by a manufacturing corporation
Correct answer: Convertible bonds issued by a manufacturing corporation
Registration as an investment adviser follows from the business of advising about securities, and the only security on this list is the convertible bonds issued by a manufacturing corporation, since a corporate debt instrument is a security whether or not a conversion feature is attached. Rare convertible automobiles sold at collector auctions are tangible collectibles. Gold and silver coins struck by foreign governments are bullion or numismatic property, and physical metal is not a security. Apartments in a building converting to condominiums are real estate, and advice about buying a residence is not securities advice under the act.
- Under both state and federal laws, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion?
- A newsletter publisher paid by issuers to push their stock
- An economist teaching a fundamental analysis course at college
- A lawyer who refers injury clients to a registered planner
- An accountant showing clients the tax-free yield on municipals
Correct answer: A newsletter publisher paid by issuers to push their stock
The publisher exclusion belongs only to a bona fide publication of general and regular circulation that takes no pay from the issuers whose securities it covers, so it fails for a newsletter publisher paid by issuers to push their stock. An economist teaching a fundamental analysis course at college is instructing a class rather than advising a client about particular securities. A lawyer who refers injury clients to a registered planner is sending the advisory work elsewhere rather than performing it. An accountant showing clients the tax-free yield on municipals is doing tax analysis incidental to accounting practice, which the professional exclusion covers.
- Under the Uniform Securities Act, which of the following are not considered investment advisers or investment adviser representatives in this state? I. An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. II. United Trust Company of America III. An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management IV. An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state
- I and III
- II and IV
- II only
- IV only
Correct answer: II and IV
A trust company is carved out of the adviser definition, and an adviser with no office in the state that deals exclusively with other advisers located there is carved out as well, so II and IV names the two persons who are neither advisers nor adviser representatives. Statement I describes a person selling advisory services on behalf of an advisory firm, which is exactly what an investment adviser representative does. Statement III describes an agent taking a fixed fee measured as a percentage of assets under management, which is compensation for advice and makes that agent a representative too. Answers resting on I or III therefore release a person the act reaches.
- Under the Uniform Securities Act, which of the following persons has to register as an investment adviser?
- An agent of a broker-dealer charging a separate adviser fee
- An attorney delivering a legal opinion for a bond indenture
- A broker-dealer that bills advice at a fee of its own
- A broker-dealer that folds advice into its commission
Correct answer: A broker-dealer that bills advice at a fee of its own
A firm loses the brokerage exclusion the moment it takes separate pay for advice, so the person who must register as an investment adviser is a broker-dealer that bills advice at a fee of its own. A broker-dealer that folds advice into its commission keeps the exclusion, because nothing is charged for the advice itself. An agent of a broker-dealer charging a separate adviser fee registers as an investment adviser representative, while it is the employing firm that takes on the adviser registration. An attorney delivering a legal opinion for a bond indenture is giving a legal conclusion about the instrument, not advice about investing in it.
- Which of the following is required to register as an investment adviser with the state securities Administrator?
- An author who writes a book on money and banking sold in this state
- A newly formed advisory firm that holds $130 million of client assets
- An advisory firm with under $100 million in assets that opens an office here
- A firm with no office in the state that advises only banks and funds
Correct answer: An advisory firm with under $100 million in assets that opens an office here
State registration turns on the adviser's size and on where it keeps a place of business. An advisory firm with under $100 million in assets that opens an office here sits below the federal asset threshold, so the Administrator rather than the SEC is its regulator. A firm holding $130 million is past the $110 million mark at which SEC registration is mandatory and is a federal covered adviser. An author who writes a book on money and banking sold in the state is a publisher of a bona fide publication of general and regular circulation and is excluded from the definition. A firm with no office in the state that advises only banks and funds is exempt because it has no place of business there and its clientele is entirely institutional.
- Under SEC Release IA-1092, the term investment adviser does not include which of the following? I. A broker-dealer who charges for investment advice II. A publisher of a financial newspaper with regular and general circulation III. A person who sells security analyses IV. A CPA who, as an incidental part of his practice, suggests tax-sheltered investments to wealthier clients
- I and II
- II and IV
- I and III
- III and IV
Correct answer: II and IV
Release IA-1092 leaves the publisher and incidental-professional exclusions intact. A publisher of a financial newspaper of regular and general circulation is outside the definition, and so is a CPA who suggests tax-sheltered investments only as an incidental part of an accounting practice, which makes II and IV the pair that fall outside the term. A broker-dealer that charges separately for investment advice is taking special compensation and loses its exclusion, and a person who sells security analyses is furnishing advice about securities for compensation and meets the definition as well.
- Individuals registered as agents of a broker-dealer are generally excluded from the definition of investment adviser. Under the Uniform Securities Act, which of the following would prevent an agent from claiming that exclusion?
- Charging a separate fee for comparing term and whole life insurance policies
- Accepting compensation for investment advice apart from transaction commissions
- Speaking without pay at a local club about future stock market trends
- Earning ordinary sales commissions on securities trades for retail clients
Correct answer: Accepting compensation for investment advice apart from transaction commissions
The exclusion holds only while the advice stays incidental to the securities business and the agent is paid nothing for it beyond ordinary transaction-based commissions. Accepting compensation for investment advice apart from transaction commissions is special compensation, and the agent then falls inside the definition of investment adviser or investment adviser representative. Earning ordinary sales commissions on securities trades is precisely the compensation the exclusion contemplates and preserves it. Charging a separate fee for comparing term and whole life insurance policies concerns insurance contracts, which are not securities. Speaking without pay at a local club about market trends involves no compensation and no advice about specific securities.
- Which of the following statements is are true? I. A person with a place of business in the state who transacts business exclusively for the accounts of banks and savings institutions is not a broker-dealer under the Uniform Securities Act. II. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $100 million in assets under management, is subject to the jurisdiction of the state Administrator. III. A person required to register as an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular business headquartered in this state, may be subject to notice filing fees required by the state Administrator. IV. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration.
- I and II
- I and IV
- II and III
- III and IV
Correct answer: III and IV
Statement III is accurate: a federal covered adviser whose business is headquartered in the state may still be charged notice filing fees by the Administrator. Statement IV is accurate too, because a broker-dealer whose advice is incidental and who takes no compensation beyond commissions is not an investment adviser, so III and IV is the true pair. Statement I fails because a firm with a place of business in the state is a broker-dealer under the Act even when it deals exclusively with banks and savings institutions; only the absence of a place of business would remove it. Statement II fails because a person excluded from the definition under the Investment Advisers Act of 1940 is beyond state jurisdiction no matter how small the amount managed.
- Under the Uniform Securities Act, which of the following are elements in the definition of an investment adviser? I. Advice as to investments must be in writing, not given orally. II. Advice must relate to the value of securities or recommendations to purchase or sell securities. III. There must be compensation for services rendered.
- II only
- II and III
- I and II only
- I, II, and III
Correct answer: II and III
Two things must both be present. The advice must relate to the value of securities or to the advisability of buying or selling them, and it must be rendered for compensation, so II and III are the elements the Act names. Statement I is not an element, because the Act is indifferent to whether the advice is delivered orally or in writing. Any choice that keeps statement I therefore imposes a writing requirement the Act never created, and resting on statement II alone drops the compensation element the definition requires.
- Under the Uniform Securities Act, persons providing investment advice do not have to register as investment advisers if they have no place of business in the state and they I. limit their clientele to individuals who meet the accredited investor standards. II. deal only with institutional investors. III. have five or fewer noninstitutional clients in the state during any 12-month period. IV. deal only with other registered investment advisers.
- I and II only
- I, II, and III
- III and IV only
- II, III, and IV
Correct answer: II, III, and IV
An adviser with no place of business in the state escapes registration when its clients are institutional investors, when its clients are other investment advisers, or when it has had five or fewer noninstitutional clients in the state during any rolling twelve-month period, so II, III, and IV together describe the exemption. Statement I fails: the accredited investor standard reaches individuals, and an individual accredited investor is not an institutional client, so limiting a clientele that way still leaves the adviser required to register.
- An agent of a broker-dealer maintains wrap fee accounts for several customers of the firm. Which of the following registrations is required?
- The firm must be registered as an investment adviser
- The agent must obtain a separate investment adviser registration
- No registration beyond the existing securities licenses applies
- Only the supervising principal registers in each state
Correct answer: The firm must be registered as an investment adviser
A wrap fee is advisory compensation, so the brokerage is no longer giving advice solely incidental to its securities business without special compensation. Once that exclusion is lost, the firm must be registered as an investment adviser, with the state or with the SEC depending on its size, and the individuals servicing the accounts register as investment adviser representatives rather than as advisers in their own right. Saying the agent must obtain a separate investment adviser registration puts the obligation on the wrong person, the existing securities licenses do not reach advisory activity at all, and registration by the supervising principal does nothing to cure the firm's own status.
- Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business without requiring registration as an investment adviser except
- An economist
- An accountant
- An estate lawyer
- A civil engineer
Correct answer: An economist
The Act lets lawyers, accountants, teachers, and engineers give investment advice that is incidental to their profession without registering, a list often remembered as LATE. An economist appears nowhere on it, so an economist who advises about securities for compensation must register as an investment adviser. An accountant, an estate lawyer, and a civil engineer each remain inside the professional exclusion so long as the advice is genuinely incidental and no separate charge is made for it.
- Peterson Financial Planning is a small personal financial planning partnership in Missouri that has $10 million in assets under management. As a result of the Dodd-Frank Act, which of the following statements best describes the registration requirement for Peterson Financial Planning?
- The firm registers with the SEC and gives Missouri notice
- The firm registers with the Missouri Administrator alone
- The firm registers with the SEC instead of the state
- The firm registers with both the SEC and the state
Correct answer: The firm registers with the Missouri Administrator alone
Dodd-Frank sorted advisers by assets under management. At $10 million Peterson is a small adviser, well under the $25 million line and far under the $100 million line, so the firm registers with the Missouri Administrator alone. SEC registration is unavailable to an adviser of this size, which disposes of every choice that sends Peterson to the Commission, whether by itself, alongside the state, or with a notice filing. Notice filings belong to federal covered advisers, and Peterson is not one.
- All of the following statements regarding the registration of an investment adviser in a state are true except
- The annual renewal requires the fees and a refiled consent to service of process
- The registration of the adviser expires on December 31 of each year
- The first application carries the form, a consent to service, and the fees
- An officer active in the advisory work is automatically registered as a representative
Correct answer: The annual renewal requires the fees and a refiled consent to service of process
The consent to service of process is filed once, with the initial application, and stays permanently on file, so the untrue statement is the one asserting that the annual renewal requires the fees and a refiled consent to service of process; renewal takes the fee alone. An adviser's registration does expire on December 31 each year unless it is renewed. The first application does carry the application form, the consent to service of process, an application for each representative who will act for the adviser, and the fees. And where the adviser is an entity, an officer or partner who takes an active part in giving or supervising advice is automatically registered as an investment adviser representative.
- An individual is an agent for a broker-dealer. He takes and passes the appropriate examinations and forms a sole proprietorship investment adviser. About a year later, he terminates his registration with the broker-dealer. This action would require
- Amending the Form ADV already filed
- Withdrawing the adviser registration on Form ADV-W
- Requalifying by retaking the Series 65 examination
- Filing a new Form BD for the sole proprietorship
Correct answer: Amending the Form ADV already filed
The sole proprietorship's advisory registration survives the end of the brokerage affiliation; what changes is a fact already disclosed. Part 1A of the Form ADV asked whether the adviser is also an agent of a broker-dealer, that answer is no longer accurate, and so the action called for is amending the Form ADV already filed, and doing it promptly. Withdrawing the adviser registration would shut down an advisory business that is still operating. Nothing about leaving a broker-dealer requires an adviser to sit an examination again, and Form BD is the broker-dealer registration filing, which a sole proprietorship adviser is not making.
- The Administrator may, by rule or by order, prescribe the filing of financial reports by which of the following persons registered in his state? I. Agents II. Broker-dealers III. Investment advisers
- II only
- I and III
- II and III
- I, II, and III
Correct answer: II and III
Financial reporting is a business-entity obligation. The Administrator may require registered broker-dealers and registered investment advisers to file financial reports, so II and III is the pair. Agents are individuals who work for a registered firm, and the Act imposes no financial reporting duty on them, which is why any choice carrying statement I is wrong; it is the firm's balance sheet, not the employee's, that the regulators need in order to judge solvency and net capital.
- If an investment adviser files an initial registration with a state on June 30, which of the following statements regarding the filing fee to be paid is true?
- The full fee for the year must be paid
- The fee is prorated from the filing date
- The fee is prorated from the effective date
- No fee is due until the renewal at the end of December
Correct answer: The full fee for the year must be paid
The Uniform Securities Act does not prorate registration fees. An application filed on June 30 is treated exactly like one filed in January: the full fee for the year must be paid, and the registration then runs only until December 31, when it must be renewed. Nothing in the Act reduces the charge by reference to the date of filing or the date the registration takes effect, and no provision lets an applicant put payment off until the renewal at year end.
- If a state-registered investment adviser moves to another location, the Administrator must be notified
- Promptly after the office has relocated
- Within 30 days of relocating
- Within 15 days of the relocation
- At the time of the next renewal
Correct answer: Promptly after the office has relocated
An office move changes information the Administrator already holds on file, and the Act calls for that correction promptly after the office has relocated rather than on any fixed timetable. There is no fifteen-day or thirty-day grace period written into the Act for a change of address, and holding the change until the time of the next renewal would leave the Administrator without a current address for correspondence and for service of process.
- Under the Uniform Securities Act, a consent to service of process must accompany which of the following?
- The first application an adviser files in this state
- The yearly renewal application of a registered agent
- A civil complaint brought against a licensed broker-dealer
- A notice that ends the registration of an adviser representative
Correct answer: The first application an adviser files in this state
Every initial application for registration under the Act must be accompanied by a consent to service of process, the instrument that appoints the Administrator to receive legal papers for the applicant, so the first application an adviser files in this state is the filing that carries it. The consent then stays on file permanently, which is why the yearly renewal application of a registered agent does not repeat it. A notice that ends a registration closes the file instead of opening it, and a civil complaint is litigation between private parties rather than a filing made with the Administrator.
- The document that gives the Administrator the right to process complaints against a registrant is known as
- A consent to service of process
- A verified affidavit of service
- A durable power of attorney
- A permanent injunction order
Correct answer: A consent to service of process
A consent to service of process is the instrument by which an applicant irrevocably appoints the Administrator as its attorney to receive service of any legal papers in a proceeding arising out of the applicant's securities activity, and that is what lets the Administrator process complaints against a registrant. A verified affidavit of service only proves that papers were delivered in a case already under way, and it confers no authority on anyone. A durable power of attorney lets one person act for another in private matters and has no place in state securities filings. A permanent injunction order is relief a court grants once a case has already been brought, not a document filed with the Administrator.
- Each of the following statements about post-registration provisions is true except
- The Administrator cannot examine an adviser keeping no office in the state
- A registered adviser can be required to file its advertising materials
- An adviser must observe the recordkeeping rules that the Administrator adopts
- A correcting amendment is due when information already on file becomes wrong
Correct answer: The Administrator cannot examine an adviser keeping no office in the state
Examination authority follows the registration rather than the geography, so a registered investment adviser may be examined on site whether or not it maintains a place of business in that state, and the untrue statement is the one saying the Administrator cannot examine an adviser keeping no office in the state. The Act does permit the Administrator to require advertising and sales literature to be filed, does impose recordkeeping obligations on registered advisers, and does require a correcting amendment whenever information already on file becomes inaccurate or incomplete.
- Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator?
- With the initial application only
- With the initial application and each renewal
- Only when the Administrator asks for it
- Only when a proceeding is pending
Correct answer: With the initial application only
The consent to service of process goes in with the initial application for registration and then becomes a permanent part of the file, so it is filed with the initial application only. Renewal calls for the fee, not a fresh consent. The Administrator has no need to ask for it, because the Act already conditions the application on it, and it cannot wait for a proceeding, since its whole purpose is to be on file in advance so that subpoenas and other process can be served through the Administrator.
- Under the Uniform Securities Act, which of the following statements is true regarding the initial registration of an agent if the application has not been amended?
- Unless the Administrator specifies an earlier date, it is effective at noon on the 10th day
- Unless the Administrator specifies an earlier date, it is effective at noon on the 30th day
- Unless the Administrator specifies an earlier date, it is effective at noon on the 20th day
- Unless the Administrator specifies an earlier date, it is effective at noon on the 40th day
Correct answer: Unless the Administrator specifies an earlier date, it is effective at noon on the 30th day
Registrations ripen automatically under the Act. Where the application has not been amended and no denial order or proceeding is pending, then unless the Administrator specifies an earlier date, it is effective at noon on the 30th day after the application is filed. The count runs from the day the application reaches the Administrator's office rather than the day the applicant mailed it, and the Act sets no shorter or longer default period.
- Platinum Investment in Growth Group, Inc. (PIGGI) is registered as an investment adviser in State W, where it has its principal office. PIGGI has near-term plans to open offices in States A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those two states. Under the Uniform Securities Act,
- The flyers may be mailed, but no account may be opened before registration
- The flyers could not be mailed until PIGGI was registered in States A and B
- The flyers may be mailed because PIGGI keeps no office in States A and B
- The flyers must be filed with the SEC because PIGGI is a covered adviser
Correct answer: The flyers could not be mailed until PIGGI was registered in States A and B
Offering advisory services in a state is doing business in that state. Several hundred flyers sent to prospects hold PIGGI out as an adviser in States A and B, so the flyers could not be mailed until PIGGI was registered in States A and B, no exclusion or exemption being available on these facts. Putting off the opening of accounts does not undo the offer that the mailing already made, the absence of an office does not matter once a firm solicits the public in the state, and PIGGI cannot be a federal covered adviser, because such an adviser would not be registered in State W in the first place.
- Under the Uniform Securities Act, the executive office of the investment adviser—from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser—is properly referred to as
- The principal office and place of business
- The office of supervisory jurisdiction
- The home office and branch of record
- The registered office and the address of record
Correct answer: The principal office and place of business
One defined term covers the executive office from which the officers, partners, or managers direct, control, and coordinate the adviser's activities, and that term is the principal office and place of business. People often call the same building the home office, but that is a colloquial label rather than the defined term, and the address a firm registers for service is simply where mail is received. Office of supervisory jurisdiction is a FINRA concept describing a broker-dealer branch that carries supervisory functions, and it has no application to this definition.
- Which of the following may be required by the Administrator to post surety bonds? I. An agent who has discretion over client funds and securities II. A broker-dealer who has custody of or discretion over, client funds and securities III. An investment adviser who has custody of or discretion over, client funds and securities
- I and III
- None of I, II, or III
- I, II, and III
- II and III only
Correct answer: I, II, and III
The Administrator may by rule or order require a surety bond from any registrant that holds or controls client money or securities. That reaches an agent who exercises discretion over a customer's funds and securities, a broker-dealer with custody or discretion, and an investment adviser with custody or discretion, so I, II, and III are all within the bonding power. Nothing in the Act confines that power to firms, and it is the agent's discretionary authority, not the agent's status as an individual, that decides the question.
- On April 15, ABC Securities, Inc., made application for registration as a broker-dealer with State X. Absent a denial or stop order, registration will become effective
- At noon on April 15
- At noon on April 30
- At noon on May 15
- At noon on June 14
Correct answer: At noon on May 15
With no denial or stop order in effect and no proceeding pending, a broker-dealer's application becomes effective automatically at noon on the 30th day after it is filed. Counting thirty days from April 15 reaches May 15, so registration takes effect at noon on May 15. The day the application is filed is not the effective date, fifteen days is not the statutory period, and sixty days runs well past the point at which the Act makes the registration effective on its own.
- A broker-dealer registered in States P, S, and U has several clients in State C. If the firm does not have a place of business in State C, the firm would need to register in State C if any of its clients in the state are
- Individual investors buying for their own accounts
- Trust companies acting for their fiduciary accounts
- Investment companies registered under federal law
- Insurance companies writing property and casualty lines
Correct answer: Individual investors buying for their own accounts
The relief a broker-dealer enjoys when it has no place of business in a state lasts only while its clientele there is entirely institutional. Individual investors buying for their own accounts are retail customers, and one of them in State C obliges the firm to register there. Trust companies, registered investment companies, and insurance companies are institutional clients for this purpose, and the kind of coverage an insurer writes makes no difference, so none of those relationships costs the firm the exemption.
- A broker-dealer with no place of business in the state would not be required to register with the Administrator if its only clients were
- Executors of a decedent's private estate
- Accredited investors that clear the income limit
- Retail investors numbering five or fewer
- Savings institutions with deposits in that state
Correct answer: Savings institutions with deposits in that state
The Uniform Securities Act excludes from the broker-dealer definition a firm with no place of business in the state whose customers there are limited to institutions: banks, savings institutions, trust companies, insurance companies, investment companies, employee benefit plans with at least $1 million in assets, and other broker-dealers. Savings institutions with deposits in that state sit squarely on that list, so registration is not triggered. Executors of a decedent's private estate are individual customers, and acting as a fiduciary does not turn an estate into an institution. Accredited investors that clear the income limit qualify on personal income, which marks them as retail customers rather than institutions. Retail investors numbering five or fewer still force registration, because the de minimis relief belongs to investment advisers and their representatives and has no broker-dealer counterpart.
- Which of the following would meet the Uniform Securities Act's definition of broker-dealer?
- Rushmore Investments, which sells mutual fund shares
- Strathmore Investments, which buys and sells bullion bars
- Cranmore Secured, which buys and resells foreclosed homes
- Baltimore Traders, which handles rare postage stamps
Correct answer: Rushmore Investments, which sells mutual fund shares
A broker-dealer is any person engaged in the business of effecting transactions in securities for the account of others or for its own account, and person reaches far beyond individuals. Mutual fund shares are securities, so Rushmore Investments, which sells mutual fund shares, is effecting securities transactions and meets the definition. Strathmore Investments, which buys and sells bullion bars, deals in a metal, and gold is not a security. Cranmore Secured, which buys and resells foreclosed homes, deals in real estate, which is not a security either. Baltimore Traders, which handles rare postage stamps, deals in collectibles, and collectibles sit outside the Act entirely.
- Under the Uniform Securities Act, the term broker-dealer would include
- An issuer distributing its own recently registered shares
- A firm with no state office selling variable life to five residents
- A firm with no state office dealing only with local insurance firms
- An agent liquidating securities from a retirement account
Correct answer: A firm with no state office selling variable life to five residents
Variable life is a security, so a firm with no state office selling variable life to five residents is effecting securities transactions with individual residents and is a broker-dealer there. Having no office does not rescue it, because the out-of-state exclusion requires that the business be confined to institutions and other broker-dealers, and no client count relieves a broker-dealer. A firm with no state office dealing only with local insurance firms fits that institutional exclusion exactly and is therefore not a broker-dealer in the state. An issuer distributing its own recently registered shares stays an issuer, and issuers are excluded by name. An agent liquidating securities from a retirement account is disposing of a personal holding rather than carrying on a securities business.
- An individual recently inherited $100,000 and would like to invest some of that money into stocks and bonds. To purchase those securities, the individual would most likely use the services of
- An accountant preparing the buyer's tax return
- A commercial bank holding the buyer's savings deposits
- A broker-dealer serving the buyer's home state
- A mutual fund investing shareholder cash in securities
Correct answer: A broker-dealer serving the buyer's home state
Buying stocks and bonds means placing securities orders, and executing those orders is the work of a broker-dealer serving the buyer's home state. An accountant preparing the buyer's tax return may comment on the tax consequences, but accountants do not execute securities transactions. A commercial bank holding the buyer's savings deposits takes deposits and makes loans, and where a bank offers securities the customer is actually dealing with an affiliated broker-dealer. A mutual fund investing shareholder cash in securities buys portfolio holdings for itself; the investor buys the fund's own shares rather than the underlying stocks and bonds.
- Broad Street Securities (BSS) is a broker-dealer based in State P with offices in no other state. In addition to its State P clients, BSS has 4 retail customers living in State M. During the winter, if 14 existing customers vacation in State A for up to two months at a time, BSS meets the Uniform Securities Act's definition of a broker-dealer in
- State P and State M and State A
- State P and not any of the rest
- States M and A, but nothing more
- States P and M, and nowhere else
Correct answer: States P and M, and nowhere else
BSS is a broker-dealer in State P because it maintains its office there, and in State M because four retail customers reside there, since one retail resident is enough where no de minimis relief exists for broker-dealers. Customers who winter in State A keep their residence elsewhere, so the snowbird treatment applies and State A registration is not triggered, leaving States P and M, and nowhere else. State P and State M and State A overstates the reach by counting transient vacationers as residents. State P and not any of the rest ignores the four customers who actually live in State M. States M and A, but nothing more drops the one state where the firm keeps a place of business.
- If an incorporated entity sells nonexempt securities to public customers, receives a commission on the sale of the securities, and pays commissions to the employees who sell them, according to the Uniform Securities Act, the corporation is
- A broker-dealer required to register there
- An issuer exempted from registration there
- A broker-dealer whose sales are entirely exempt
- An issuer whose customers are all sophisticated
Correct answer: A broker-dealer required to register there
Effecting securities transactions for public customers, collecting commissions on them, and paying commissions to the employees who sell them is the business of a broker-dealer, so the corporation is a broker-dealer required to register there. An issuer exempted from registration there misreads the facts, because the firm is selling to customers and paying sales compensation rather than distributing its own paper. A broker-dealer whose sales are entirely exempt contradicts the stated facts, which describe nonexempt securities. An issuer whose customers are all sophisticated adds a purchaser qualification the facts never supply, and the sales here run to public customers.
- Under the Uniform Securities Act, which of the following are not excluded from the definition of broker-dealer?
- Issuers distributing shares of their own equity
- Firms trading securities only for their own account
- Agents effecting trades for one registered firm
- Banks holding customer stock inside a trust account
Correct answer: Firms trading securities only for their own account
The Act defines a broker-dealer as a person in the business of effecting securities transactions for the account of others or for its own account, so firms trading securities only for their own account, such as over-the-counter market makers, are inside the definition and are not excluded. Issuers distributing shares of their own equity are excluded by name. Agents effecting trades for one registered firm are excluded as well and register in the agent capacity instead. Banks holding customer stock inside a trust account are excluded because banks, savings institutions, and trust companies are all named exclusions.
- Under the Uniform Securities Act, which of the following statements regarding the business structure of a broker-dealer are true? I. It can be a sole proprietorship. II. It can be a corporation. III. It can be a stock exchange. IV. It can be a partnership.
- II, III, and IV
- I and II only
- I, II, and IV
- III and IV only
Correct answer: I, II, and IV
A broker-dealer may be organized in any recognized business form, including a sole proprietorship, a partnership, a limited liability company, or a corporation, which makes the sole proprietorship, corporation, and partnership statements true and gives I, II, and IV. A stock exchange is not a business structure a broker-dealer can adopt; firms become members of exchanges rather than being one. II, III, and IV wrongly admits the stock exchange while dropping the sole proprietorship. I and II only leaves out the partnership, which is plainly permitted. III and IV only keeps the stock exchange and omits both the sole proprietorship and the corporation.
- Which of the following persons are excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act? I. A broker-dealer with no office in the state that effects trades exclusively with other broker-dealers in the state II. A trust company with an office in the state that deals with the general public III. A broker-dealer with no office in the state that has no more than five retail clients resident in the state within the past year IV. A broker-dealer with no office in the state that effects securities trades exclusively with trust companies or other broker-dealers
- Choices II, III, and IV, but no more
- Choices II and III, nothing else
- Choices III and IV, nothing else
- Choices I, II, and IV, and no others
Correct answer: Choices I, II, and IV, and no others
A firm with no office in the state that trades exclusively with other broker-dealers qualifies for the out-of-state exclusion, and so does one whose trades run only to trust companies or other broker-dealers, which covers statements I and IV. A trust company is excluded from the broker-dealer definition by name, and that exclusion turns on neither office location nor customer type, which covers statement II and yields Choices I, II, and IV, and no others. Statement III is not excluded, because five retail clients still require registration and the de minimis relief exists only for investment advisers. Choices II, III, and IV, but no more admits statement III and drops statement I. Choices II and III, nothing else repeats the statement III error and omits two genuine exclusions. Choices III and IV, nothing else makes the same mistake and drops the trust company.
- A broker-dealer with no place of business in a state is not defined as a broker-dealer in that state when its only clients in that state are
- Investment companies registered under federal law
- Employee benefit plans holding $800,000 in plan assets
- Charitable foundations recognized under state law
- Individual buyers who meet the accredited investor test
Correct answer: Investment companies registered under federal law
The out-of-state exclusion holds only where the firm's clients in the state are institutional, and investment companies registered under federal law appear on that list, so no registration is required. Employee benefit plans holding $800,000 in plan assets fall under the $1 million floor the Act sets for benefit plans, so such a plan is not an institutional client. Charitable foundations recognized under state law are not among the named institutions, and a nonprofit is generally not treated as an institutional buyer. Individual buyers who meet the accredited investor test remain individuals, and no individual qualifies as an institution however wealthy.
- The Uniform Securities Act refers to a broker-dealer by using the language any person. Although that is a broad term, it would be unusual to find a broker-dealer structured as
- A general partnership owned by several registered agents
- A sole proprietorship owned by one registered individual
- A corporation with several public shareholders
- A limited liability company with member-owners
Correct answer: A sole proprietorship owned by one registered individual
Every recognized business form is legally open to a broker-dealer, but a sole proprietorship owned by one registered individual is vanishingly rare in practice; only a handful of the thousands of registered firms are organized that way. A general partnership owned by several registered agents, a corporation with several public shareholders, and a limited liability company with member-owners are all ordinary structures, and each spreads capital and liability in ways a one-owner firm cannot. The question asks what would be unusual to find, not what is permitted, and all four forms are permitted.
- An existing customer of Broker-dealer A is on vacation in State N. Broker-dealer A, who is registered in and maintains offices only in State F, wishes to make the vacationing customer aware of an investment opportunity that has just become available. Which of the following is true?
- Broker-dealer A may lawfully contact any resident it wishes within State N.
- Broker-dealer A may contact the customer through its State N branch office.
- Broker-dealer A may lawfully contact the customer in State N.
- Broker-dealer A must alert the State N Administrator by mail.
Correct answer: Broker-dealer A may lawfully contact the customer in State N.
A firm registered in State F with no office in State N is not defined as a broker-dealer in State N when it deals with an existing customer who is merely visiting rather than residing there, so Broker-dealer A may lawfully contact the customer in State N. The snowbird treatment turns on the customer's residence combined with the absence of a place of business in the visited state. Broker-dealer A may lawfully contact any resident it wishes within State N stretches that far past its limits, since soliciting actual State N residents would require registration there. Broker-dealer A may contact the customer through its State N branch office invents a branch the firm neither has nor needs. Broker-dealer A must alert the State N Administrator by mail adds a notice obligation the Act does not impose.
- Under the Uniform Securities Act, each of the following is specifically excluded from the definition of a broker-dealer except
- An agent trading securities for a broker-dealer
- An international bank taking deposits from its own clients
- An issuer selling its own registered securities
- An investment adviser managing client portfolios for a fee
Correct answer: An investment adviser managing client portfolios for a fee
Agents, issuers, and banks, whether domestic or international, are named exclusions from the broker-dealer definition, but investment advisers are not, so an investment adviser managing client portfolios for a fee is the one that is not excluded and must register as a broker-dealer if its method of operation calls for it. An agent trading securities for a broker-dealer is excluded and registers in the agent capacity. An international bank taking deposits from its own clients falls within the bank exclusion, which the Act does not confine to domestic institutions. An issuer selling its own registered securities remains an issuer even when it runs the distribution itself.
- A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer does no business in that state other than with
- Other broker-dealers operating in that state
- Investment advisers who are registered in that state
- No more than five retail investors residing in-state
- Accredited buyers residing within that state
Correct answer: Other broker-dealers operating in that state
A firm with no place of business in the state avoids registration only while its business there stays confined to other broker-dealers and institutional clients, so limiting the business to other broker-dealers operating in that state preserves the exclusion. Investment advisers who are registered in that state are not on the institutional list for this purpose, so serving them does trigger registration. No more than five retail investors residing in-state triggers it as well, because the de minimis relief runs to investment advisers and their representatives and never to broker-dealers. Accredited buyers residing within that state are commonly individuals who qualify on income or net worth, and individuals are retail clients rather than institutions.
- Which of the following is included in the definition of a broker-dealer under the Uniform Securities Act?
- An agent placing equity orders for broker-dealers
- A firm effecting securities trades for itself or for others
- A firm without any state office serving dealers or insurers
- An issuer distributing its own unregistered stock
Correct answer: A firm effecting securities trades for itself or for others
The definition reaches any person in the business of effecting transactions in securities for its own account or for the accounts of others, so a firm effecting securities trades for itself or for others is included. An agent placing equity orders for broker-dealers is excluded by name and registers in the agent capacity. A firm without any state office serving dealers or insurers meets the out-of-state exclusion, since its business is confined to other dealers and institutional clients. An issuer distributing its own unregistered stock is an issuer, and issuers are excluded whether or not they run the distribution themselves.
- The Uniform Securities Act provides several exclusions from the definition of broker-dealer. Those include all of the following except
- A person who buys and sells agricultural tracts
- A dealer who trades in rare gold coins for other people
- A dealer that trades securities for its clients
- A broker who deals in grain and corn futures for buyers
Correct answer: A dealer that trades securities for its clients
The Act concerns itself with persons in the business of effecting transactions in securities and with nothing else, so a dealer that trades securities for its clients is the one choice that is not excluded, because it is the broker-dealer definition itself. A person who buys and sells agricultural tracts deals in real estate. A dealer who trades in rare gold coins for other people deals in collectibles and metal. A broker who deals in grain and corn futures for buyers deals in commodities. None of those products is a security, so none of those persons is a broker-dealer under this Act however professional the activity.
- Under the Uniform Securities Act, which of the following is, by definition, a broker-dealer in a state?
- An agent who places trades for a broker that is registered
- A trust company with an office here that serves the public
- A firm with no offices in the state that deals only with trust companies
- A firm with an office in the state that deals only with commercial banks
Correct answer: A firm with an office in the state that deals only with commercial banks
A place of business in the state settles the question on its own, so a firm with an office in the state that deals only with commercial banks is a broker-dealer there and must register; the institutional exclusion is open only to firms with no office in the state. An agent who places trades for a broker that is registered is excluded from the definition and registers in the agent capacity. A trust company with an office here that serves the public is excluded from the definition by name, and that exclusion turns on neither office location nor customer type. A firm with no offices in the state that deals only with trust companies satisfies it too, because trust companies are institutional clients.
- In our everyday lives, we often come across the term dealer. It might be an automobile dealer, an appliance dealer, or a furniture dealer. In each case, the adjective describes the product handled by that dealer. In the case of a broker-dealer registered with the Administrator, the product is
- Securities, whether or not they are exempted
- Fixed annuity and whole life insurance plans
- Investment products of every sort, such as real estate
- Brokerage services sold by other firms, such as agents
Correct answer: Securities, whether or not they are exempted
The Act defines a broker-dealer as a person in the business of effecting transactions in securities, so the product handled is securities, whether or not they are exempted, since an exempt security is still a security. Fixed annuity and whole life insurance plans are not securities; only variable products, whose value rides on a separate account, are. Investment products of every sort, such as real estate, sweeps in far too much, because a great many investments are not securities at all. Brokerage services sold by other firms, such as agents, names a service the firm performs rather than the product the Act regulates.
- A broker-dealer registered with the SEC has offices in States L, A, and M. The firm has several clients in State G. If the firm does not have a place of business in State G, when would registration as a broker-dealer in that state be required?
- If a client is a federally registered investment company
- If a client qualifies as an accredited investor under the income test
- If a client is a federally chartered savings institution
- If a client is a state-chartered bank that buys securities for itself
Correct answer: If a client qualifies as an accredited investor under the income test
A single retail client in the state requires registration, and the income branch of the accredited investor test can be met only by an individual, so registration becomes necessary if a client qualifies as an accredited investor under the income test. Having no place of business in State G does not help, and SEC registration never displaces the state requirement. If a client is a federally registered investment company, the institutional exclusion holds. If a client is a federally chartered savings institution, it holds again, since savings institutions are named institutions. If a client is a state-chartered bank that buys securities for itself, the exclusion still holds, because banks qualify whether chartered by a state or by the federal government.
- A broker-dealer would likely have to register in a state when
- One of its agents emails a personal note to one resident
- Its website posts a directory of branch offices
- Its website posts stock picks for income buyers
- It keeps no office there and deals only with local banks
Correct answer: Its website posts stock picks for income buyers
The NASAA model rule on internet communications treats a site carrying securities recommendations as doing securities business in the state, so registration becomes likely once its website posts stock picks for income buyers, even though those picks are keyed to broad criteria rather than to one person. Its website posts a directory of branch offices is the standard example on the other side, because a plain listing of locations is neither an offer nor a recommendation. One of its agents emails a personal note to one resident tells us nothing about the content, and correspondence unrelated to securities business triggers nothing. It keeps no office there and deals only with local banks describes the out-of-state institutional exclusion, which removes the registration requirement rather than creating one.
- Under the Uniform Securities Act, which of the following is considered a broker-dealer in a state?
- A national bank that keeps one office and serves the public
- An agent that places trades and serves a registered firm
- A broker that avoids state offices and takes dealer bids
- A firm that keeps an office and serves only insurance firms
Correct answer: A firm that keeps an office and serves only insurance firms
Once a firm keeps a place of business in the state, the identity of its customers stops mattering, so a firm that keeps an office and serves only insurance firms is a broker-dealer there and must register. A national bank that keeps one office and serves the public is excluded from the definition by name, since banks are named exclusions whatever their office arrangements. An agent that places trades and serves a registered firm is excluded as well and registers in the agent capacity. A broker that avoids state offices and takes dealer bids has no place of business in the state and confines its business to other dealers, which is precisely the out-of-state exclusion.
- In compliance with the Uniform Securities Act, a broker-dealer without a place of business in a state meets the definition of a broker-dealer when
- It has five retail clients who all live in-state
- It limits its clients in the state to investment firms
- It trades in that state only with fellow dealers
- Its clients in the state are plans holding $3 million
Correct answer: It has five retail clients who all live in-state
One retail client resident in the state makes an out-of-state firm a broker-dealer there, so the definition is met once it has five retail clients who all live in-state. The trap is the de minimis exemption, which the Act grants to investment advisers and their representatives and never to broker-dealers. It limits its clients in the state to investment firms keeps the firm inside the institutional exclusion. It trades in that state only with fellow dealers does the same, because business confined to other broker-dealers is expressly excluded. Its clients in the state are plans holding $3 million clears the $1 million floor the Act sets for employee benefit plans, so those clients count as institutional.
- The Uniform Securities Act would not consider which of the following to be broker-dealers?
- Market makers that buy and sell securities for their own accounts
- Private investors who buy and sell equities in their own accounts
- Firms that underwrite new issues of corporate securities
- Firms that execute securities orders for other investors
Correct answer: Private investors who buy and sell equities in their own accounts
Being in the business means being compensated by others for securities activity, which is why private investors who buy and sell equities in their own accounts are not broker-dealers however actively they trade. Market makers that buy and sell securities for their own accounts are in that business, and the definition expressly covers trading for one's own account. Firms that underwrite new issues of corporate securities are performing the investment banking function of a broker-dealer. Firms that execute securities orders for other investors are effecting transactions for the accounts of others, which is the core of the definition.
- A broker-dealer with no place of business in the state would not be required to register with the Administrator unless one of its clients was
- A closed-end fund holding $40,000,000 in net assets
- A second broker-dealer that keeps an office in-state
- A benefit plan holding $845,000 in assets
- A trust company holding assets for clients
Correct answer: A benefit plan holding $845,000 in assets
Employee benefit plans count as institutional clients only when they hold at least $1 million in assets, so a benefit plan holding $845,000 in assets falls below the floor and forces the out-of-state firm to register. A closed-end fund holding $40,000,000 in net assets is an investment company as defined in the Investment Company Act of 1940 and sits on the institutional list. A second broker-dealer that keeps an office in-state is another broker-dealer, and business confined to other broker-dealers is excluded. A trust company holding assets for clients is named in the exclusion alongside banks and savings institutions.
- Rachel passed her life insurance license exam six months ago and is now studying for the Series 63 exam. During this period, Rachel would be permitted to sell
- Publicly traded corporate securities
- Guaranteed ordinary life insurance contracts
- Registered investment company shares
- Registered variable life insurance contracts
Correct answer: Guaranteed ordinary life insurance contracts
Until a person is registered as an agent, that person may not effect securities transactions with customers or prospects. A life insurance license covers guaranteed ordinary life insurance contracts, a fixed product that is not a security, so Rachel may sell those today. Registered variable life insurance contracts are securities, because the cash value funds a separate account, and selling them requires agent registration on top of the insurance license. Registered investment company shares are securities issued by a pooled fund, and publicly traded corporate securities are securities as well, so an unregistered person may sell neither.
- Traditionally, banks have been excluded from the definition of a broker-dealer. However, under recent federal legislation, a bank is included in the definition if it
- Lends retail customers millions of dollars against pledged stock collateral
- Executes thousands of retail customer stock orders through branch employees
- Places its retail securities business in a wholly owned registered broker subsidiary
- Sweeps uninvested retail customer balances into shares of no-load money market funds
Correct answer: Executes thousands of retail customer stock orders through branch employees
The Gramm-Leach-Bliley Act struck the blanket exclusion of banks from the broker definition and replaced it with eleven activity-based exceptions, so bank securities activity is now functionally regulated: a bank is a broker, and must register, whenever it effects securities transactions for customers outside those exceptions. Executing thousands of retail customer stock orders through branch employees is outside all of them, since the de minimis exception reaches only 500 transactions a year. Sweeping uninvested balances into shares of no-load money market funds is inside the sweep exception, as are networking with a registered broker-dealer, trust and fiduciary work, and safekeeping and custody. Lending against pledged stock collateral is an extension of credit, not the effecting of a securities transaction for the account of others. And where a bank places its securities business in a wholly owned registered broker subsidiary, it is the subsidiary, a separate registered broker-dealer, that registers, not the bank.
- A broker-dealer with no place of business in the state would not be required to register if their only clients were
- Five individual retail brokerage clients
- Individuals acting as fiduciary trustees
- Insurance companies and federally insured banks
- Individuals or trusts holding accredited status
Correct answer: Insurance companies and federally insured banks
A broker-dealer with no place of business in a state stays outside that state's definition of broker-dealer when its clientele is limited to institutions, and insurance companies and federally insured banks are both on the institutional list. Individuals or trusts holding accredited status are still private clients, and wealth does not make a client institutional. Individuals acting as fiduciary trustees are individuals as well, and the capacity in which a client acts is irrelevant here. Five individual retail brokerage clients still trigger registration, because unlike investment advisers, broker-dealers get no de minimis exemption.
- Which of the following is least likely to be excluded from the Uniform Securities Act's definition of broker-dealer?
- A partnership effecting trades for its own clients
- A pension plan effecting trades for its own beneficiaries
- A commercial bank effecting trades for its own depositors
- A corporation issuing its own securities to buyers
Correct answer: A partnership effecting trades for its own clients
A broker-dealer is any person engaged in the business of effecting securities transactions for the accounts of others or for its own account, so a partnership effecting trades for its own clients meets the definition and is not excluded from it. A corporation issuing its own securities to buyers is an issuer, and issuers are expressly excluded. A commercial bank effecting trades for its own depositors is excluded because banks are named in the exclusion. A pension plan effecting trades for its own beneficiaries is not in the business of effecting transactions and falls outside the definition.
- A broker-dealer registered in States P, S, and U has several clients in State C. If the firm does not have a place of business in State C, the firm would avoid the need to register in State C if its only clients in the state are
- Investment advisers or their advisory clients
- Individuals with substantial income or wealth
- Savings and loan associations chartered in the state
- Individuals who work as agents or officers elsewhere
Correct answer: Savings and loan associations chartered in the state
A broker-dealer with no place of business in a state is not defined as a broker-dealer there when its only clients are institutions or other broker-dealers, and savings and loan associations chartered in the state sit on the institutional list alongside banks and trust companies. Investment advisers or their advisory clients are not on that list, so a single adviser client costs the firm the exclusion. Individuals who work as agents or officers elsewhere are still individuals, and individuals with substantial income or wealth are individuals as well, so neither group preserves the exclusion.
- Which of the following persons is not excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act?
- A firm with no local office and five retail clients
- A firm with no local office and only outside dealer clients
- A trust company that has a local office and private clients
- A firm with no local office and only issuer clients
Correct answer: A firm with no local office and five retail clients
There is no de minimis exemption for broker-dealers, so a firm with no local office and five retail clients is a broker-dealer in that state and must register there; even one resident retail client ends the exclusion. A firm with no local office and only issuer clients is excluded, because trading confined to the issuers of the securities involved sits inside the exclusion. A firm with no local office and only outside dealer clients is excluded on the same reasoning. A trust company that has a local office and private clients is excluded because trust companies are named in the definition itself, and an office does not change that.
- Under the Uniform Securities Act, which of the following statements are true? I. A broker-dealer may not also be registered as an investment adviser. II. A broker-dealer may be structured as a corporation, a partnership, or a sole proprietorship. III. A broker-dealer's primary business is effecting securities transactions for clients or for the broker-dealer's own account. IV. A broker-dealer need not register in a state in which it has noninstitutional clients unless it has an office in that state.
- I and IV
- III and IV
- II and III
- I and II
Correct answer: II and III
Statement II is true, because a broker-dealer may be organized as a corporation, a partnership, or a sole proprietorship. Statement III is true, because a broker-dealer's business is effecting securities transactions for clients or for its own account. Statement I is false, since one person may be registered as both a broker-dealer and an investment adviser at the same time. Statement IV is false, because a firm with noninstitutional clients in a state must register there whether or not it keeps an office in that state.
- According to the Uniform Securities Act, a person must register as a broker-dealer in a state if he had which of the following? I. No place of business in the state, but clients who relocated their official residence to that state more than 30 days ago II. No place of business in the state but dealt exclusively with broker-dealers in that state III. No place of business in the state but effected transactions exclusively with issuers of securities in that state IV. A place of business in the state
- II and III
- III and IV
- I and IV
- I and II
Correct answer: I and IV
Statement I requires registration, because the accommodation for a visiting customer runs only while that customer is temporarily in the state; once the client has been a permanent resident for more than 30 days the firm must register or end the relationship. Statement IV requires registration, because a place of business in the state makes a firm a broker-dealer there no matter who its clients are. Statement II does not, since trading confined to other broker-dealers sits inside the exclusion, and statement III does not, since trading confined to issuers of the securities involved sits inside it as well.
- Under the Uniform Securities Act, which of the following is not excluded from the definition of broker-dealer?
- An agent who solicits or takes orders for a firm
- An issuer that sells or exchanges its own shares
- A firm with no local office serving only broker-dealers
- A firm with a local office and only institution clients
Correct answer: A firm with a local office and only institution clients
Once a person keeps an office in the state, the identity of its clients stops mattering, so a firm with a local office and only institution clients is a broker-dealer and must register. A firm with no local office serving only broker-dealers is outside the definition, because the exclusion covers a firm whose in-state trading is confined to other broker-dealers. An agent who solicits or takes orders for a firm is defined as an agent rather than a broker-dealer, and an issuer that sells or exchanges its own shares is expressly excluded from the definition.
- One of the terms defined in the Uniform Securities Act is broker-dealer. Which of the following is not included in that definition? I. An individual employed by a business entity to open new customer accounts for the purpose of trading securities II. A business entity seeking to raise additional capital using the regulated securities markets III. A person whose primary function is buying securities for his own account and for the accounts of others IV. A person whose primary function is providing advice on what assets belong in clients' investment portfolios
- III and IV
- II, III, and IV
- I, II, and IV
- II and III
Correct answer: I, II, and IV
The person in statement I is employed to open new customer accounts and is therefore an agent, the entity in statement II is raising capital through the regulated markets and is therefore an issuer, and the person in statement IV advises on portfolio holdings and is therefore an investment adviser. None of those three is included in the broker-dealer definition. Statement III, describing a person whose primary function is buying securities for his own account and for the accounts of others, is the definition itself, so every choice that carries statement III is wrong.
- Under the Uniform Securities Act, which of the following is a broker-dealer?
- A corporation selling partnership units for the oil issuer
- A credit union selling its own shares to new members
- An individual selling securities for a state licensed firm
- A company selling its own bonds to raise new capital
Correct answer: A corporation selling partnership units for the oil issuer
A broker-dealer is any person effecting securities transactions for the accounts of others or for its own account, and a corporation selling partnership units for the oil issuer is doing exactly that, since limited partnership interests are securities and the proceeds go to the issuer. A credit union selling its own shares to new members is issuing its own security and is therefore an issuer. An individual selling securities for a state licensed firm is a natural person representing a firm, which makes that person an agent. A company selling its own bonds to raise new capital is likewise an issuer.
- A broker-dealer registered in State X has several clients in State Y. If the firm does not have a place of business in State Y, registration in State Y would be required if one of those clients is
- An investment adviser registered in State Y
- A broker-dealer that is registered in State Y
- A commercial bank doing business in State Y
- An investment company registered with the SEC
Correct answer: An investment adviser registered in State Y
The exclusion for a firm with no place of business in a state survives only while every in-state client is an institution or another broker-dealer, and an investment adviser registered in State Y is neither, so that one relationship forces registration. A commercial bank doing business in State Y is an institution and preserves the exclusion. A broker-dealer that is registered in State Y is expressly covered by the exclusion. An investment company registered with the SEC sits on the institutional list as well.
- Asset Augmentation Associates (AAA) accepts accounts from individual investors resident in this state who wish to buy and sell a variety of securities. It is likely that the Uniform Securities Act would define AAA as
- A fee-paid adviser to individual investors
- An investment company that must register its units
- A broker-dealer that must register with this state
- An agent for an unregistered broker-dealer
Correct answer: A broker-dealer that must register with this state
Asset Augmentation Associates opens accounts for resident individuals and executes their purchases and sales, which is the business of effecting securities transactions for the accounts of others, so it is a broker-dealer that must register with this state. An investment company that must register its units is a pooled issuer, and its units are among the securities a customer might buy through the firm. An agent for an unregistered broker-dealer is a natural person representing a firm, not the firm itself. A fee-paid adviser to individual investors is paid for advice rather than for executing orders.
- Pelf Professional Investment Services (PPIS) is an SEC-registered broker-dealer registered in 13 states. Which of the following customers moving to a state that is not one of those 13 would cause PPIS to need registration with the Administrator of that state?
- An individual who is an accredited investor
- An employee benefit plan with $1.5 million in assets
- An insurance company that is authorized in that state
- A savings association licensed in the state
Correct answer: An individual who is an accredited investor
A firm with no place of business in a state need not register there while every client in the state fits the institutional definition, and no individual ever fits it, so an individual who is an accredited investor forces registration; the accredited investor standard belongs to federal offering rules and does not reach this exclusion. A savings association licensed in the state is an institution, an employee benefit plan with $1.5 million in assets clears the plan asset threshold, and an insurance company that is authorized in that state is named on the institutional list.
- An investor who trades securities for her own account is
- A dealer that must register with the state
- A principal of a registered brokerage firm
- An agent registered through her employing firm
- A public customer who has no registration duty
Correct answer: A public customer who has no registration duty
The broker-dealer definition reaches only a person engaged in the business of effecting securities transactions, and an investor buying and selling for her own account is not in that business, so she is a public customer who has no registration duty. She is not an agent registered through her employing firm, because she represents no firm and sells nothing to anyone. She is not a dealer that must register with the state, since trading one's own money is not a securities business, and she is not a principal of a registered brokerage firm, since that status also depends on employment by a firm.
- All of the following statements regarding broker-dealers are true except
- They register their agents as adviser representatives
- They buy and sell securities as principals for themselves
- They execute their customer orders on the stock exchanges
- They register in the states where they have customers
Correct answer: They register their agents as adviser representatives
The false statement is that they register their agents as adviser representatives. A natural person who sells securities for a broker-dealer registers as an agent, while an investment adviser representative is associated with an investment adviser instead. The other statements are accurate. Broker-dealers execute their customer orders on the stock exchanges when acting as brokers for others, they buy and sell securities as principals for themselves when acting as dealers, and they register in the states where they have customers.
- Company X receives commissions for the sale of Company Y's stock. In turn, Company X pays out all of that commission to its employees who sell Company Y's stock. As defined in Section 401(c) of the Uniform Securities Act, Company X would be known as
- An issuer distributing its own new common stock
- A commissioned agent of the selling corporation
- An investment banker that underwrites stock offerings
- A broker-dealer taking commissions on the stock sales
Correct answer: A broker-dealer taking commissions on the stock sales
Company X takes commissions for selling another company's stock, which is effecting securities transactions for the account of another, so the definitions section makes it a broker-dealer taking commissions on the stock sales. An investment banker that underwrites stock offerings describes real market activity, but investment banker is not a term the Act defines, so it cannot be the answer here. An issuer distributing its own new common stock would be Company Y. A commissioned agent of the selling corporation describes the individual employees, since only a natural person can be an agent.
- XYZ Securities is a broker-dealer based in Wisconsin with offices in no other state. In addition to its Wisconsin clients, XYZ has 30 retail customers living in Illinois. During the winter, if 10 existing customers vacation in Florida for up to seven weeks at a time, XYZ Securities is a broker-dealer in
- All three of the states named
- Wisconsin and nowhere else
- Every state adopting the Act
- Wisconsin and Illinois
Correct answer: Wisconsin and Illinois
The firm keeps its office in Wisconsin, which makes it a broker-dealer there, and its 30 Illinois retail customers make it a broker-dealer in Illinois as well, since no de minimis exemption is available and an office is not required, so the answer is Wisconsin and Illinois. Wisconsin and nowhere else ignores those 30 Illinois retail clients. All three of the states named is wrong because customers wintering in Florida for seven weeks remain residents of their home states, so the firm may serve them there without registering. Every state adopting the Act is wrong because registration follows a firm's offices and clients, not the reach of the statute.
- Persons not included in the Uniform Securities Act's definition of broker-dealer are I. agents. II. banks. III. issuers. IV. trust companies.
- I, II, and III
- I, II, III, and IV
- II, III, and IV
- I, III, and IV
Correct answer: I, II, III, and IV
All four listed persons sit outside the broker-dealer definition. Agents represent broker-dealers and register in that separate capacity. Banks, savings institutions, and trust companies are named in the exclusion itself. Issuers such as corporations and governments sell their own securities and are excluded as well. Because every one of the four is excluded, any choice that names only three of them is incomplete. Note that a bank subsidiary organized to conduct a securities business is generally a broker-dealer and must register as one.
- A broker-dealer with no place of business in State N receives an order from an existing customer who is visiting her family in that state. Should the customer decide to take up permanent residence in State N, and the firm wish to maintain the customer relationship, registration as a broker-dealer with the State N Administrator would be required
- Before the end of the renewal period
- Within 30 days after the move
- Before the date of the change
- Within 90 days of the address change
Correct answer: Within 30 days after the move
A firm relying on the accommodation for a customer temporarily in the state must register with the Administrator within 30 days after the move once the customer takes up permanent residence there, assuming it wants to keep the relationship. Before the date of the change is wrong, because the accommodation still covers the account while the customer is merely visiting family. Within 90 days of the address change states a period the Act does not grant. Before the end of the renewal period is wrong, because renewal dates have nothing to do with this deadline.
- Burgeoning Capital Associates (BCA) is a broker-dealer specializing in assisting corporations and municipalities with raising funds through the issuance of equity or debt securities. BCA does not maintain a place of business in State Z. It is likely, however, that BCA would have to register as a broker-dealer in State Z if one of its clients in the state is
- A township issuing bonds for library construction
- An issuing corporation selling shares to fund expansion
- A broker-dealer seeking help with an underwriting
- An individual borrowing against her own stock portfolio
Correct answer: An individual borrowing against her own stock portfolio
The firm has no place of business in State Z, so it keeps the exclusion only while its in-state clients are issuers of the securities involved, institutions, or other broker-dealers. An individual borrowing against her own stock portfolio is a retail margin customer, and one such resident client ends the exclusion and forces registration. An issuing corporation selling shares to fund expansion is an issuer of the security involved, and a township issuing bonds for library construction is an issuer as well. A broker-dealer seeking help with an underwriting sits squarely inside the exclusion.
- Main Street Investors (MSI) is a broker-dealer registered in State T. It has no offices in State O, although it does do business in that state. Under the Uniform Securities Act, registration in State O is required if the client is
- A bank that holds a federal banking charter
- A person who works for an insurance company
- An issuer selling the securities being traded
- An investment company registered with the SEC
Correct answer: A person who works for an insurance company
A firm with no place of business in the state keeps its exclusion only while every in-state client is an institution, another broker-dealer, or the issuer of the security involved. A person who works for an insurance company is a natural person and a retail client, and the employer's business does not make that individual an institution, so registration in State O is required. A bank that holds a federal banking charter is an institution, an investment company registered with the SEC sits on the institutional list, and an issuer selling the securities being traded is covered by its own branch of the exclusion.
- Creative Financial Solutions (CFS) is a broker-dealer registered with the SEC. CFS has its principal and only office in State A. CFS also does business with clients domiciled in State B. Which of these clients would cause CFS to have to register in State B?
- Two mutual funds registered with the SEC
- Fifteen other broker-dealers based in State B
- Three savings banks chartered in State B
- Four individual customers resident in State B
Correct answer: Four individual customers resident in State B
Federal registration says nothing about state registration, since broker-dealers register with the SEC and with the states, and the state analysis turns entirely on the in-state clientele. Four individual customers resident in State B are noninstitutional residents, and no de minimis exemption exists for broker-dealers, so their presence forces registration in State B. Three savings banks chartered in State B are institutions, fifteen other broker-dealers based in State B sit expressly inside the exclusion, and two mutual funds registered with the SEC are institutions as well.
- Whitehorse Investments Incorporated (WII) is in the business of buying and selling securities for the accounts of its customers. From time to time, WII takes a position in a security for its own account. Under the Uniform Securities Act, WII would be defined as
- A retail brokerage house
- A broker-dealer firm
- A wholesale market maker
- An investment banker
Correct answer: A broker-dealer firm
The Act defines broker-dealer as any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account, and Whitehorse does both, so it is a broker-dealer firm. A retail brokerage house is ordinary industry speech for the same business, but it is not the statutory term the question asks for. An investment banker describes capital raising work, and that phrase appears nowhere in the definitions section. A wholesale market maker describes continuous two-sided quoting, which is one activity a broker-dealer may conduct rather than a separate defined status.
- A broker-dealer registered in State A has several clients in State Z. If the firm does not have a place of business in State Z, the firm would avoid the need to register in State Z if its only clients in the state are
- Personal trusts with at least $1 million in assets
- Wealthy family members with at least $1 million in assets
- Married couples with at least $1 million in assets
- Employee benefit plans with at least $1 million in assets
Correct answer: Employee benefit plans with at least $1 million in assets
A firm with no place of business in the state escapes that state's broker-dealer definition only if every client there is another broker-dealer or an institutional investor, and employee benefit plans holding at least $1 million in assets sit on the institutional list. Married couples, wealthy family members, and personal trusts are all retail accounts no matter how much money they hold, and a single retail client in the state makes registration there mandatory.
- Which of the following persons with an office in the state is excluded from the Uniform Securities Act's definition of broker-dealer?
- A person who executes stock orders for banks in the state
- A person who handles stock orders for trusts in the state
- A person who lends money to residents of the state
- A person who sells bonds to residents of the state
Correct answer: A person who lends money to residents of the state
Lending money is not effecting transactions in securities, so a lender never enters the broker-dealer definition in the first place. The other three all effect securities transactions, and because each maintains an office in the state, none of the exclusions that depend on having no place of business there is available: selling bonds to residents, executing stock orders for banks, and handling stock orders for trusts all make the person a broker-dealer in that state.
- South Street Investors (SSI) is a broker-dealer registered in State P. It has no offices in State O, although it does do business in that state. Under the Uniform Securities Act, registration in State O is required if the client is
- An investment company that is publicly held
- An individual who is accredited by great wealth
- An insurance company that is state licensed
- An employee benefit plan that holds $1 million
Correct answer: An individual who is accredited by great wealth
With no place of business in the state, the firm stays outside that state's broker-dealer definition for as long as every client there is an institution. Investment companies and insurance companies are institutional investors, and an employee benefit plan holding $1 million in assets is treated as one as well. Wealth does not turn a natural person into an institution, so an accredited investor is still a retail client, and a single retail client in the state makes registration necessary.
- Under the Uniform Securities Act, any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account is the definition of
- A broker-dealer handling customer orders
- An adviser reviewing customer portfolios
- An issuer distributing its own unissued shares
- A sales agent soliciting orders from investors
Correct answer: A broker-dealer handling customer orders
The wording quoted in the question is the statutory definition of a broker-dealer, which reaches a person effecting securities transactions for customers, for its own account, or both. An adviser who reviews customer portfolios is paid for advice rather than for executing trades. An agent who solicits orders is an individual representing a firm, and agents are expressly carved out of the broker-dealer definition. A person distributing its own unissued shares is an issuer, another category the definition excludes.
- The snowbird exemption is lost when your existing customer changes her official residence. Which of the following changes made by the client would be least likely to indicate a change of address?
- Obtaining a license in the new state
- Buying a permanent house in the new state
- Registering to vote in the new state
- Joining an athletic club in the new state
Correct answer: Joining an athletic club in the new state
Signing up at a gym or athletic club in a state the client visits often is an ordinary convenience and says nothing about where that client is domiciled. A new voter registration and a new license are the two changes regulators treat as the clearest evidence of a new domicile, and buying a permanent house to live in settles the question outright. Once domicile moves, the relief for a visiting client disappears and registration in that state is required.
- One of the terms defined in the Uniform Securities Act is broker-dealer. Which of the following is included in that definition?
- A person who obtains capital by issuing its own shares
- A person who is employed to open new customer accounts
- A person who trades securities for its own account
- A person who counsels clients on their stock picks
Correct answer: A person who trades securities for its own account
The definition reaches any person in the business of effecting securities transactions for the accounts of others or for its own account, so a firm trading its own account is a broker-dealer. A person paid to counsel clients on stock picks is an investment adviser, not a broker-dealer. An individual employed to open new customer accounts is an agent. A person obtaining capital by issuing its own shares is an issuer. Agents and issuers are both carved out of the definition.
- Burgeoning Capital Associates (BCA) is a broker-dealer specializing in assisting corporations and municipalities with raising funds through the issuance of equity or debt securities. BCA has places of business in States A, B, and C. Great Organic Products (GOP), a corporation domiciled in State D, wishes to borrow $25 million to purchase new equipment. GOP approaches BCA, who suggests a 20-year debenture. GOP agrees and BCA purchases the entire issue with a view to reselling the securities to its retail customers. Based on the Uniform Securities Act, BCA
- It becomes a State D broker-dealer after resale
- It stays outside the broker-dealer definition in State D
- It must employ agents registered within State D
- It must hold registration with the State D Administrator
Correct answer: It stays outside the broker-dealer definition in State D
A firm with no place of business in a state is outside that state's broker-dealer definition when its only client there is the issuer of the securities the firm is buying. This firm's offices sit in three other states and its lone State D contact is the issuing corporation, so the purchase does not pull it into State D. Because it is not a broker-dealer there, no State D registration and no State D agents are needed, and the resales occur in the states where the firm is already registered.
- Under the Uniform Securities Act, all of the following are specifically excluded from the definition of a broker-dealer except
- Investment advisers registered in the state
- Issuers of the securities being distributed
- Agents employed by a registered broker-dealer firm
- Banks organized under the state's banking statutes
Correct answer: Investment advisers registered in the state
Agents, banks, and issuers are each named in the statute as persons who are not broker-dealers, which is why none of them can be the exception the question asks for. Investment advisers appear nowhere in that list of exclusions; advising for compensation is regulated under a separate definition, and a great many advisory firms are separately registered as broker-dealers as well.
- Which of the following meets the definition of broker-dealer?
- A trust company chartered by the state
- A bank that executes trades for its depositors
- A savings bank supervised by the state
- A person who executes trades for its customers
Correct answer: A person who executes trades for its customers
Effecting securities transactions for the accounts of customers is the conduct the definition captures, so the person doing it must register as a broker-dealer. Banks, savings institutions, and trust companies are named exclusions and stay outside the definition even when they execute securities trades for the people who bank with them.
- Broker-dealers with no place of business in a state are not required to register in that state if their only clients in that state are
- Agents employed by broker-dealers in the state
- Corporations listed on a large public exchange
- Insurance companies licensed in the state
- Investment advisers licensed in the state
Correct answer: Insurance companies licensed in the state
With no office in the state, a firm avoids registration there only while every client is another broker-dealer or an institution, and insurance companies sit on the institutional list. Investment advisers do not, so having one as the sole client would not help. Agents are individuals rather than institutions. A corporation whose shares are listed on an exchange is simply a customer investing its cash; the issuer exclusion reaches only business done with an issuer in the securities it is issuing.
- A broker-dealer is registered in State Y. It has no offices in State Y, although it does do business in that state. Under the Uniform Securities Act, registration in State Y is required if the client is
- Another broker-dealer trading in this state
- An individual working for the state's tax office
- An insurance company selling policies there
- The issuer of the securities involved in trading
Correct answer: An individual working for the state's tax office
Without a place of business in the state, the firm stays outside that state's broker-dealer definition while its clients there are other broker-dealers, institutions such as insurance companies, or the issuer of the securities involved in the transactions. Someone on a state agency's payroll is still a retail customer, and who signs that paycheck is beside the point: one retail client in the state triggers the registration requirement.
- Which of the following statements concerning the snowbird exemption is true?
- It is available only when the firm keeps no offices there
- It is available only if the client is a large institution
- It is forfeited once the client has been in the state 30 days
- It is limited to no more than two states in a 12-month period
Correct answer: It is available only when the firm keeps no offices there
The relief for a client who is temporarily in another state depends on the firm keeping no place of business in that state; an office there ends the relief immediately. The relief is about existing clients who are visiting, not about institutional clients, which are covered by a separate exclusion. Nothing caps the number of states involved, and no day count applies, because the statute sets no time limit; what matters is whether the client changes domicile.
- A retail customer of Broker-dealer A is on vacation in State N. Broker-dealer A, who is registered and maintains an office in State F, wishes to make the customer aware of an investment opportunity that has just become available. Which of the following is true?
- The firm must register a branch office within State N
- The firm may contact her once it is registered in State N
- The firm must give the State N regulator notice first
- The firm may contact the customer while she is in State N
Correct answer: The firm may contact the customer while she is in State N
A firm with no place of business in State N that reaches an existing client who is only visiting is not a broker-dealer in State N, so State N law does not reach the call and the solicitation is permitted as things stand. That is why no State N registration, no branch office there, and no advance notice to that state's regulator is called for. The analysis changes only if the client moves her domicile to State N or the firm opens an office there.
- A broker-dealer registered in State X has several clients in State Y. If the firm does not have a place of business in State Y, the firm would avoid the need to register in State Y if its only clients in the state are
- Persons related to the firm's chief officials
- Trusts created for the firm's wealthy clients
- Trust companies chartered by the state
- Advisory firms registered in the state
Correct answer: Trust companies chartered by the state
A firm with no place of business in the state keeps out of that state's broker-dealer definition while its only clients there are other broker-dealers or institutions, and banking institutions including trust companies are on the institutional list. A trust is not a trust company, and an investment advisory firm is not an institutional investor for this purpose. People related to the firm's own officials are ordinary retail clients, and one of them ends the relief.
- Farrier and Nail has applied for registration as a broker-dealer in the state. The application is required to contain I. the business history of the firm's principal officers. II. the types of business the firm is engaged in. III. information obtained from a recognized credit reporting agency on each of the firm's principal officers. IV. a record of any conviction of any principal officer for any misdemeanor within the previous 10 years.
- III and IV alone
- I, II, and IV only
- II and III alone
- I, II, III, and IV
Correct answer: I, II, and IV only
The application asks the firm to describe the business history of its principal officers and to identify the kinds of securities business it conducts or intends to conduct, and it requires disclosure of the officers' conviction and disciplinary record. Nothing in the application calls for a consumer credit report on an officer from a credit reporting agency, so any combination containing that item is wrong.
- Diligent Investment Services (DIS) is registered in several states as a broker-dealer. The annual renewal process requires DIS to
- Pay the annual renewal fee to the Administrator
- File another consent to service of process form
- Report the number of its clients residing in the state
- Submit an amended copy of the application to the state
Correct answer: Pay the annual renewal fee to the Administrator
Every securities professional pays a fee to keep a registration alive for another year, and the amount may differ from the fee charged on the original application. The consent to service of process filed with the first application stays in force until the firm's status changes, so it is not refiled annually. The registration application is amended when something material changes rather than on a calendar. No head count of a state's residents is ever required.
- Which of the following statements relating to the registration requirements of broker-dealers is true?
- Registrations expire a year after the filing date
- Paying the fee makes any application effective at once
- A denial order cannot postpone the effective date
- Registration takes effect at noon 30 days after filing
Correct answer: Registration takes effect at noon 30 days after filing
An application ripens into an effective registration at noon on the thirtieth day after it was filed, provided no denial order or proceeding to deny is under way. A pending denial does hold that date up, which is why the rule is conditional, and paying the fee does not move the date forward either. Registrations of securities professionals run to December 31 and must then be renewed, rather than lasting a year from the date of filing.
- A person registering as a broker-dealer with the Administrator must disclose its form of business organization. Which of the following are permitted forms? I. Sole proprietorship II. Corporation III. Partnership IV. Limited liability company (LLC)
- I, II, and III only
- I, III, and IV only
- I, II, III, and IV
- I, II, and IV only
Correct answer: I, II, III, and IV
The application asks the applicant to state its form of organization, and every one of the listed structures is acceptable. Corporations and partnerships are the familiar choices and limited liability companies are common now, while a sole proprietorship, though unusual for a securities firm, is permitted as well. Any combination that leaves one of the four out understates what the statute allows.
- Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of
- An amount chosen each year by the legislature
- An amount no greater than the federal bond maximum
- An amount settled by the firm's own directors
- An amount equal to twice the firm's stated capital
Correct answer: An amount no greater than the federal bond maximum
Federal law bars a state from demanding a surety bond larger than the amount federal rules allow, so the Administrator's power stops at that ceiling, and the bond is excused altogether for a firm that maintains the specified net capital. The required amount is not a multiple of the firm's capital, is not fixed by a legislature each session, and is certainly not left to the registrant's own directors to decide.
- Broker-dealers registered with the state are required to keep records. The Administrator of the state would expect firms registered in her state to retain all of the following records except
- Copies of customers' income tax returns
- Records of each customer's cash account
- Journals of the cash receipts and disbursements
- Blotters of the firm's overall trading activity
Correct answer: Copies of customers' income tax returns
Firms are expected to keep blotters covering the day's trading, journals of cash received and paid out, and records for each customer's account. Suitability work often means asking a customer about income and net worth, but nothing obliges the firm to collect and store the customer's filed tax returns; those documents belong to the customer, and no state rule makes them part of a firm's books and records.
- Fast Growth Securities, Inc. (FGSI), a member of the Financial Industry Regulatory Authority (FINRA), has its main office in State A and is therefore
- Excused from registering in State A or any state
- Excused from registering in State A because of federal rules
- Required to register in State A and nowhere else
- Required to register in State A with the state Administrator
Correct answer: Required to register in State A with the state Administrator
A firm that keeps its main office in a state must register as a broker-dealer with that state's Administrator, and federal registration or membership in a self-regulatory organization does nothing to remove that duty, because it is the state securities Administrator who licenses firms to do business in the state. Registration is also not confined to states where offices sit: doing business with retail customers elsewhere brings those states in too.
- Each of the following requirements is common to the registration of agents, investment adviser representatives, state-registered investment advisers, and broker-dealers under the Uniform Securities Act except
- The Administrator keeps power over the person for a year after that
- An application that is not complete can be refused on those grounds
- Each registration runs for a period of two calendar years
- A consent to service of process must accompany the filing
Correct answer: Each registration runs for a period of two calendar years
Registrations do not run in two-year terms; every one of these registrations expires on December 31 and must be renewed for the year ahead. The other three statements apply across all four categories: each application carries a consent to service of process, an application that is not complete can be denied on that basis, and the Administrator's authority over the person continues for a year after the registration ends.
- Which of the following legal or disciplinary actions is a broker-dealer not required to disclose to clients and prospective clients if they occurred within the last 10 years?
- A suspension imposed by a national securities association
- A civil judgment ordering an officer to pay overdue child support
- A misdemeanor conviction arising in a securities business
- A state ruling finding that the firm broke any investment statute
Correct answer: A civil judgment ordering an officer to pay overdue child support
Disclosure to clients and prospects reaches adverse events of the last ten years that bear on the securities business: a misdemeanor conviction arising from an investment-related business, a regulatory finding that an investment statute was violated, and a bar or suspension imposed by a self-regulatory body. A domestic matter such as unpaid child support is not investment related and is not treated as material, so it stays outside the disclosure obligation.
- The application for registration as a broker-dealer in a state discloses that the firm's registration in a different state was revoked four years ago. The cause was repeated violations of the Uniform Securities Act. This would most likely lead to the Administrator of this state declining the application under the legal concept of
- A statutory disqualification
- An anticipatory cancellation
- A constructive determination
- An administrative rescission
Correct answer: A statutory disqualification
A registration that another state revoked for repeated violations is exactly the history the statute treats as disqualifying, and the Administrator receiving the new application may refuse it on that ground alone. The reasoning is straightforward: if one regulator judged the firm's conduct serious enough to end its registration outright rather than suspend it for a time, another regulator has little reason to admit the firm. The remaining terms name nothing the statute provides for.
- Northwestern Options Traders (NOT) is a broker-dealer registered with the SEC. NOT is also registered in eight states. With regard to NOT's net capital requirements,
- The average of the eight state net capital rules is the true floor
- The federal net capital rule alone sets the firm's duty
- The eight state net capital rules apply on top of the federal rule
- The state of the principal office alone sets the figure
Correct answer: The federal net capital rule alone sets the firm's duty
The National Securities Markets Improvement Act of 1996 amended the Securities Exchange Act of 1934 so that no state may set a net capital requirement above the SEC's, which is why the federal net capital rule alone sets the firm's duty. Registration in eight states does not stack eight more obligations on top of the federal one. The Uniform Securities Act contains no averaging device, so an average of the eight state rules is not the floor either. Nor does the state of the principal office alone set the figure; where the head office sits decides where records must be readily accessible, not how much net capital the firm carries. The same federal ceiling governs recordkeeping and bonding.
- An Administrator wishing to set the net capital requirement for a broker-dealer may not require an amount greater than that
- Imposed by the Administrator of the firm's home state
- Imposed by FINRA upon each of its own registered dealer members
- Imposed by the state with the smallest capital demand
- Imposed under section 15 of the Securities Exchange Act of 1934
Correct answer: Imposed under section 15 of the Securities Exchange Act of 1934
Section 15 of the Securities Exchange Act of 1934 caps what a state may demand of a broker-dealer, so the ceiling is the figure imposed under section 15 of the Securities Exchange Act of 1934 itself. FINRA fixes no net capital figure for this purpose, so nothing imposed by FINRA upon its own registered dealer members controls the answer. The Administrator of the firm's home state cannot reach above that federal amount, and neither can the state with the smallest capital demand, because a state rule is limited by the federal one rather than the other way round.
- Which of the following statements is not true regarding the authority of the Administrator under the Uniform Securities Act?
- The Administrator must obtain a federal court order to see records
- The Administrator may demand a specific minimum capital as a term of registration
- The Administrator must have a signed consent to service of process
- The Administrator may require an oral examination of the applicant as a condition
Correct answer: The Administrator must obtain a federal court order to see records
The statement that is not true is that the Administrator must obtain a federal court order to see records. Inspection power under the Uniform Securities Act reaches a firm's records whether they sit inside or outside the state, and no court approval is needed for it. The Administrator may require an oral examination of the applicant as a condition, because the act allows written or oral examinations for any class of applicant. The Administrator may demand a specific minimum capital as a term of registration, subject to the federal ceiling. And the Administrator must have a signed consent to service of process from every registrant.
- In lieu of a surety bond, the Administrator is authorized to accept
- Improved real estate or undeveloped acreage within a county
- Domestically minted gold or silver bullion pieces
- A cash deposit or marketable securities of equivalent value
- Grain futures or other traded commodity contracts
Correct answer: A cash deposit or marketable securities of equivalent value
The Uniform Securities Act lets a registrant substitute a cash deposit or marketable securities of equivalent value for the surety bond itself. Domestically minted gold or silver bullion pieces are collectibles rather than securities, so they are not accepted. Improved real estate or undeveloped acreage within a county is illiquid property and is not a security either. Grain futures or other traded commodity contracts are commodities, and the act does not treat commodities as securities.
- The Uniform Securities Act requires that, under certain conditions, broker-dealers must maintain a surety bond. The amount that must be kept is no higher than
- The bonding amount fixed by the state where the agents reside
- The lowest bonding amount among the covered states
- The bonding amount fixed by the state of the principal office
- The bonding amount fixed by federal securities law
Correct answer: The bonding amount fixed by federal securities law
A state may never impose a bonding requirement above the federal one, so the ceiling is the bonding amount fixed by federal securities law. Where the agents happen to live carries no weight, so the bonding amount fixed by the state where the agents reside is wrong, and so is the bonding amount fixed by the state of the principal office. Taking the lowest bonding amount among the covered states also misreads the rule, because the cap is federal rather than a comparison among states. The same ceiling governs net capital and recordkeeping.
- Under the Uniform Securities Act, broker-dealers may not be required by the Administrator to
- Publish a registration notice in one or more newspapers
- Post a surety bond absent client custody or discretionary authority
- File periodic financial reports of net worth or capital
- File a written amendment when a paper becomes materially inaccurate
Correct answer: Post a surety bond absent client custody or discretionary authority
A surety bond reaches only broker-dealers that exercise discretion or hold customer funds and securities, so the Administrator cannot make a firm post a surety bond absent client custody or discretionary authority. The other three all sit within the Administrator's power. A firm can be made to file a written amendment when a paper becomes materially inaccurate. It can be made to file periodic financial reports of net worth or capital. And the act expressly lets the Administrator make it publish a registration notice in one or more newspapers.
- As part of the registration process as a broker-dealer in a state, the Administrator may require
- Holding net capital above the current federal minimum
- Providing a roster of every client the applicant already serves
- Publishing a registration notice in a local newspaper
- Keeping records for a longer stretch than federal rules require
Correct answer: Publishing a registration notice in a local newspaper
The Uniform Securities Act expressly permits the Administrator to condition registration on publishing a registration notice in a local newspaper, the same sort of legal notice newspapers carry for new corporations and new licenses. Holding net capital above the current federal minimum cannot be required, because no state may exceed the SEC's figure. Keeping records for a longer stretch than federal rules require is barred for the same reason. Providing a roster of every client the applicant already serves forms no part of state registration.
- Alice Worthington is a registered agent with a broker-dealer. She is highly successful at bringing new clients to the firm. Although some of her techniques tend to be in conflict with the firm's compliance policies, the revenue generated by these new clients is considered to be worth taking the risk. One of Worthington's customers complains to the Administrator that she believes trades have been made without her authorization and conversion of the proceeds has taken place. After an investigation, Worthington is found guilty and her registration is revoked. This would most likely
- Subject the broker-dealer to a sanction for its supervision failure
- Subject the agent to a penalty for unauthorized trades
- Require the broker-dealer itself to select a senior account officer
- Require the firm to close this customer's cash account
Correct answer: Subject the broker-dealer to a sanction for its supervision failure
The firm knew Worthington's methods conflicted with its own compliance policies and tolerated them for the revenue, which is a failure to supervise, so the likely outcome is to subject the broker-dealer to a sanction for its supervision failure. That can be a fine, a suspension, or revocation of the firm's own registration. It would not subject the agent to a penalty for unauthorized trades, because her registration has already been revoked and that action is finished. Nothing tells the firm to close this customer's cash account; the customer is far likelier to leave on her own. Another agent will have to take over the account, but no rule would require the broker-dealer itself to select a senior account officer.
- The document that appoints the Administrator as the applicant for registration as a broker-dealer's attorney to receive and process noncriminal securities-related complaints against the applicant is
- The special power of attorney for process
- The consent to service of process
- The blanket consent to a firm's attorneys
- The formal note of firm contumacy
Correct answer: The consent to service of process
The consent to service of process names the Administrator as the registrant's attorney for receiving noncriminal process in securities matters. It is filed as part of Form BD, it stays in force as long as the firm does business, and every registrant files one. The special power of attorney for process is a private arrangement between a customer and a firm rather than a filing with the state. The blanket consent to a firm's attorneys is not a term the act uses. Contumacy means refusing to obey a subpoena, so the formal note of firm contumacy is not a registration document either.
- All of the following statements regarding registration of broker-dealers under the Uniform Securities Act are true except
- A successor firm owes no payment before the renewal date
- A broker-dealer with discretionary accounts may be told to post a bond
- A state may never demand capital above the federal level
- A successor firm never files a duplicate consent to service of process
Correct answer: A successor firm never files a duplicate consent to service of process
The untrue statement is that a successor firm never files a duplicate consent to service of process. Where the successor is a new legal entity its application is an initial filing, and a fresh consent has to accompany it. The fee relief is real, so a successor firm owes no payment before the renewal date is a true statement. A broker-dealer with discretionary accounts may be told to post a bond, or to keep minimum net capital. And a state may never demand capital above the federal level, which is the limit the Securities Exchange Act of 1934 places on the Administrator.
- The recordkeeping rules of the Uniform Securities Act contain specific retention requirements. Among those is a stated period during which the records must be readily accessible. Readily accessible means the records are located
- In the principal office of the broker-dealer
- In the chief regional office of the state Administrator
- In the compliance department of every branch
- In the central reference facility maintained by the SEC
Correct answer: In the principal office of the broker-dealer
Readily accessible under the Uniform Securities Act means the records sit in the principal office of the broker-dealer, where the originals are kept. Branch offices usually hold only copies relating to their own business, so in the compliance department of every branch is not the standard the act sets. Regulators do not warehouse the records of the firms they oversee, so neither in the chief regional office of the state Administrator nor in the central reference facility maintained by the SEC describes where a registrant's records live.
- If XYZ is a registered broker-dealer with its lone office located in State T, under which of the following circumstances must it also register in State L? I. XYZ's only dealings in State L are directly with issuers of securities in State L. II. XYZ engages in extensive transactions with the largest insurance company in State L. III. XYZ routinely sells nonexempt securities to extremely high-net-worth residents of State L. IV. XYZ purchases exempt securities from extremely high-net-worth residents of State L for resale to residents of State T.
- II and III
- I and IV
- III and IV
- I and II
Correct answer: III and IV
A broker-dealer must register in a state once it transacts with individual investors there, and the net worth of those individuals is irrelevant, so III and IV are what force registration in State L. Statement III has nonexempt securities sold to residents and statement IV has exempt securities bought from residents; the exempt status of a security never excuses the firm from registering. Statement I describes dealings with an issuer, which is an exempt transaction, and statement II describes business with an insurance company, an institution a firm with no office in the state may serve without registering. That is why I and II, I and IV, and II and III each fall short.
- Diligent Investment Services (DIS) has been registered in States B and C for about five years. DIS applies for registration as a broker-dealer in State C on October 19, 2020. If the registration is accepted, it would be correct to state that
- The fee for the application is due thirty days after receipt
- No fee attaches since the firm is already listed
- Renewal is first required at the close of calendar year 2021
- The first renewal arrives on December 31 of 2020
Correct answer: The first renewal arrives on December 31 of 2020
Registration takes effect at noon on the 30th day after the application is filed, and every new registration then comes up for renewal on the December 31 that follows. An October filing leaves only a few weeks, so the first renewal arrives on December 31 of 2020. Renewal is first required at the close of calendar year 2021 stretches the cycle a full year too far. The fee must accompany the application itself, so it is wrong that the fee for the application is due thirty days after receipt. And a firm's other registrations do not waive it, so no fee attaches since the firm is already listed is wrong as well.
- Form BD is used to register
- The commercial bank dealer unit itself
- The securities broker-dealer firm at each level
- The general business dealer firm alone
- The sales agent at any registered broker-dealer
Correct answer: The securities broker-dealer firm at each level
Form BD is the application filed by the securities broker-dealer firm at each level, state and federal alike. The sales agent at any registered broker-dealer is registered on Form U4 instead. The commercial bank dealer unit itself falls outside the definition of a broker-dealer where the bank is the party, so no Form BD is filed for it. The general business dealer firm alone is not a securities firm at all and files nothing under the act.
- A broker-dealer suddenly incurs a liability that materially affects its net capital. Which of the following statements under the Uniform Securities Act is true?
- The firm states nothing before the annual audit
- The firm discloses the change in its next periodic report
- The firm has to tell the Administrator promptly
- The firm defers notice when an examination is already set
Correct answer: The firm has to tell the Administrator promptly
A liability that materially affects net capital is a potential financial impairment, and the Uniform Securities Act answers it the same way every time: the firm has to tell the Administrator promptly. Waiting until the firm discloses the change in its next periodic report is far too slow for a solvency question. The firm states nothing before the annual audit abandons the duty altogether. And a scheduled inspection excuses nothing, so the firm defers notice when an examination is already set is wrong too.
- Powers granted to the Administrator under the Uniform Securities Act include the ability to inspect the records of a broker-dealer
- At any time within the firm's normal business hours
- At any moment after written notice arrives
- At any point a specific rule violation is suspected
- At no more than quarterly review intervals
Correct answer: At any time within the firm's normal business hours
The Administrator may inspect a registered firm's records at any time within the firm's normal business hours, wherever in the country those records are kept. No advance notice is required, so inspection is not confined to at any moment after written notice arrives. The Administrator need not first point to a rule, order, or section believed to have been broken, so it is not limited to at any point a specific rule violation is suspected. And nothing caps how often records may be examined, so at no more than quarterly review intervals is wrong; the quarterly limit belongs to issuer reporting instead.
- The Uniform Securities Act requires that broker-dealers maintain all of the following records except
- The original copies of published sales material
- Copies of customer federal tax returns
- The daily blotters of each executed transaction
- New account records for every customer
Correct answer: Copies of customer federal tax returns
Broker-dealers keep a long list of business records, but copies of customer federal tax returns are not on it; a firm has no duty to collect a customer's tax filings at all. The daily blotters of each executed transaction are required records. The original copies of published sales material must be retained. New account records for every customer are required as well.
- First Growth Securities, Inc., a member of the Financial Industry Regulatory Authority (FINRA), has its main office in State I and is therefore
- An investment adviser ready to sell securities
- Licensed by FINRA to sell securities inside that state
- Registered as a state securities agent already
- Obligated to register as a broker-dealer in that state
Correct answer: Obligated to register as a broker-dealer in that state
A FINRA member is registered with the SEC, and it must still register in every state where it keeps a place of business, so a main office in State I leaves the firm obligated to register as a broker-dealer in that state. FINRA does not license its members to do business in a state; the state securities Administrator does, so the firm is not licensed by FINRA to sell securities inside that state. A broker-dealer is a firm rather than a natural person, so it is not registered as a state securities agent already. And a broker-dealer is not an investment adviser ready to sell securities, although many firms own a separate advisory entity.
- Records that must be kept by a broker-dealer include all of the following except
- The customer's federal income tax filings
- The cash receipts journal of the firm's operations
- The daily blotter of securities purchases
- The individual customer account ledger of the firm
Correct answer: The customer's federal income tax filings
No securities professional has to obtain or retain the customer's federal income tax filings, which is why that is the item outside the recordkeeping rules. The daily blotter of securities purchases is a required record. The cash receipts journal of the firm's operations must be kept. The individual customer account ledger of the firm is required as well.
- On April 15, 2021 ABC Advisers, Inc., made application for registration as a broker-dealer with a state. Absent a denial or stop order, registration will become effective
- On December 31 of 2021 at the first renewal
- On April 15 of 2021 with zero delay
- On May 15 of 2021 under the thirty-day rule
- On June 15 of 2021 after sixty days
Correct answer: On May 15 of 2021 under the thirty-day rule
Absent a denial or a stop order, and with no proceeding pending, a state registration becomes effective at noon on the 30th day after the application is filed. Counting from April 15 puts that on May 15 of 2021 under the thirty-day rule. Registration does not take hold the moment papers arrive, so on April 15 of 2021 with zero delay is wrong. December 31 is a renewal date rather than an effective date, so on December 31 of 2021 at the first renewal is wrong. And the waiting period is not doubled, so on June 15 of 2021 after sixty days is wrong.
- Except as limited by the Securities Exchange Act of 1934, the state securities Administrator may require, by rule or order, that broker-dealers make or maintain all of the following records except
- Blotters and books of the original documents
- Papers and memoranda about the transactions
- Ledgers for all asset and liability accounts
- Emails or notes of unsolicited testimonials
Correct answer: Emails or notes of unsolicited testimonials
The Administrator may require a broker-dealer to keep account ledgers, blotters and books, papers and memoranda, and correspondence including email, so long as the state does not go past the Securities Exchange Act of 1934. Emails or notes of unsolicited testimonials are not correspondence the firm initiated, and the firm may discard them. Ledgers for all asset and liability accounts are required. Blotters and books of the original documents are required. Papers and memoranda about the transactions are required.
- A Canadian broker-dealer is registered in the province of Alberta. The firm has clients who vacation in Arizona, New Mexico, and Texas, and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act,
- The firm may transact after federal SEC registration alone
- The firm may serve current customers under a limited state registration
- The firm may take unsolicited orders without state filings
- The firm must work through a domestic broker-dealer licensed in Arizona
Correct answer: The firm may serve current customers under a limited state registration
The Uniform Securities Act opens a limited registration route for Canadian broker-dealers, so the firm may serve current customers under a limited state registration once it is in good standing in Alberta, files a consent to service of process, and files the appropriate application in each state where those clients are staying. The claim that the firm must work through a domestic broker-dealer licensed in Arizona is wrong, because routing orders through a United States firm is a commercial choice the act never imposes. Federal registration confers no state authority, so the firm may transact after federal SEC registration alone is wrong. And the firm may take unsolicited orders without state filings is wrong, because the limited registration filing still has to be made.
- Charles Horse is the CEO of Farrier and Nail, a new broker-dealer applying for registration in a number of states. In completing the application, which of the following events in the CEO's life must be disclosed?
- A misdemeanor for unpaid child support or old debts
- A consumer credit or employer report about the firm's officer
- A misdemeanor bribery or forgery charge at any time
- A misdemeanor investment or fraud charge limited to ten years
Correct answer: A misdemeanor bribery or forgery charge at any time
The application asks whether the officer has ever been charged with, convicted of, or pleaded guilty to an investment-related or comparable financial offense, and it sets no lookback window, so a misdemeanor bribery or forgery charge at any time has to be disclosed. A misdemeanor investment or fraud charge limited to ten years is wrong because it borrows the ten-year window that governs statutory disqualification; the application asks whether the officer has ever been charged. Domestic obligations such as a misdemeanor for unpaid child support or old debts fall outside the investment-related category. And a consumer credit or employer report about the firm's officer is not among the items the form calls for.
- Under the Uniform Securities Act, who automatically becomes registered as an agent when a broker-dealer firm's registration becomes effective?
- Each partner or officer active in the securities business
- Each employee or courier with the certificates
- Each applicant or trainee with an agent application filed
- Each investor or financier behind the business
Correct answer: Each partner or officer active in the securities business
When a broker-dealer's registration becomes effective, each partner or officer active in the securities business and listed on Form BD is registered as an agent at the same moment, with no separate filing. Each investor or financier behind the business is only a source of funds and gains nothing by it. Each applicant or trainee with an agent application filed still waits for that application to be granted. And each employee or courier with the certificates is doing back-office work, which does not make a person an agent.
- The registration of a broker-dealer in this state would automatically register as an agent
- Any advisory rep who serves customers of the firm
- Any clerk who has served this same firm for five years
- Any company director who also serves as its agent
- Any person who is carried on any of the firm's records
Correct answer: Any company director who also serves as its agent
Section 202(a) of the Uniform Securities Act provides that registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer, or director of the firm, or who occupies a similar status. Any company director who also serves as its agent is therefore covered without a separate agent filing. An advisory representative is registered under the investment adviser provisions and is not swept in by the broker-dealer's registration. Length of clerical service confers nothing, since a clerk who takes no securities orders is not an agent at all. And appearing on the firm's records does not make a person an agent; only effecting or attempting to effect securities transactions does.
- Under the Uniform Securities Act, an agent's license is effective for
- A twenty year term measured from the very next December 31
- The remainder of the year up to the December 31 expiration
- An eighteen month period from the last December 31
- One full year from the December 31 approval notice
Correct answer: The remainder of the year up to the December 31 expiration
Every registration under the Act runs to December 31 and must be renewed for the following year, so an initial license covers only the remainder of the year up to the December 31 expiration and is normally shorter than twelve months. A twenty year term measured from a December 31 does not exist anywhere in the Act. There is no eighteen month term and no probationary period in the Act either. And a license does not run a full year from the date of approval, because the expiration date is set by the calendar rather than by the date the Administrator cleared the applicant.
- Under the Uniform Securities Act, the registration requirements for agents would never include
- A minimum net capital level under state rules
- A properly signed consent to service of legal process
- A written exam offered by the state securities agency
- A surety bond posted to cover client accounts
Correct answer: A minimum net capital level under state rules
Minimum financial standards reach broker-dealers and investment advisers, who may hold customer funds or securities; an agent holds nothing in his own name and has no net worth test, so a minimum net capital level under state rules is the requirement never imposed on an agent. A consent to service of process is routinely required with the application. The Administrator may require an applicant to pass a written examination. And the Administrator may by rule require a surety bond of an agent who exercises discretion over client accounts, so bonding can lawfully be asked of an agent.
- The Administrator may require an applicant for registration as an agent to do all of the following except
- Publish an announcement of the application in a state newspaper
- Pay the state registration fee to the Administrator
- Pass the written test required by the Administrator
- Submit a complete set of fingerprint cards to the Administrator
Correct answer: Submit a complete set of fingerprint cards to the Administrator
The Uniform Securities Act carries no fingerprint requirement, so a demand to submit a complete set of fingerprint cards to the Administrator is the one thing on this list the Administrator cannot make. Fingerprinting is a FINRA obligation, not a state one. The Act expressly lets the Administrator require an applicant to publish an announcement of the application in one or more newspapers in the state. A filing fee is authorised by the Act. And the Administrator may require the applicant to pass a written qualification examination before the registration becomes effective.
- Adrian sells life insurance as an independent licensed insurance producer for several large insurance companies. Selling variable life insurance also requires registration as an agent with a broker-dealer handling that product. Supervisory responsibility over Adrian's sales of variable life is that of
- The insurance carrier behind the variable life policy
- The insurance commissioner for the state where Adrian works
- The broker-dealer where Adrian is a registered person
- The state securities Administrator where the policy is sold
Correct answer: The broker-dealer where Adrian is a registered person
An independent insurance producer who sells variable life must also register as an agent of a broker-dealer, and a broker-dealer supervises every securities activity of the persons registered through it. Supervision therefore belongs to the broker-dealer where Adrian is a registered person. The insurance carrier issues and underwrites the contract but supervises no one's securities business. The insurance commissioner regulates only the fixed insurance side of the transaction. And the securities Administrator enforces the Act and examines registrants rather than supervising an individual agent's daily sales.
- An agent's registration is considered effective
- When FINRA has entered the approval into its central records
- When the Administrator has notified the firm it is effective
- Once an applicant sends the Administrator its fees
- After a candidate passes the Series 63 examination
Correct answer: When the Administrator has notified the firm it is effective
An agent may not transact securities business until the state has acted on the application, and the registration is effective when the Administrator has notified the firm it is effective. Payment of a fee is only one element of a complete filing and settles nothing by itself. FINRA does not grant state registration; an entry in its central records reflects a state action rather than causing one. And passing the qualification examination makes a candidate eligible to be registered but confers no licence on its own.
- Registration with the Administrator as a broker-dealer generally requires the filing of
- Form BD sent to the state securities Administrator
- Form ADV completed by advisers for notice purposes
- Form U4 completed for each of the regional representatives
- Form U5 mailed when a registered person departs employment
Correct answer: Form BD sent to the state securities Administrator
Broker-dealer registration with a state Administrator is made on Form BD, so the filing is Form BD sent to the state securities Administrator. Form ADV is the investment adviser application and notice filing, not the broker-dealer's. Form U4 is the individual application filed for agents and investment adviser representatives, so it registers people rather than the firm. And Form U5 reports a termination of an individual's association, which is the opposite of opening a firm registration.
- The Administrator wishes to examine the books of a broker-dealer registered in her state. She may do so
- Only after the firm receives ten days of written notice
- No more often than once in each calendar quarter
- Only when the firm runs offices inside her state
- At any moment she judges necessary with no prior notice
Correct answer: At any moment she judges necessary with no prior notice
All records of a registered broker-dealer are subject to reasonable periodic, special, or other examinations by the Administrator of any state in which the firm is registered, and the Act requires no warning, so she may examine the books at any moment she judges necessary with no prior notice. No notice period appears in the Act, so a ten day requirement is invented. No cap on frequency appears either, so a quarterly limit is wrong. And an in-state office is irrelevant: registration alone, not physical presence, is what gives the Administrator the power to examine.
- High Performance Securities (HPS) is a broker-dealer registered in States A, B, and E. State E is the location of the HPS principal office. If a customer of HPS files a complaint with the Administrator of State A,
- The State A Administrator must forward the complaints to State E
- The State E Administrator alone may examine the records at its offices
- The State A Administrator may inspect the records inside State E
- The State A Administrator may act only through a formal court subpoena
Correct answer: The State A Administrator may inspect the records inside State E
An Administrator's authority to inspect does not stop at the state line. The Administrator of any state in which a firm is registered may demand records relevant to a complaint during reasonable business hours and as often as she deems necessary, and a broker-dealer's records sit at its principal office, so the State A Administrator may inspect the records inside State E. State A does not lose jurisdiction merely because the books are kept elsewhere. State E holds no exclusive claim over a firm registered in three states. And no court subpoena is needed to inspect the records of a registrant.
- Under the Uniform Securities Act, a person who has passed the appropriate NASAA examination but whose license has not yet been issued can participate in
- A written solicitation mailed to prospects of the firm
- A seminar on whole life versus term insurance coverage
- An unsolicited order from one of the customers
- A telephone pitch about a mutual fund purchase
Correct answer: A seminar on whole life versus term insurance coverage
Until the Administrator makes the registration effective, the applicant may not transact securities business, but nothing bars activity in a product that is not a security. A seminar on whole life versus term insurance coverage concerns fixed insurance only, so it is permitted. A written solicitation mailed to prospects is securities prospecting and must wait. Accepting an order is securities business whether or not the customer solicited it. And a telephone pitch about a mutual fund purchase is a solicitation of a security, which is exactly what the unissued registration bars.
- On the basis of information gathered from reliable sources, an Administrator has reason to believe that a broker-dealer located in the state is engaging in practices that might be a violation of the Uniform Securities Act. As a result, the Administrator assembles a task force to conduct a surprise audit of the firm's operations. In doing so, the Administrator's task force would be able to enter the broker-dealer's premises
- At any time in usual business hours without notice
- After fifteen days of written notice to the office
- Only after a district court has granted a search warrant
- With the prior written consent of the firm's own counsel
Correct answer: At any time in usual business hours without notice
The Act allows the Administrator to examine a registrant without advance warning, which is what makes a surprise audit possible, so the task force may enter at any time in usual business hours without notice. A fifteen day notice period appears nowhere in the Act and would defeat the purpose of the audit. No search warrant is needed, because a statutory examination of a registrant is not a criminal search. And the firm's own counsel has no power to consent to or to withhold consent from an examination the Act authorises.
- Pelf Securities and Investments, Inc., (PSII) has been in business as a registered broker-dealer in State Z since 1932. During that time, control of the company was in the hands of the descendants of the founder. With no one in the current generation interested in continuing the firm's legacy, the board of directors votes to withdraw PSII's registration. Which of the following statements is true?
- The Administrator loses all power over the firm from the outset
- Court actions against the firm cease on the same date
- The regulator keeps power over the firm for two years
- Withdrawal takes effect on the 30th day after the papers arrive
Correct answer: Withdrawal takes effect on the 30th day after the papers arrive
A withdrawal filed by a registered broker-dealer becomes effective on the 30th day after the Administrator receives it, absent a pending proceeding, so withdrawal takes effect on the 30th day after the papers arrive. The Administrator does not lose authority the moment the form is filed; she keeps jurisdiction to bring a proceeding for one year after the withdrawal becomes effective. That one year window is also why a two year figure is wrong, which is the FINRA period rather than the state one. And a pending action is not cancelled by the filing; it suspends the withdrawal until the matter is decided.
- Jamal is registered as an agent with Dearborn Distinctive Investments (DDI), a broker-dealer registered with the SEC and a number of states. Due to some poor management mishaps, the SEC revokes DDI's registration as a broker-dealer. How does this affect Jamal's registration as an agent?
- His registration is revoked by the same SEC action
- His registration is intact because he passed the state exam
- His registration is no longer active with any firm
- His registration lasts thirty days while he seeks new firms
Correct answer: His registration is no longer active with any firm
An agent's registration exists only through the broker-dealer that employs him. When the firm's registration is terminated, the agent's registration is no longer active with any firm; it sits in limbo until he associates with another registered broker-dealer. It is not revoked, because revocation follows action against the individual and Jamal was not a named party to the SEC's case. It is not intact either, and passing the state examination does not keep a registration alive without a firm behind it. And no thirty day grace period exists; what the rules allow is that an agent returning to the business within two years generally need not sit the examination again.
- USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwestern states. Regarding financial requirements, USATrade must meet those of
- The state with the strictest capital standard of the ten
- The SEC since its federal capital rules limit the states
- FINRA since its own rules bind every member firm
- The state where the firm has its regional office
Correct answer: The SEC since its federal capital rules limit the states
A FINRA member broker-dealer is also registered with the SEC, and federal law bars a state from imposing financial, bonding, or recordkeeping requirements greater than the SEC's on such a firm. USATrade therefore answers to the SEC since its federal capital rules limit the states. The strictest of the ten states cannot apply its higher figure to an SEC-registered firm. FINRA's own rules do not displace the federal net capital rule as the financial standard. And the location of the principal office decides nothing about which financial requirements govern.
- A control affiliate of a broker-dealer applying for state registration could be the cause of a statutory disqualification if its Form BD disclosed that the control affiliate was
- Convicted of a felony outside securities work eight years ago
- Charged with a major securities felony within the past decade
- Indicted for a securities misdemeanor in the past two whole years
- Named as a respondent in a private customer arbitration this year
Correct answer: Convicted of a felony outside securities work eight years ago
Statutory disqualification follows a conviction, not an accusation, and any felony conviction within the previous ten years counts whether or not it was securities-related. A control affiliate convicted of a felony outside securities work eight years ago therefore triggers it. A charge is only an allegation and must be reported without causing disqualification. An indictment is likewise an accusation, and a misdemeanor causes disqualification only when it is securities-related and only on conviction. And being named a respondent in a customer arbitration is a civil matter, not a criminal conviction at all.
- When filing the consent to service of process, which of the following is true?
- It must be resubmitted every year with the state securities agency
- It expires with the registration on the last of December
- It covers advisers rather than any of their sales agents
- It arrives with the initial application then stays on file forever
Correct answer: It arrives with the initial application then stays on file forever
The consent to service of process appoints the Administrator as attorney to receive service in actions arising out of the applicant's securities business in that state. It arrives with the initial application then stays on file forever, so nothing further is filed for it. It is not resubmitted annually, because it is not part of the renewal. It does not expire with the registration on December 31, since its whole purpose is to survive the registration. And it is required of investment adviser representatives just as it is of the firms they work for.
- Under the Uniform Securities Act, which of the following statements is true regarding registration of a broker-dealer if the application has not been amended?
- Ninety days after the papers are sent in by the local firm
- No sooner than the 15th day after the papers are sent
- At noon on the 30th day after the papers are complete
- Right away once the state agency has the fees in its hands
Correct answer: At noon on the 30th day after the papers are complete
Absent an earlier date set by the Administrator and absent a pending proceeding, a broker-dealer registration becomes effective at noon on the 30th day after the papers are complete. Ninety days is not a period the Act uses for this purpose. A fifteen day floor appears nowhere in the statute. And receipt of the fee does not make a registration effective; the filing date is the date a complete application reaches the Administrator's office, not the date the applicant mailed it or paid.
- Pinnacle Asset Management (PAM) is an SEC-registered broker-dealer. PAM is also registered in more than 25 states. The net capital rule of the SEC requires PAM's net capital to be at least $50,000, and at its most recent calculation, it had net capital of $58,000. One of the states where PAM is registered has a bonding requirement of $60,000. To be in compliance,
- A $60,000 bond is owed since the state sets a higher amount
- A bond is not due since the $58,000 tops the $50,000 floor
- A $50,000 bond must be put up with the state today
- A $2,000 bond must cover this gap in its net worth
Correct answer: A bond is not due since the $58,000 tops the $50,000 floor
No state may impose a bonding or financial requirement on an SEC-registered broker-dealer that exceeds the SEC's own, and an SEC-registered firm whose net capital already clears the federal minimum has no bonding obligation at all. A bond is not due since the $58,000 tops the $50,000 floor. The state's $60,000 figure may be applied only to firms that are not SEC registered. A $50,000 deposit would substitute for a bond that is not required in the first place. And there is no shortfall to cover, because the firm's net capital already exceeds the SEC minimum by $8,000.
- Parlous Professional Investors (PPI) is applying for registration as a broker-dealer in State X. Which of the following would not be included in the registrant's application?
- Fingerprint cards for every officer of the applicant firm
- A statement of the applicant's form of business structure
- A disclosure of any prior adjudication by a securities regulator
- The exact address of the applicant's principal place of business
Correct answer: Fingerprint cards for every officer of the applicant firm
The Uniform Securities Act asks for no fingerprints, from the firm or from the officers who will register as agents, so fingerprint cards for every officer of the applicant firm are not part of the application. A statement of the applicant's form of business organization is required. Disclosure of prior adjudications by the SEC or a securities self-regulatory organization is required. And the address of the applicant's principal place of business is required.
- Gamma Delta LLC (GDL) is a broker-dealer registered with the Administrator. The nature of Gamma Delta's business is such that the Administrator requires a $30,000 surety bond. In lieu of the bond, GDL could
- Deposit $30,000 of stock with no ready open market
- Submit a signed $30,000 note from every firm owner
- Deposit a $30,000 letter of credit from a commercial lender
- Deposit $30,000 in cash with the Administrator of the state
Correct answer: Deposit $30,000 in cash with the Administrator of the state
When the Administrator requires a surety bond, the Act directs that an appropriate deposit of cash or securities be accepted in lieu of it, so GDL may deposit $30,000 in cash with the Administrator of the state. Stock with no ready open market fails, because securities offered in lieu of a bond must be marketable enough to be turned into cash. A signed note from the owners is a personal promise rather than a deposit of cash or securities. And a letter of credit is a third party's undertaking, not a deposit made by the firm.
- Which of the following can be substituted for a surety bond?
- Cash or commodity contracts held in a separate account
- Real estate or other property the partners hold
- Cash or securities with an active public market
- Commodities or unlisted shares put up by the directors
Correct answer: Cash or securities with an active public market
The Act provides that an appropriate deposit of cash or securities shall be accepted in lieu of any bond the Administrator requires, and the securities have to be liquid, so the substitute is cash or securities with an active public market. Commodity contracts are not securities under the Act, whatever account holds them. Real property cannot be turned into cash on demand and is not accepted no matter who owns it. And unlisted shares are disqualified precisely because there is no ready market in which to sell them.
- Under the Uniform Securities Act, which of the following are true regarding the registration of a successor firm? I. The successor firm need not be in existence when the application for registration is filed. II. A filing fee is required with the application. III. The successor firm's registration will be effective for the unexpired portion of the year.
- The second and the third assertions match the uniform act
- The first and the third assertions are accurate as stated
- The first two claims match the model act exactly
- Each of the three claims is correct as presented
Correct answer: The first and the third assertions are accurate as stated
Section 202(c) of the Act lets an application be filed to register a successor firm whether or not the successor is then in existence, waives the filing fee, and makes the successor's registration effective for the unexpired portion of the year. The first and the third assertions are accurate as stated. The fee assertion is false, so any answer that keeps it fails: pairing the fee with the unexpired-portion point is wrong, pairing the fee with the not-yet-in-existence point is wrong, and accepting all three is wrong for the same reason.
- Michal is an agent registered with a broker-dealer in State W. The responsibility for ensuring that Michal's activity as an agent is properly supervised is that of
- The person the broker-dealer picked to supervise his work
- The chief compliance officer at the firm's central office
- The Administrator of State W where Michal holds his registration
- The senior agent recruited by the company before Michal appeared
Correct answer: The person the broker-dealer picked to supervise his work
A broker-dealer is responsible for supervising the securities activities of its agents, and in practice it names a specific individual to supervise each one, so the duty rests with the person the broker-dealer picked to supervise his work. A chief compliance officer writes and monitors procedures and would rarely be the named supervisor of an individual agent. The Administrator regulates and examines the firm but supervises none of its agents. And seniority creates no authority: an agent who joined earlier holds no supervisory power over one who joined later.
- Parlous Professional Investors (PPI) has filed an application to register as a broker-dealer in State X. Under the procedures described in the Uniform Securities Act, PPI's registration is most likely to become effective
- At the same hour the SEC clears the firm for federal sales
- At the end of the 20 day period for federal issues
- At the time each new hire takes the Series 63 exam
- At noon on the 30th day after the complete Form BD arrives
Correct answer: At noon on the 30th day after the complete Form BD arrives
A registration becomes effective at noon on the 30th day after a complete application is filed, and for a broker-dealer the application is the Form BD, so PPI is registered at noon on the 30th day after the complete Form BD arrives. The Administrator may accelerate that date, and if an incomplete filing is returned the thirty day clock starts again. SEC clearance is a separate federal event and does not carry a state registration with it. The twenty day period belongs to the registration of securities rather than of firms. And no examination taken by a new hire makes the firm's registration effective.
- If the Administrator wishes to conduct an examination of a broker-dealer's books and records, how much advance notice must be given?
- A thirty-day written notice must be sent to the firm
- No advance notice is required in any amount
- Notice is needed where records are kept out of state
- Fifteen days of advance notice must be sent
Correct answer: No advance notice is required in any amount
The Uniform Securities Act lets the Administrator inspect a broker-dealer's books and records without giving any advance notice at all; the only limit is that the inspection take place during the registrant's normal business hours. Because no notice period exists, neither a fifteen-day notice nor a thirty-day written notice is required of the Administrator. Nor does the location of the records create a notice duty: records held out of state are open to the same inspection as records held inside it.
- In general, the Uniform Securities Act requires broker-dealers to keep most records for
- Two years, with the first year in an accessible place
- Three years, with the first two easily accessible
- Five years, with the first two in an accessible place
- Six years, with the first three easily accessible
Correct answer: Three years, with the first two easily accessible
The general recordkeeping period for a broker-dealer is three years, and the first two of those years the records must sit in an easily accessible place. Two years is short of the required period, and six and five years both exceed what the general rule imposes. The accessibility figure is likewise fixed at the first two years, so a rule keyed to the first year or the first three years misstates it.
- Defalcator Dependable Brokers (DDB) has changed its business structure from a general partnership to a corporation. Notification of this change
- Is not required because the business still goes on
- Must be filed with the state promptly once it occurs
- Is made by amending the form at the annual renewal
- Must be delivered to the state before noon on day 30
Correct answer: Must be filed with the state promptly once it occurs
When information in a registration application stops being accurate or complete, the registrant must file a corrected application promptly. Form of business organization is disclosed on the application, so moving from a general partnership to a corporation is exactly such a change and calls for a prompt correcting filing. The change is plainly material, so treating it as no notice at all is wrong. Waiting for the annual renewal, or for noon of the 30th day, reads a deadline into the Act that it never states; the Act says promptly and leaves the term undefined.
- The Administrator may require registered broker-dealers to comply with all of the following except
- Filing the firm's own advertising and sales literature
- Renewing the firm's registration twice in each year
- Filing the firm's financial reports on a set timetable
- Keeping the firm's business records for three years
Correct answer: Renewing the firm's registration twice in each year
Registrations run to December 31 and are renewed once a year, so a semiannual renewal is something the Administrator cannot demand. Everything else listed is within the Administrator's post-registration authority: advertising and sales literature may be required to be filed, financial information may be required on a periodic schedule, and records may be required to be kept, with three years the customary period.
- Under the National Securities Markets Improvement Act of 1996 (NSMIA), states are prevented from all of the following except
- Requiring covered securities to register there
- Imposing recordkeeping duties that exceed federal law
- Registering investment advisers who do business there
- Setting capital rules higher than federal ones
Correct answer: Registering investment advisers who do business there
The National Securities Markets Improvement Act of 1996 ended dual regulation of investment advisers, but it did not take state registration of advisers away: an adviser barred from registering federally registers with the state instead, so this is the one activity left to the states. The other three are all preempted. States may not set net capital or custody standards above the federal ones, may not impose recordkeeping duties beyond federal law, and may not make federal covered securities register at the state level, although a notice filing may still be demanded.
- All of the following may be required of broker-dealers by the post-registration provisions of the Uniform Securities Act except
- Keeping correspondence for a certain period of time
- Filing form letters sent to prospective clients
- Keeping records longer than federal law demands
- Filing reports about the firm's financial condition
Correct answer: Keeping records longer than federal law demands
The National Securities Markets Improvement Act of 1996 bars a state from imposing financial or recordkeeping requirements on a broker-dealer that go beyond the federal Securities Exchange Act of 1934, so a state retention period longer than the federal one cannot be demanded. The Administrator's remaining post-registration powers are intact: correspondence may be required to be kept for a stated period, form letters sent to prospective clients may be required to be filed, and reports on the firm's financial condition may be required as well.
- Under the Uniform Securities Act, if the Administrator does not deny an application for registration as a broker-dealer and no disciplinary proceeding is underway in regard to it, how many days after filing the application does registration generally become effective?
- Sixty days after filing the application
- Twenty days after the application was filed
- Seven days after filing the application
- Thirty days after the application was filed
Correct answer: Thirty days after the application was filed
Registration of a securities professional becomes effective at noon on the 30th day after the application is filed, provided the Administrator has not started a proceeding or entered a stop order in the meantime. Seven, twenty and sixty days all misstate that statutory period. Two adjustments sit alongside the rule rather than replacing it: the Administrator may name an earlier effective date, and where an amendment is required the period runs again from the filing of the amendment.
- Which of the following statements regarding broker-dealer registration under the Uniform Securities Act are true? I. In the absence of any action by the Administrator, the effective date of a registration is noon of the 45th day. II. The Administrator may initiate a disciplinary action within two years of a broker-dealer's withdrawal of registration. III. The Administrator may request that the broker-dealer furnish a statement of assets and liabilities. IV. If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon filing of those amendments.
- Statements I and IV only
- Statements II and III only
- Statements I and II only
- Statements III and IV only
Correct answer: Statements III and IV only
The Administrator may require a broker-dealer to furnish a statement of financial condition, that is, a balance sheet showing assets and liabilities, and where amendments to a pending application are required the application counts as first filed when those amendments are filed. Both of those statements are accurate. The effective date is noon of the 30th day, not the 45th, and after a registration is withdrawn the Administrator has one year, not two, in which to begin a disciplinary proceeding, so any pairing built on those two statements is wrong.
- Under the Uniform Securities Act, registrations of securities professionals expire
- One year from the effective date, unless renewed
- On December 31 of every year, unless it is renewed
- Two years after the effective date, unless renewed
- On June 30 in each calendar year, unless renewed
Correct answer: On December 31 of every year, unless it is renewed
Under the Uniform Securities Act every registration of a securities professional runs out on December 31 and must be renewed to continue. The expiration is tied to that calendar date, not to a fiscal midyear date such as June 30, and not to a term of one or two years measured from the date the registration took effect. State practice can differ in detail, but the question asks what the Act itself provides.
- Which of the following statements regarding the Administrator's authority to examine the books and records of registrants is true?
- Records may be inspected, to gather evidence at hearings
- Records of advisers, and of agents, are wholly shielded
- Records may be reviewed at any time, in or out of state
- Records of advisers are reviewed once notice is provided
Correct answer: Records may be reviewed at any time, in or out of state
Every record a registrant is required to keep must be open to the Administrator at any time and for any reason that is appropriate or necessary in the public interest, whether the record sits inside the state or beyond its borders. Collecting evidence for a hearing is one occasion for an examination, not the only one that the Act permits. Investment advisers are covered on the same terms as broker-dealers, so adviser records are neither shielded from review nor conditioned on advance notice.
- Under the Uniform Securities Act, those persons carrying out a broker-dealer's supervisory regimen over agents
- Need not be registered by the state at any time
- Must pass a separate supervisory qualification exam
- Must be registered as agents under the state's laws
- Need not be registered if they avoid sales work
Correct answer: Must be registered as agents under the state's laws
State law has no separate principal or supervisor category the way the self-regulatory rulebook does, so a person who supervises a broker-dealer's agents registers as an agent. That is true even of a supervisor who never handles a customer order: supervising people who effect securities transactions is itself the activity that triggers registration, so neither an exemption for non-selling supervisors nor a blanket exemption from state registration applies. There is also no distinct supervisory qualification examination created by the Act.
- A broker-dealer is registered in five states. One of those states requires that trade blotters must be kept for 10 years. The state where the principal office of the firm is located only requires those records be kept for 5 years. SEC Rule 17a-4 has a 6-year retention requirement for trade blotters. This broker-dealer would be in compliance by keeping its trade blotters
- Ten years, the period the strictest state fixes
- Five years, the period the main office state fixes
- Six years, the period the federal rule requires
- Three years, the period the state statute requires
Correct answer: Six years, the period the federal rule requires
Because the National Securities Markets Improvement Act of 1996 bars any state from setting recordkeeping requirements that differ from or add to the federal ones, the firm satisfies every state it is registered in by following the federal retention rule, which holds trade blotters for six years. The ten-year demand of one state and the five-year period of the state holding the principal office are both preempted, and the three-year period that generally applies to other records is shorter than the blotter rule. Nothing obliges the firm to track a separate period for each state.
- Profitable Investment Planning (PIP) is a registered broker-dealer in State D. Walter, PIP's chief compliance officer (CCO), wins the lottery and announces his immediate retirement. PIP's president appoints Wendy as Walter's replacement. This change would require notification to the State D Administrator
- Within 90 days after the fiscal year's end
- Promptly, as soon as the new officer is named
- At the next annual renewal of registration
- By noon, on day 30 after the appointment date
Correct answer: Promptly, as soon as the new officer is named
Replacing the chief compliance officer changes material information in the firm's registration application, and the Act calls for a corrected filing to be made promptly, without defining how long prompt is. Because the duty runs from the change itself, it cannot be deferred to the next annual renewal or to a date measured from the close of the fiscal year. Noon of the 30th day is the effective date rule for a pending registration, not a deadline for reporting a change in a firm's personnel.
- A person meeting the definition of broker-dealer registers with the state by doing all of the following except
- Filing an application using the required form
- Submitting a full set of fingerprint cards
- Providing a consent to service of any process
- Paying the state's registration filing fee
Correct answer: Submitting a full set of fingerprint cards
State registration of a broker-dealer calls for an application, the filing fee, and a consent to service of process, and all three of those are conditions of the registration. Fingerprint cards are not part of what the Uniform Securities Act asks a registering broker-dealer to submit, which makes the fingerprint requirement the one item on the list that the state does not impose.
- What document must accompany an initial registration application for those natural persons required to register under the Uniform Securities Act?
- A birth certificate to prove the person's age
- An attested copy of the state-issued photo license
- An irrevocable consent to service of legal process
- A sworn statement of the person's citizenship
Correct answer: An irrevocable consent to service of legal process
An initial application for registration must be accompanied by a consent to service of process, the filing that appoints the Administrator to receive legal process for the applicant. Identification documents are not part of that requirement, so a state photo card is beside the point. Citizenship is not a condition of registration either, since foreign nationals may register, and the Act sets no minimum age that a birth certificate would have to establish.
- A consent to service of process allows the Administrator to
- Confirm the facts in any application without notice
- Accept legal process as the registrant's attorney
- Shorten an appeal that the registrant later files
- Serve papers on any customer of the registered firm
Correct answer: Accept legal process as the registrant's attorney
A consent to service of process appoints the Administrator as the registrant's attorney for the receipt of legal process, so process served on the Administrator has the same effect as process served on the registrant in person. That appointment is limited to receiving service. It confers no power to verify or vouch for what an application says, no power to compress the timetable of an appeal, and no power to serve papers on the firm's customers, none of which the consent addresses.
- Which of the following is least likely to appear on a broker-dealer's application submitted to the Administrator?
- The felony record of the firm's principals
- The proposed method of doing a securities business
- The number of registered agents currently employed
- The form of the business organization used
Correct answer: The number of registered agents currently employed
A broker-dealer's application discloses the form of the business organization, the method of doing business the firm proposes to use, and the disciplinary history of the firm and its officers, including any felony charge, conviction or guilty plea. A headcount of registered agents is not part of that application, even for an established firm registering in an additional state, which makes it the item least likely to appear.
- CDL Securities is a broker-dealer doing business in several states, including State M. The Administrator of State M has just published a rule requiring all broker-dealers registered in the state to maintain records for two years longer than SEC Rule 17a-4, the SEC's recordkeeping retention rule. CDL refuses to comply with the Administrator's new rule. Which of the following statements is true?
- The rule binds every firm that trades in that state
- The state may set rules stricter than the federal ones
- The state may not require a longer retention period
- The rule reaches firms whose main office sits in state
Correct answer: The state may not require a longer retention period
A broker-dealer doing business across state lines registers federally as well as in each state where it meets the definition, and the National Securities Markets Improvement Act of 1996 forbids a state from setting requirements above the federal ones. A retention period two years longer than the federal recordkeeping rule is exactly such an excess, so the state was never free to write the stricter rule at all. Being preempted, the rule reaches nobody: it does not bind the firms that trade in the state, and it does not fasten onto firms whose principal office happens to sit there, because the federal rule is the one that governs.
- Rapacious Investment Partners (RIP) is a broker-dealer registered in States X and Y. Wishing to expand into State Z, RIP acquires Peng Asset Traders (PAT), a broker-dealer registered in State Z. The acquisition is finalized on July 1, 2020. As the successor firm to PAT, RIP
- Owes the full license fee with the application filed
- Owes no new license fee until the next renewal period
- Files no new application in the state it is entering
- Files no consent to service of process for that state
Correct answer: Owes no new license fee until the next renewal period
A firm that succeeds to an existing broker-dealer takes over a registration the acquired firm has already paid for that year, so no further license fee falls due until the December 31 renewal. Succession does not excuse the paperwork, though. The successor files an application in the new state as an initial registrant, and because the acquired firm has ceased to exist the successor files its own consent to service of process for that state as well.
- Which of the following statements referring to renewal of a broker-dealer's registration under the Uniform Securities Act are correct? I. Annual renewal takes place on the anniversary of the registrant's initial registration. II. Each renewal application must be accompanied by the appropriate fee. III. Each renewal application must be accompanied by a consent to service of process signed by an authorized supervisory person of the firm. IV. Registrations expire December 31, unless renewed or canceled.
- Statements I and III only
- Statements I and IV only
- Statements II and IV only
- Statements I and II only
Correct answer: Statements II and IV only
Each renewal application goes in with the appropriate fee, and registrations expire on December 31 unless they are renewed, withdrawn or canceled, so those two statements are the accurate pair. Renewal is not tied to the anniversary of the original registration, since the Act fixes one common expiration date for everyone. A fresh consent to service of process is not filed each year either; the consent goes in with the initial application and stays in the registrant's file permanently.
- The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, investment adviser, or investment adviser representative involved in any securities sale that violates the Uniform Securities Act is
- The state's order to cease and desist
- The standing agreement to actionable offenses
- The irrevocable consent to service of process
- The registrant's right of retribution
Correct answer: The irrevocable consent to service of process
Every applicant for registration and every issuer files an irrevocable consent to service of process, which appoints the Administrator as attorney to receive any lawful process in a civil suit, action or proceeding growing out of a securities sale that violates the Act, with the same legal effect as personal service on the registrant. A cease and desist order is a remedy the Administrator issues to stop conduct, not an appointment to receive process, and the other two are not instruments the Act creates at all.
- Which of the following emails sent using the broker-dealer's account has no retention requirement?
- An email telling a few customers of a pending issue
- An email confirming a dinner date with a customer
- An email confirming a meeting to review a portfolio
- An email telling customers of a coming fee change
Correct answer: An email confirming a dinner date with a customer
A message that does nothing but settle a social arrangement carries no business content, so it is personal correspondence and sits outside the retention rules even though it travels over the firm's account and goes to a customer. The other three are business communications that must be preserved: a notice that fees are changing and word of a new issue about to come to market are both communications about the firm's securities business, and an email confirming a meeting to go over a customer's portfolio, with a spreadsheet of that portfolio attached, is business correspondence on its face.
- With regard to net capital of broker-dealers, when the Administrator promulgates the minimum requirements for his state, it is mandatory that those requirements do not exceed those of
- The state where the firm keeps its office
- The strictest state in which the firm registers
- The federal regulator of securities firms
- The states in which the firm does some business
Correct answer: The federal regulator of securities firms
The National Securities Markets Improvement Act of 1996 caps state authority at the federal level, so a state minimum net capital requirement may never exceed the federal one. That ceiling is set by federal law alone. It is not borrowed from whichever state happens to demand the most, nor from the state where the principal office sits, nor from the several states in which the firm happens to transact business.
- Transient Investment Products (TIP) is a registered broker-dealer. TIP has just changed the location of its principal office. This information must be communicated to the Administrator
- A separate attachment appended to the Form BD
- An amended Form BD filed as soon as possible
- A certified letter giving the new office site
- An email sent to the state securities office
Correct answer: An amended Form BD filed as soon as possible
The address of a broker-dealer's principal office is material information in its registration application, so a move is reported by promptly filing an amended Form BD. Correspondence outside that filing does not discharge the duty: a certified letter about the move, or an email to the state securities office, leaves the application itself inaccurate. Nor will a separate attachment appended to the form do the work of amending it, since what the Act requires is that the application on file be corrected.
- A broker-dealer is registered with the SEC and States A, B, and C. The SEC's net capital requirement for the firm is $65,000, while the net capital requirement of State A, the location of the broker-dealer's principal office, is $75,000; that of State B is $100,000; and that of State C is $50,000. Being in compliance requires this broker-dealer to maintain net capital of
- $100,000.
- $75,000.
- $50,000.
- $65,000.
Correct answer: $65,000.
An SEC-registered broker-dealer answers to the SEC's net capital standard, and no state may impose a more stringent financial requirement on it. The firm's obligation is therefore the SEC figure of $65,000. Holding $100,000 would be meeting State B's requirement and $75,000 State A's, but neither state may enforce a net capital figure above the federal one, and $50,000, State C's figure, sits below the federal standard the firm must actually satisfy.
- The Uniform Securities Act permits broker-dealers to maintain their records using electronic storage. In the case of records created or maintained on electronic storage media, the broker-dealer must establish and maintain all of the following procedures except
- Preserve the stored records against loss or unlawful alteration
- Arrange for the stored records to be edited when regulations change
- Ensure reproductions of stored records are complete and legible
- Limit access to the stored records to personnel the firm authorizes
Correct answer: Arrange for the stored records to be edited when regulations change
Electronic storage is permitted only if what has been written cannot afterward be changed, the write-once, read-many standard. Building in a way for stored records to be edited when regulations change is the opposite of that requirement, so it is the item on this list the firm is not asked to provide for. Preserving the records against loss or unlawful alteration, keeping reproductions complete and legible, and limiting access to personnel the firm authorizes are each express conditions of using electronic media.
- When submitting an application for registration as a broker-dealer, which of the following must be disclosed? I. Form of business organization. II. Any felonies or certain misdemeanors on the records of partners or officers. III. Business history of the principals of the firm. IV. Financial information on the firm.
- I, II, and III, not IV
- I, II, III, and IV
- II, III, and IV, not I
- I, II, IV, not III
Correct answer: I, II, III, and IV
A broker-dealer's application for registration must disclose the form of business organization, any felonies and specified misdemeanors on the records of partners and officers, the business history of the principals, and financial information on the firm. All four appear on the Uniform Securities Act's list, so an answer excluding the firm's financial information, or the form of business organization, or the principals' business history each withholds something the Administrator is entitled to have before registration can take effect.
- Under the Uniform Securities Act, a state-registered investment adviser's records may be examined by the Administrator or his designee
- Annually, at the adviser's office or its branches
- At any time during regular business hours, in state or beyond
- At any time a court of competent jurisdiction issues an order
- Following 10 business days' notice to the adviser
Correct answer: At any time during regular business hours, in state or beyond
A state-registered investment adviser's records are open to the Administrator or a designee at any time during regular business hours, and the examination may reach records kept within or outside the state. The Act sets no annual quota, so an annual visit confined to the adviser's office or its branches understates the power; it requires no court order before an examination; and it obliges the Administrator to give no set period of notice, so a 10-business-day wait is a condition the Act does not impose.
- Online Securities Trading, Inc. (OSTI) is a broker-dealer registered in several states. Their initial website was created two years ago. Due to an increase in customer "hits," OSTI has revised its website. Under the Uniform Securities Act, what copy will be retained in the records?
- The revision for three years, with nothing kept of the original
- The original for one more year, with nothing kept of the revision
- The original for another year, and the revision for three years
- Both the original and the revision for three years from this date
Correct answer: The original for another year, and the revision for three years
A website is advertising, and advertising is retained for three years from the date it is used. The site put up two years ago has one year of its period left to run, while the revised site begins a three-year period of its own on the day it goes up, which is why a firm often holds several versions at once. Discarding the original cuts its period short, keeping nothing of the revision ignores the new copy's own clock, and starting both clocks again today would stretch the original's retention past the three years the rule allows.
- The Uniform Securities Act gives the Administrator the power to examine a broker-dealer's business records
- Following a written request approved by a state court of record
- Following one week's advance notice to the principals
- At any hour, including evenings and national holidays
- During normal business hours, in this state or in another state
Correct answer: During normal business hours, in this state or in another state
The Administrator may examine a broker-dealer's business records during normal business hours, and the Act expressly allows the examination to reach records located in this state or in another. No court has to approve a written request first, no advance notice to the firm's principals is required, and the power does not stretch into evenings and holidays: the one real limit is that the examination take place in business hours.
- The Administrator may require broker-dealers who are registered in her state and who have custody of or discretionary authority over client funds or securities to meet certain financial standards. Those could include all of the following except
- Marketable securities pledged in place of a surety bond
- A surety bond in this state's required amount
- Cash deposited in place of a state-approved surety bond
- Net capital above the level federal rules set
Correct answer: Net capital above the level federal rules set
Where a broker-dealer has custody of or discretion over client assets, the Administrator may require a surety bond in the amount the state fixes, and may accept cash or marketable securities pledged in place of that bond. What the Administrator may not do is demand net capital above the level federal rules set, because an SEC-registered firm's financial requirements are capped at the federal standard. That is the one item on the list a state cannot require.
- If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must
- Amend the details on file promptly, whatever the renewal date
- File an amended registration statement within 60 days
- File a separate registration statement within 30 days
- Hold the corrections until the next annual renewal, then file
Correct answer: Amend the details on file promptly, whatever the renewal date
When information already on file becomes materially inaccurate, the registrant must amend or update it promptly, and that duty does not wait on the renewal cycle. The Act declines to define promptly, but it plainly does not mean a fixed 60-day window, and it does not call for a separate registration statement inside 30 days when an amendment will do. Holding corrections until the next annual renewal leaves inaccurate information on file in the meantime, which is exactly what the requirement exists to prevent. The same duty applies to investment advisers and to securities as well as to broker-dealers.
- Omega Tav Securities (OTS), a FINRA member broker-dealer, is registered in seven southern states. Regarding financial requirements, OTS must meet those of
- The strictest southern regulator
- The state with the firm's chief office
- The state with the largest client base
- The federal securities regulator
Correct answer: The federal securities regulator
A FINRA member broker-dealer is registered with the SEC as well, so the federal securities regulator sets its financial requirements, and the same is true of bonding and recordkeeping. The seven southern states cannot demand more than the federal standard, so the strictest of their regulators does not fix this firm's obligation, and neither does the state holding the firm's chief office nor the state with the largest client base.
- A broker-dealer is registered in all 50 states. Which of the following statements is correct regarding the firm's obligations for maintaining books and records?
- Its recordkeeping must meet the standards of the regulator at the federal level
- Its recordkeeping must meet the standards of the state it calls home
- Its recordkeeping must meet the standards of every one of the states
- Its recordkeeping must meet the standards of the state with the strictest rules
Correct answer: Its recordkeeping must meet the standards of the regulator at the federal level
Since the National Securities Markets Improvement Act, Administrators may not impose recordkeeping requirements on an SEC-registered broker-dealer beyond those the regulator at the federal level sets. A firm registered in all 50 states therefore keeps one set of books, built to the federal standard. Building instead to the rules of the state with the strictest ones, to the rules of the state it calls home, or to the rules of every one of the states in turn would each mean answering to requirements the states are preempted from imposing.
- If a broker-dealer whose principal office is in Iowa addresses five solicitations to potential customers in the nearby Nebraska town of Middleton and the return address on the mailings is that of the broker-dealer's satellite office in Middleton, which of the following statements is true?
- Registration is required in Iowa and in Nebraska
- The Nebraska Administrator alone can call for it
- The Iowa filing is all that the statute would require
- A federal filing covers the firm in Iowa and Nebraska
Correct answer: Registration is required in Iowa and in Nebraska
A broker-dealer must register in any state where it keeps an office or does business with retail clients, and there is no de minimis exemption for broker-dealers as there is for investment advisers. Mailing solicitations into Middleton is making offers in Nebraska, and the satellite office carrying the return address is an office in that state; the principal office makes Iowa registration necessary as well. So the Iowa filing is not all the statute would require, the Nebraska Administrator is not the one regulator with a claim here, and a federal filing does not cover the firm in either state, because an SEC-registered broker-dealer still meets state registration requirements.
- The Uniform Securities Act grants many powers to the Administrator. Among them is the ability to inspect the records of a broker-dealer registered in the Administrator's state
- In normal business hours, with no advance notice to the firm
- In normal business hours, on reasonable prior notice
- In any hours whatsoever, upon a court-issued warrant
- In normal business hours, but no more than once each quarter
Correct answer: In normal business hours, with no advance notice to the firm
Where a broker-dealer is registered in the Administrator's own state, its records may be inspected during normal business hours with no advance notice at all, which is why these are known as surprise inspections. The Act does not condition the visit on reasonable prior notice, does not cap inspections at one a quarter, and does not require a court-issued warrant; nor does it open the firm's records to inspection outside normal business hours.
- If information on file with the Administrator changes, a broker-dealer must give notification
- At the next yearly renewal cycle
- Within 30 calendar days of any change
- Promptly once the change is made
- Within 10 business days of the change
Correct answer: Promptly once the change is made
A broker-dealer must file notice of a change in the information on file with the Administrator promptly, once the change is made. The Act fixes no number of days for it: a 30-calendar-day window, a 10-business-day window, and a report held back until the next yearly renewal each leave inaccurate information on file for a period the Act never sanctions. There is no current definition of promptly in the Act, but it is not a counted deadline.
- Terrence Washington operates his own financial planning organization, TW and Associates. He is registered with the state as an investment adviser. From time to time, Washington sells mutual funds to his advisory clients. Complying with state and federal laws means that Washington is registered as an agent with a broker-dealer. His actions as an agent must be supervised by
- The supervisory staff of the advisory practice he owns outright
- The supervisory staff of the broker-dealer where he is licensed
- The securities regulator granting his agent license
- The self-regulatory body that oversees member firms
Correct answer: The supervisory staff of the broker-dealer where he is licensed
An individual who holds an agent's license through a registered broker-dealer is supervised, in that capacity, by the supervisory staff of the broker-dealer where he is licensed, exactly as any in-house agent would be. The advisory practice he owns outright supervises his advisory work, not his agent activity; the regulator that grants a license does not supervise day-to-day sales conduct; and a self-regulatory body oversees member firms rather than standing in for a firm's own supervision of one of its agents.
- An applicant for registration as a broker-dealer realized that material information was omitted from the initial application. In that case,
- The 30-day period runs from the corrected application
- The application is denied and the applicant must wait a year
- The 30-day period pauses and resumes after the gap is filled
- The omission changes nothing about the effective date
Correct answer: The 30-day period runs from the corrected application
Registration takes effect at noon on the 30th day after a complete application is filed. An application missing material information was never complete, so the 30-day period runs from the corrected application rather than from the original one. The omission is not fatal, so the application is not denied and no year-long wait follows; but it is not harmless either, so the clock does not merely pause and pick up where it left off, and the effective date the first filing would have produced does not survive.
- It is common for a registered broker-dealer to maintain a website. Which of the following statements is true?
- Each revision drives the earlier design out of the advertising file
- The design first posted belongs in the advertising file three years
- A design belongs on file for five years after uploading
- A revision reaches the file after the first period ends
Correct answer: The design first posted belongs in the advertising file three years
A website is viewed as any other advertisement, so the design first posted belongs in the advertising file for three years. Each revision is kept as well and starts a three-year period of its own, which is why several versions can sit in the file at once. A revision therefore does not drive the earlier design out, a revision goes into the file when it is used rather than waiting for the first period to end, and the retention period is three years, not five.
- Susie Shue is the CFO of Farrier and Nail, a new broker-dealer applying for registration in a number of states. In completing the applications, which of the following events in the CFO's life could lead to statutory disqualification?
- An arrest for embezzlement ending in acquittal six years ago
- A personal bankruptcy discharged by a federal court six years ago
- A conviction on a misdemeanor extortion charge six years ago
- A civil judgment over an unpaid credit-card balance six years ago
Correct answer: A conviction on a misdemeanor extortion charge six years ago
Statutory disqualification follows a conviction, including a guilty plea, for any felony or for a misdemeanor involving investments, an investment-related business, or bribery, forgery, extortion, and similar offenses within the previous 10 years. A conviction on a misdemeanor extortion charge six years ago sits squarely in that list. An arrest that ended in acquittal has to be disclosed but produced no conviction; a discharged personal bankruptcy is a disclosure item, and trouble only if it is concealed; and a civil judgment on a consumer debt is neither a felony nor one of the listed misdemeanors.
- All of the following must register as agents when representing a broker-dealer except
- A partner in the firm whose work lies outside securities sales
- A clerk in the firm accepting solicited orders from the public
- A staffer who sells shares of a chartered trust company
- A staffer representing the firm in deals with an issuer
Correct answer: A partner in the firm whose work lies outside securities sales
A partner or employee of a broker-dealer whose work lies outside securities sales, supervision of sales included, is not required to register as an agent, and that is the exception on this list. A clerk who accepts solicited orders is effecting securities transactions and must register. Shares of a chartered trust company are an exempt security, but the person selling them here is doing so for the broker-dealer, so agent registration is required anyway. And someone representing the firm in deals with an issuer is representing the underwriter, not the issuer, so the exclusion written for issuer representatives does not reach him.
- In some instances, rather than using an investment banker to distribute its securities to the public, an issuer will hire a sales force or use its own employees to make the sales. The individuals involved in the selling in this state would not be defined as agents under the Uniform Securities Act if selling on behalf of which of the following issuers?
- A credit union supervised under the laws of this state
- A savings institution formed under the laws of a state
- A building and loan association that does business in this state
- A federal savings and loan association doing business in a state
Correct answer: A savings institution formed under the laws of a state
Each of these issuers puts out securities the Act exempts from registration, but the exclusion from the definition of agent for individuals selling on the issuer's own behalf is granted to a much shorter list. A savings institution formed under the laws of a state is on it. A credit union is not, a building and loan association is not, and a federal savings and loan association is not, so their salespeople must register as agents. A savings institution is not the same thing as a savings and loan or a building and loan association.
- An individual representing a broker-dealer is an agent when attempting to effect the sale of
- A term life insurance policy for retail investors
- A desk from the firm's surplus office furnishings
- A fixed annuity issued by a state-licensed insurance company
- A security expressly exempt from registration with the state
Correct answer: A security expressly exempt from registration with the state
An individual representing a broker-dealer is an agent whenever the thing being sold is a security, and a security expressly exempt from registration with the state is still a security. The exemption belongs to the instrument and says nothing about whether the individual must be licensed. The other items are not securities at all: a term life insurance policy and a fixed annuity are insurance products unless the word variable appears, and surplus office furnishings are simply property of the firm.
- A president of a bank sells shares of the bank to public investors. Under the Uniform Securities Act, she is
- An agent, since she is selling to the investing public
- An investment adviser, as she gives advice on the sale
- Outside the statutory definition of an agent
- Within the statutory definition of an issuer
Correct answer: Outside the statutory definition of an agent
An individual selling securities on behalf of an issuer of certain exempt securities is excluded from the definition of agent, and securities issued by a bank are on that list. The bank's president therefore falls outside the statutory definition of an agent, even though she is selling to the investing public. She is not an investment adviser, since she is selling the bank's own shares rather than advising for compensation, and she is not within the definition of an issuer either: the bank is the issuer, and she is the person selling on its behalf.
- The First Home Savings and Loan Association of State C has a securities offering being made in the state. Deborah is an employee of the S&L and is selling this security to residents of State C. Deborah
- Is outside the agent definition, the securities exempted by statute
- Can sell to accredited purchasers without registering first
- Must obtain an agent registration through the issuer before selling
- Needs no registration because the association is home-based
Correct answer: Must obtain an agent registration through the issuer before selling
Securities issued by a savings and loan association are exempt from registration with the state, but the exclusion from the definition of agent covers individuals representing banks, savings institutions, and trust companies, and does not extend to savings and loan or building and loan associations. Deborah must therefore obtain an agent registration through the issuer before selling. The exemption attaching to the securities does not carry over to her, the association's being home-based has no bearing on the question, and whether a buyer is accredited is irrelevant to the definition of an agent.
- Which of the following would be an agent under the terms of the Uniform Securities Act? I. A sales representative of a licensed broker-dealer who sells secondary securities to the general public II. An assistant to the president of a broker-dealer who, for administrative purposes, accepts orders on behalf of senior partners III. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public IV. An issuer of nonexempt securities that are registered in the state and sold to the general public
- II and III
- I and IV
- III and IV
- I and II
Correct answer: I and II
Only an individual can be an agent under the Act. The sales representative selling secondary securities for a licensed broker-dealer is plainly one, and so is the president's assistant: an administrative employee who accepts securities orders on behalf of others is effecting transactions in securities, and the job title does not matter. The remaining two are entities, not individuals. A bank subsidiary registered as a broker-dealer is a broker-dealer, and an issuer selling its own registered securities is an issuer; corporate entities, broker-dealers, and issuers are all excluded from the definition of agent.
- The term agent as defined in the Uniform Securities Act, would not include which of the following individuals?
- One who represents an issuer of state-exempt securities
- One who represents a broker-dealer that sells exempt securities
- One who represents an issuer when effecting exempt transactions
- One who represents a broker-dealer selling listed stock
Correct answer: One who represents an issuer when effecting exempt transactions
An individual representing an issuer is always outside the definition of agent when the transactions themselves are exempt, so that is the one description here that escapes the term. The exclusion is transaction-based and does not follow from a security's exemption: representing an issuer of state-exempt securities can still make a person an agent, because only a handful of exempt-security categories carry the exclusion. Anyone selling for a registered broker-dealer is an agent whatever the security, so both broker-dealer descriptions fall inside the definition, including the one involving listed stock, which is exempt from state registration only because it is federally covered.
- The Uniform Securities Act's definition of an agent excludes all of the following except
- An individual who supervises the firm's securities sales agents
- An investment adviser representative of an advisory affiliate
- A broker-dealer that earns commissions on its customers' trades
- A clerical employee of the firm's trade-processing department
Correct answer: An individual who supervises the firm's securities sales agents
Under the Uniform Securities Act an agent is any individual, other than a broker-dealer, who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. The act creates no separate principal or supervisory license, so an individual who supervises the firm's securities sales agents registers on the same terms as the people he oversees. A broker-dealer that earns commissions on its customers' trades is written out of the agent definition by its own words; the firm registers as a broker-dealer, and how it is paid changes nothing. An investment adviser representative of an advisory affiliate is captured by a different definition, because rendering advice is not effecting securities transactions. A clerical employee of the firm's trade-processing department stays outside the definition so long as he neither solicits business nor accepts orders.
- Under the Uniform Securities Act, an agent is
- An individual who represents an issuer in an exempt private placement
- An individual who represents a broker-dealer in covered stock trades
- A broker-dealer that sells its registered shares to public investors
- An individual who represents the United States Treasury in bill sales
Correct answer: An individual who represents a broker-dealer in covered stock trades
Anyone who represents a broker-dealer in securities transactions is an agent, and the character of the security is beside the point: federal covered securities such as exchange-listed shares are still securities, so an individual who represents a broker-dealer in covered stock trades must be registered. The exclusions run the other way and belong to people who represent the issuer. An individual who represents an issuer in an exempt private placement is outside the definition because the transaction itself is exempt, and an individual who represents the United States Treasury in bill sales represents the issuer of an exempt federal security. A broker-dealer that sells its registered shares to public investors is a firm, and firms are expressly excluded from the term agent.
- Which of the following employees of a registered broker-dealer is excluded from the definition of agent as stated in the Uniform Securities Act?
- Sandy, who reviews and approves the firm's customer orders daily
- Suzie, who qualifies prospects from the lists that the agents supply
- Stuart, who greets visitors and routes telephone calls to the agents
- Sally, the firm's president, who solicits her own retail clients
Correct answer: Stuart, who greets visitors and routes telephone calls to the agents
The act excludes from the agent definition any individual whose function for the broker-dealer is clerical or ministerial, and Stuart, who greets visitors and routes telephone calls to the agents, is doing exactly that. Sandy, who reviews and approves the firm's customer orders daily, exercises authority over securities transactions, and anyone holding that authority registers as an agent. Suzie's work goes beyond simple cold calling: qualifying prospects from the lists that the agents supply is a sales function and requires registration. A title is no shelter either, so Sally, the firm's president, who solicits her own retail clients, is representing the firm in securities sales and must be registered.
- Which of the following would be required to register as an agent under the Uniform Securities Act? I. An officer of a broker-dealer who does not deal with customers or supervision of sales II. A director of a broker-dealer who is not involved in day-to-day operations III. A trader who is authorized to handle customer orders IV. An individual who makes cold calls to pre-qualify prospects and lets a principal in the firm handle all customer trades
- I, III, and IV
- II and III
- I, II, and III
- III and IV
Correct answer: III and IV
An agent is an individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. A trader authorized to handle customer orders is doing precisely that, and prequalifying prospects is a sales function even when a supervisory person ultimately handles every trade, so statements III and IV both require registration. Officers and directors of a broker-dealer are not agents when they neither deal with the public in securities transactions nor supervise those who do, which takes statements I and II out of the picture. Remember also that the act has no separate principal category; supervisory personnel are licensed as agents.
- As defined in the Uniform Securities Act, which of the following persons is included in the term agent?
- An individual employed by a broker-dealer who sells listed stock
- A director who represents an issuer in exempt transactions
- A broker-dealer that sells registered bonds to the retail public
- The Canadian government's employee who sells its own bonds
Correct answer: An individual employed by a broker-dealer who sells listed stock
An agent is an individual who sells securities to the public, and institutional buyers are part of that public, so an individual employed by a broker-dealer who sells listed stock is inside the term. The definition excludes broker-dealers themselves, which is why a broker-dealer that sells registered bonds to the retail public is not an agent no matter who buys. A director who represents an issuer in exempt transactions is excluded because the exemption attaches to the transaction. The Canadian government's employee who sells its own bonds represents the issuer of a security the act exempts, and issuer representatives selling securities on that list are not agents.
- Sarah has not yet passed the Series 63 exam. As Jack's assistant, Sarah has frequent telephone contact with Jack's customers, to whom she provides account information and current stock quotes. In this situation, Sarah is
- In violation of the Securities Exchange Act of 1934
- Not in violation of any securities statute
- In violation of the Uniform Securities Act
- Not permitted to quote market prices over the phone
Correct answer: Not in violation of any securities statute
Sarah's duties are ministerial. She passes along account information and current quotations; she does not solicit business, render advice, or accept orders, and that work is excluded from the definition of agent, so she is not in violation of any securities statute and needs no registration. The Uniform Securities Act is not breached, because the act reaches individuals who effect or attempt to effect securities transactions and she does neither. The Securities Exchange Act of 1934 is not breached either; it imposes no state license on a clerical assistant. And nothing bars her from quoting market prices over the phone: relaying quotations and account data is the very kind of ministerial task the exclusion contemplates.
- Which of the following is required to have a Series 63 license?
- A broker-dealer that is registered in several other states
- A silent partner in the broker-dealer's own parent company
- An individual who sells stock to the public for a broker-dealer
- The issuer of the securities that are offered to retail clients
Correct answer: An individual who sells stock to the public for a broker-dealer
Passing the Series 63 is a condition of registering as an agent, and agent registration attaches to an individual who sells stock to the public for a broker-dealer. A broker-dealer that is registered in several other states is a firm; firms register as broker-dealers and never sit for an agent examination. The issuer of the securities that are offered to retail clients is an entity as well, so it holds no agent license. A silent partner in the broker-dealer's own parent company neither solicits nor effects securities transactions, so nothing about that position triggers registration or an exam.
- Which of the following would not be considered an agent under the Uniform Securities Act?
- An individual who sells foreign shares registered within the state
- An individual at a broker-dealer who sells exempt commercial paper
- A salesperson who sells variable annuities for the insurer
- A broker-dealer that does business with the general public
Correct answer: A broker-dealer that does business with the general public
The term agent reaches individuals only, so a broker-dealer that does business with the general public is excluded by the statute itself and is the one here that is not an agent. An individual at a broker-dealer who sells exempt commercial paper is an agent, because a security's exemption never exempts the person who sells it for the firm. An individual who sells foreign shares registered within the state is selling a non-exempt security and must register. A salesperson who sells variable annuities for the insurer is selling a security as well as an insurance product, so a securities registration is required alongside the insurance license.
- A broker-dealer limits its business to effecting transactions in securities that are exempt from registration with the state. The individuals representing that broker-dealer
- Must register as agents with the state Administrator
- May themselves choose to register as agents
- Must obtain a limited registration within this state
- Are exempt from registration in every state
Correct answer: Must register as agents with the state Administrator
A security's exemption from registration with the state has no bearing on the individual who sells it. Anyone representing this broker-dealer in securities transactions meets the definition of agent and must register as agents with the state Administrator. Registration is not elective, so it is wrong to say these individuals may themselves choose to register as agents. They are not exempt from registration in every state either, since the exemption belongs to the security rather than to the salesperson. And the act offers no partial category, so there is no way to obtain a limited registration within this state.
- Under the Uniform Securities Act, an agent is an individual representing
- A savings institution organized under the law of a state
- A broker-dealer that sells the bonds of a friendly foreign nation
- An issuer of common stock in an exempt private placement
- An issuer of bonds that are guaranteed by the Canadian government
Correct answer: A broker-dealer that sells the bonds of a friendly foreign nation
An agent is an individual representing a broker-dealer or an issuer in effecting securities transactions, and representing a broker-dealer is the case that produces an agent almost without exception, including a broker-dealer that sells the bonds of a friendly foreign nation. The exclusions in the act belong to people who represent the issuer. An issuer of bonds that are guaranteed by the Canadian government is on the exempt list, so its representative is not an agent, and a savings institution organized under the law of a state is on that list as well. An issuer of common stock in an exempt private placement is excluded because the transaction is exempt, whatever the security happens to be.
- Which of the following would be eligible to register as an agent of a broker-dealer?
- Pinnacle Securities, Inc., a broker-dealer in this state
- First National Bank of Denver, a state-chartered company
- Robert Alvarez, an individual employed in the Denver office
- Alvarez Financial Group, a corporation formed in this state
Correct answer: Robert Alvarez, an individual employed in the Denver office
Registration as an agent of a broker-dealer is limited to natural persons, so Robert Alvarez, an individual employed in the Denver office, is the one who could register. Pinnacle Securities, Inc., a broker-dealer in this state, cannot: a broker-dealer is expressly excluded from the definition of agent and registers in its own category. First National Bank of Denver, a state-chartered company, is an institution rather than a person and has no way to hold an agent registration. Alvarez Financial Group, a corporation formed in this state, fails for the same reason — a corporation is not an individual, whatever business it conducts.
- Under the Uniform Securities Act, an agent of a broker-dealer registered in one state may transact business in another state in which he is not registered with which of the following?
- A resident of that state who buys an exempt security there
- An existing client who took up residence there 60 days ago
- An existing client's brother who has lived in that state
- An existing client on an extended vacation in that state
Correct answer: An existing client on an extended vacation in that state
The snowbird position carries no fixed time limit. So long as the client has not changed legal residence, the agent may keep serving an existing client on an extended vacation in that state without registering there, whether the trip lasts two weeks or several months. Once residence actually changes, the agent has 30 days to continue servicing the account, so an existing client who took up residence there 60 days ago is well outside that window and registration is required. An existing client's brother who has lived in that state is a resident and a new customer, so neither the visiting rule nor the 30-day rule reaches him. And a resident of that state who buys an exempt security there is no help, because a security's exemption is unrelated to the agent's own duty to register.
- Under the provisions of the Uniform Securities Act, a securities agent may not
- Accept an unsolicited order in a state where he is unregistered
- Hold an insurance license as well as a securities license
- Be affiliated with a licensed real estate company in this state
- Be registered as an agent with two commonly owned dealers
Correct answer: Accept an unsolicited order in a state where he is unregistered
To take an order from a client located in a state, the agent must be registered in that state, so he may not accept an unsolicited order in a state where he is unregistered; neither the unsolicited nature of the order nor an exemption attaching to the security removes that requirement. The remaining conduct is permitted. An agent may be registered as an agent with two commonly owned dealers, because dual registration is allowed where the firms are under common ownership or control or the Administrator has authorized the arrangement. An agent may hold an insurance license as well as a securities license, which is routine for anyone selling variable products. And an agent may be affiliated with a licensed real estate company in this state, since that activity sits outside securities regulation altogether.
- An agent with a broker-dealer is suddenly called out of town on a personal family matter. While away, the agent's unregistered sales assistant receives a phone call from an existing client wishing to purchase 200 shares of a listed stock. What would be the most appropriate action for the sales assistant to take?
- Take the order down and pass it along to the firm's order desk
- Route the call to another registered agent in the office
- Accept the order since the client already has an account
- Explain that the agent is out and ask the client to call later
Correct answer: Route the call to another registered agent in the office
An unregistered individual may never accept or enter a securities order, and neither an existing relationship nor an unsolicited order changes that. The assistant should route the call to another registered agent in the office, which keeps her inside her ministerial role and still gets the client served. To accept the order since the client already has an account is the prohibited act itself. To take the order down and pass it along to the firm's order desk is the same violation with an extra step, because she has still accepted the order. And to explain that the agent is out and ask the client to call later needlessly denies a client access to the market while a licensed agent is sitting in the same office.
- Under the Uniform Securities Act, the term agent refers to individuals who act on behalf of a broker-dealer or issuer in effecting securities transactions. Which of the following individuals are not included in the definition of an agent? I. A lawyer acting on behalf of an issuer in preparing documents describing the issuance of nonexempt securities II. A lawyer acting on behalf of a broker-dealer who prepares documents describing the sales or purchase of securities to the general public III. A partner or officer of a broker-dealer whose only securities activity is the purchase of shares of an issuer for his personal investment account IV. An officer of an issuer who sells shares of the issuer's stock to employees without receiving any special compensation
- I, II, and III
- II and IV
- I, II, III, and IV
- I and III
Correct answer: I, II, III, and IV
The act describes an agent as an individual, other than a broker-dealer or issuer, who represents a broker-dealer or issuer in effecting transactions in securities. A lawyer who prepares documents describing an issue or a sale is not effecting transactions, so neither lawyer is an agent, whichever party he serves. A partner or officer of a broker-dealer whose only securities activity is buying shares for his personal investment account is trading for himself rather than representing the firm with the public. An officer of an issuer who sells the issuer's stock to employees without special compensation is expressly outside the definition as well. All four descriptions therefore fall outside the term, and every narrower grouping leaves out at least one individual who is also excluded.
- Patrice is employed by ABC Securities, a registered broker-dealer. Patrice's sole responsibility is posting customer securities transactions to the blotter. As such, Patrice
- Must register as an agent because of the work that she does
- Would be an agent if she received a bonus linked to profits
- Is an agent but is exempt from the registration process
- Is not included in the statutory definition of an agent
Correct answer: Is not included in the statutory definition of an agent
The most common exception to the agent definition covers individuals whose work for a broker-dealer is solely clerical or administrative, and posting customer transactions to the blotter sits squarely inside it, so Patrice is not included in the statutory definition of an agent. That is why it is wrong to say she is an agent but is exempt from the registration process: the exception removes her from the definition rather than excusing a registration she would otherwise owe. She need not register as an agent because of the work that she does, since it is the ministerial character of that work which keeps her out. Nor would she be an agent if she received a bonus linked to profits — clerical staff may not be compensated on the basis of sales, but a payment tied to overall company profits is permitted and does not convert bookkeeping into agency.
- Under the Uniform Securities Act, an officer who sells an issuer's nonexempt securities to the public is considered
- An agent of the issuer subject to this state's registration rules
- An agent of the issuer with no registration duty whatever
- A person entirely outside the scope of the Uniform Securities Act
- A party exempt from every provision of the securities law
Correct answer: An agent of the issuer subject to this state's registration rules
An officer who sells the issuer's nonexempt securities to the public is representing the issuer in effecting securities sales, which makes him an agent of the issuer subject to this state's registration rules. Do not assume an exempt transaction unless the facts supply one. He is not an agent of the issuer with no registration duty whatever, because the relief for issuer representatives depends on an exempt security or an exempt transaction and neither is present. He is not a person entirely outside the scope of the Uniform Securities Act, since the act reaches precisely this conduct. And he is not a party exempt from every provision of the securities law: an officer who sells to existing employees without compensation would be excluded, but a public sale of nonexempt securities is a different situation.
- Registration as an agent would be required of a sales assistant who I. accepts unsolicited orders from clients. II. takes telephone messages for the registered agent. III. posts updates to client records. IV. solicits new clients for the firm.
- I, II, and III
- I and IV
- I, III, and IV
- I and II
Correct answer: I and IV
Clerical personnel lose the exclusion the moment they take on sales duties. Accepting orders, even unsolicited ones, and soliciting new clients for the firm are both sales functions, so statements I and IV are the two that require registration. Taking telephone messages for the registered agent is ministerial and triggers nothing at all. Posting updates to client records is recordkeeping and is equally ministerial. Any grouping that adds statement II or statement III therefore sweeps in work the act deliberately leaves outside the definition of agent.
- Regarding the definition of an agent found in the Uniform Securities Act, which of the following statements is true?
- An agent may be a partnership or any other unincorporated business
- An agent may be a broker-dealer or an affiliated trust corporation
- An agent represents a broker-dealer or issuer in the sale of securities
- An agent who fits this definition is exempt from the registration rules
Correct answer: An agent represents a broker-dealer or issuer in the sale of securities
Section 401(b) of the Uniform Securities Act says an agent is any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities, so the accurate statement is that an agent represents a broker-dealer or issuer in the sale of securities. An agent must be a natural person, so it is false that an agent may be a partnership or any other unincorporated business. Broker-dealers are carved out of the term by name, so it is equally false that an agent may be a broker-dealer or an affiliated trust corporation. And fitting the definition is what creates the obligation, so it is backwards to say an agent who fits this definition is exempt from the registration rules; there are situations in which representing an issuer does not make a person an agent, but that governs who fits the definition, not what follows from fitting it.
- Under the Uniform Securities Act, an individual is not required to register as an agent if he represents any of the following issuers in the sale of their securities except
- A foreign government recognized by the United States
- The government of Canada or any provincial authority
- A savings institution supervised by this state
- A corporation chartered in a Canadian province
Correct answer: A corporation chartered in a Canadian province
An individual who represents an issuer escapes agent registration only when the securities fall in the act's short list of exempt categories: United States and Canadian government and municipal issues, securities of a foreign government with which the United States maintains diplomatic relations, and securities of banks, savings institutions, and trust companies. A corporation chartered in a Canadian province is a private issuer that appears nowhere on that list, so the individual selling its shares must register. The government of Canada or any provincial authority is on the list, and so is a foreign government recognized by the United States. A savings institution supervised by this state appears there too, which is why the individual representing it is excluded.
- Which of the following persons are included in the definition of an agent under the Uniform Securities Act? I. An individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange-listed company II. An individual who, as part of the job description, represents the City of Chicago in selling its bonds to the public III. An individual who represents First Securities Brokers, Inc., whose sole activity consists of selling individual investors securities issued by the U.S. government IV. An individual who is employed by the Federal Reserve Board to sell Treasury bills to retail investors
- I and III
- I, II, and III
- II and IV
- I, III, and IV
Correct answer: I and III
An individual who represents a broker-dealer is an agent whether the security sold is exempt or not, so the person selling exchange-listed XYZ shares for First Securities Brokers and the person whose sole activity is selling United States government securities for that same firm are both agents — statements I and III. The other two represent issuers of exempt securities: selling the City of Chicago's own bonds is representing a municipal issuer, and an employee of the Federal Reserve Board selling Treasury bills is representing the federal government. Issuer representatives selling securities on the exempt list are outside the definition, so any grouping that includes statement II or statement IV is wrong.
- Under the Uniform Securities Act, an agent registered in one state may transact business in another state in which he is not registered with which of the following? I. An existing client visiting the other state for a 2-week period II. An existing client who moved to the other state 6 months ago III. An existing client who moved to the other state less than 30 days prior IV. An acquaintance from another state who requests that the agent execute transactions on his behalf
- I, III, and IV
- I and III
- I, II, and III
- II and IV
Correct answer: I and III
An agent may do business in a state where he is not registered with an existing client who is merely visiting, and with an existing client who moved there within the past 30 days, which makes statements I and III the pair that works. A two-week visit involves no change of legal residence, so nothing is triggered. The client who moved six months ago is far past the 30-day window, and the agent must be registered in that state to keep servicing the account. The acquaintance from another state was never an existing client, so there is nothing to carry over and executing transactions for him requires registration.
- If an individual acting on behalf of an issuer engages in the sale of securities issued by a savings institution organized and supervised under the laws of any state, which of the following statements is true?
- The individual is engaged in a prohibited transaction
- The individual must register as a state broker-dealer
- The individual is not required to register in the state
- The individual must have the consent of the state first
Correct answer: The individual is not required to register in the state
Securities issued by a savings institution organized and supervised under the laws of a state sit on the act's list of exempt securities, and someone who represents the issuer in selling securities on that list is excluded from the definition of agent. The individual is not required to register in the state. The sale is entirely lawful, so it is wrong to say the individual is engaged in a prohibited transaction. No approval is involved, so it is wrong to say the individual must have the consent of the state first. And selling on behalf of an issuer does not turn a person into a firm, so the claim that the individual must register as a state broker-dealer fails too.
- Which of the following must register as an agent?
- An employee of the Federal Reserve who sells Treasury bills
- An executive of a chartered bank who sells commercial paper
- A bank worker who sells insured certificates of deposit
- A person who sells commercial paper for a broker-dealer
Correct answer: A person who sells commercial paper for a broker-dealer
An individual who represents a broker-dealer registers as an agent even when the security is exempt, so a person who sells commercial paper for a broker-dealer is the one who must be registered. An executive of a chartered bank who sells commercial paper need not register, because a bank is excluded from the definition of broker-dealer and the paper is the bank's own exempt security. An employee of the Federal Reserve who sells Treasury bills represents the issuer of an exempt federal security and is outside the definition for that reason. A bank worker who sells insured certificates of deposit is not selling a security at all, so no agent registration can arise.
- A study of the Uniform Securities Act would reveal that not included in the definition of a security would be
- A whole life policy that pays a fixed death benefit
- A share of preferred stock that pays a set dividend
- A common share of a firm that mines silver and copper ore
- A debenture that a maker of hand tools sold to raise cash
Correct answer: A whole life policy that pays a fixed death benefit
The item that falls outside the definition is a whole life policy that pays a fixed death benefit. The Uniform Securities Act excludes nonvariable insurance products, because the insurer carries the investment risk and the benefit is guaranteed by contract rather than by market performance. A share of preferred stock is stock, and stock of every class is named in the definition. A common share of a mining firm is likewise stock, and the business the issuer happens to be in does not matter. A debenture is an evidence of indebtedness, which the act lists as a security.
- As defined in the Uniform Securities Act, which of the following is not a security?
- A certificate to subscribe for shares of a new company
- A block of stock bought back into a corporate treasury
- A bond on which a state has agreed to pay the interest owed
- A bar of gold bullion held in a vault as an inflation hedge
Correct answer: A bar of gold bullion held in a vault as an inflation hedge
A bar of gold bullion held in a vault as an inflation hedge is not a security. Precious metals are commodities held for their own value, and the act reaches the investment instrument rather than the metal itself. A certificate to subscribe for shares of a new company is a preorganization subscription, which the definition names outright. Stock bought back into a corporate treasury is still stock and does not lose its character when the issuer holds it. A bond backed by a state promise to pay the interest is a security; the state guarantee exempts it from registration but does not remove it from the definition.
- All of the following are correct statements when referring to a nonissuer transaction except
- It is carried out by parties other than the issuing firm
- It is settled without any cash going to the issuing firm
- It is barred from the floor of an organized exchange
- It is a trade that two investors settle between them
Correct answer: It is barred from the floor of an organized exchange
Every statement about a nonissuer transaction holds except that it is barred from the floor of an organized exchange. Nonissuer trades are executed on exchange floors constantly, and the act draws no line by venue; the test is whether the issuer benefits, not where the trade occurs. A nonissuer transaction is indeed carried out by parties other than the issuing firm, is settled without any cash going to the issuing firm, and is a trade that two investors settle between them, which is what makes it a secondary transaction.
- In the Howey decision, the U.S. Supreme Court held that a security must represent
- A loan of money to a small firm against payment of the principal at maturity
- An investment of money in a common enterprise for profit from the managerial efforts of others
- An outlay of money for property that its purchaser will personally oversee for a future profit
- A purchase of a durable asset whose holder expects to resell it for a profit
Correct answer: An investment of money in a common enterprise for profit from the managerial efforts of others
The Howey test defines a security as an investment of money in a common enterprise for profit from the managerial efforts of others. All four elements must be present, and the last one is what separates an investment contract from ordinary commerce. An outlay of money for property that its purchaser will personally oversee for a future profit fails that element, because the profit turns on the buyer's own work. A loan of money to a small firm against payment of the principal at maturity is a creditor arrangement whose return does not depend on a promoter's management. A purchase of a durable asset whose holder expects to resell it for a profit is the purchase of a thing, with no common enterprise and no manager at all.
- Which of the following are not classified as securities under the Uniform Securities Act?
- Futures contracts that call for the delivery of wheat
- Warrants that entitle the holder to buy listed shares
- Options that give the holder a claim on a silver futures contract
- Units in a limited partnership that drills for oil on leased land
Correct answer: Futures contracts that call for the delivery of wheat
Futures contracts that call for the delivery of wheat are not securities. A commodity futures contract is a contract for the commodity itself, and the act leaves it outside the definition. Warrants that entitle the holder to buy listed shares are named in the definition. Options that give the holder a claim on a silver futures contract are securities, because an option on a futures contract is treated differently from the futures contract itself. Units in a limited partnership that drills for oil on leased land are certificates of interest in a drilling program, which the act names as securities.
- As defined in the Uniform Securities Act, which of the following items is not a security?
- An interest in a partnership that feeds cattle for the market
- A bank receipt for the shares of a corporation located abroad
- A certificate that a voting trust issued to an owner
- A whole life policy that a listed insurer has issued
Correct answer: A whole life policy that a listed insurer has issued
A whole life policy that a listed insurer has issued is not a security. A traditional life insurance contract is excluded, and the fact that the insurance company's own shares trade publicly has no effect on how its policies are classified. An interest in a partnership that feeds cattle for the market is an investment contract, since the investor's return depends on the operator's management. A bank receipt for the shares of a corporation located abroad is a depositary receipt, which the act treats as a certificate of interest in a security. A certificate that a voting trust issued to an owner appears in the definition by name.
- A primary issue is
- A trade of shares that two investors make on their own
- A resale of shares that a pension fund bought at issue
- A sale of new securities by the issuer to investors
- An exchange trade in the shares of a listed company
Correct answer: A sale of new securities by the issuer to investors
A primary issue is a sale of new securities by the issuer to investors, so the proceeds move to the issuing company. A trade of shares that two investors make on their own is a secondary transaction, since the issuer receives nothing. A resale of shares that a pension fund bought at issue is also secondary, because the money goes to the fund rather than to the company. An exchange trade in the shares of a listed company is secondary as well; the venue does not make a transaction primary.
- Which of the following is not a security?
- Shares that a firm has bought back and now holds
- A condominium unit a family bought to live in as its home
- A note that a firm issued for ninety days to large buyers
- A unit in a partnership drilling for oil and gas
Correct answer: A condominium unit a family bought to live in as its home
A condominium unit a family bought to live in as its home is not a security. Real estate held as a residence is bought for its use, not for a return produced by someone else's efforts. Shares that a firm has bought back and now holds are treasury stock, and stock stays a security in the issuer's own hands. A note that a firm issued for ninety days to large buyers is commercial paper; short-term paper may be exempt from registration, but it remains a security. A unit in a partnership drilling for oil and gas is a certificate of interest in a drilling program, which the definition names.
- An interest in which of the following is a security under the Uniform Securities Act? I. Merchandising marketing scheme II. Multilevel distributorship arrangement III. Oil and gas drilling program IV. Cattle feeding program
- I, II, III, and IV
- I, II, and IV only
- I and II only
- I and IV only
Correct answer: I, II, III, and IV
All four are securities, so the answer takes in I, II, III, and IV. A merchandising marketing scheme and a multilevel distributorship arrangement are both investment contracts, because participants put up money and look to the promoter's efforts for their return. An oil and gas drilling program produces a certificate of interest in a mineral program, which the act names outright. A cattle feeding program is an interest in farm animals managed by an operator, and the act treats feeding and breeding programs alike. Any choice that leaves one of them out understates the reach of the definition.
- Which of the following is an example of a nonissuer transaction?
- A private placement arranged by the issuer itself
- An initial public offering of a small corporation
- A rights offering that lets current holders buy added shares
- A registered resale of shares that an institution is holding
Correct answer: A registered resale of shares that an institution is holding
A registered resale of shares that an institution is holding is a nonissuer transaction, because the selling institution keeps the proceeds and the issuer receives nothing. A private placement arranged by the issuer itself is an issuer transaction whatever the size of the buyer group. An initial public offering of a small corporation is the clearest issuer transaction of all, since the company sells its own new shares. A rights offering that lets current holders buy added shares is likewise an issuer transaction; the money paid on exercise goes to the company.
- Which of the following are defined as securities under the Uniform Securities Act? I. An investment in a managed pool of rental condominiums II. Unsecured debentures sold in a private placement only to accredited investors III. Bills, notes, and bonds issued by the US Treasury IV. A Roth IRA
- I and II only
- I and IV only
- I, II, and III only
- I, III, and IV only
Correct answer: I, II, and III only
Securities are found in I, II, and III. An investment in a managed pool of rental condominiums is an investment contract, because the rents are pooled and a manager produces the return. Unsecured debentures sold in a private placement are securities; the placement may be an exempt transaction, but the debentures themselves stay within the definition. Bills, notes and bonds issued by the Treasury are securities that are exempt from registration rather than excluded from the definition. A Roth IRA is only an account that holds securities, so it is not itself one.
- Under the Uniform Securities Act, all of the following are securities except
- An option on a foreign currency that an exchange has listed
- A written notice confirming a purchase by a customer
- A bank receipt for the shares of a company organized abroad
- An interest in a property trust holding office space
Correct answer: A written notice confirming a purchase by a customer
Everything listed is a security except a written notice confirming a purchase by a customer. A confirmation only records that a trade took place, and a record of a transaction is not itself an investment instrument. An option on a foreign currency that an exchange has listed is a security, because exchange-traded currency options are named in the act. A bank receipt for the shares of a company organized abroad is a depositary receipt and therefore a certificate of interest in a security. An interest in a property trust holding office space is a real estate investment trust interest, which is a security.
- Under the Uniform Securities Act, the definition of issuer includes
- A company that proposes to issue a security
- A market maker that keeps an orderly market
- A director who sells the shares of a public company
- A specialist who trades on the floor of an exchange
Correct answer: A company that proposes to issue a security
The definition of issuer reaches a company that proposes to issue a security, and it does so whether or not any shares are ever sold. A market maker that keeps an orderly market trades securities already outstanding and creates none. A director who sells the shares of a public company sells personally owned stock, so the sale is a nonissuer transaction. A specialist who trades on the floor of an exchange also deals only in outstanding securities. None of the three brings a new security into existence, which is what the term issuer requires.
- The United States Supreme Court ruled in the Howey decision that an instrument that represents the investment of money in a common enterprise with an expectation of profit solely through the managerial efforts of others is a security. In following the Howey decision, the Uniform Securities Act would consider which of the following a security?
- A futures contract on a lot of frozen orange juice
- A purchase of rare jewelry held for a later resale
- A purchase of a house in a rising market held for resale
- A purchase of options to buy one share of a listed stock
Correct answer: A purchase of options to buy one share of a listed stock
Applying the Howey standard, a purchase of options to buy one share of a listed stock is a security, since the option is an interest in a common enterprise whose value depends on the management of the underlying company. A purchase of a house in a rising market held for resale is the purchase of real property, and any gain comes from the market rather than from a promoter's efforts. A purchase of rare jewelry held for a later resale is the purchase of a collectible, with no common enterprise behind it. A futures contract on a lot of frozen orange juice is a commodity contract, which the act leaves outside the definition.
- As defined in the Uniform Securities Act, which of the following are issuers of securities? I. ABC Manufacturing Corporation borrows in the capital markets by selling bonds every few months. II. Dot.Com Inc., in an initial public offering, sells all its securities to the public within a few minutes after the shares go public. III. XYZ Corp., in an initial public offering, fails to sell any shares to the public because it is not an attractive investment. IV. YYY Corp., with 1 million shares outstanding, sells additional shares to the public in a primary offering.
- II and III only
- III and IV only
- I, II, III, and IV
- I, II, and IV only
Correct answer: I, II, III, and IV
Each of the four is an issuer, so the answer takes in I, II, III, and IV. A manufacturer that sells bonds every few months is raising debt capital and issues securities to do it. A company whose shares sell out within minutes of going public has plainly issued securities. A company that raises new equity through an additional primary offering issues securities as well. The company that failed to sell any shares is still an issuer, because the act reaches a person who proposes to issue a security, whether or not the offering succeeds.
- Under the Uniform Securities Act, which of the following are securities? I. Commodity option contract II. Treasury stock III. Keogh plan
- III only
- I and II only
- I, II, and III
- II and III only
Correct answer: I and II only
Securities are found in I and II. A commodity option contract is a security, even though a commodity futures contract is not; the act names commodity options while leaving futures contracts outside the definition. Treasury stock is stock that the issuer has reacquired, and it keeps its character as a security. A Keogh plan is a retirement arrangement that holds investments; the securities inside it are securities, but the plan is only the vehicle that owns them.
- As defined in the Uniform Securities Act, which of the following are securities? I. A variable annuity II. A subscription right to purchase common stock III. A condominium purchased solely as a place of residence IV. Certificate of interest or participation in an oil, gas, or mining partnership
- I, II, and IV only
- I, II, III, and IV
- I and III only
- II and IV only
Correct answer: I, II, and IV only
Securities are found in I, II, and IV. A variable annuity is a security because the contract owner carries the investment risk of the separate account. A subscription right to purchase common stock is a right, which the definition names. A certificate of interest or participation in an oil, gas, or mining partnership is named as well. A condominium purchased solely as a place of residence is not a security; it is real property bought for its use, with no pooled enterprise and no manager producing a return.
- Which of the following are defined as securities under the Uniform Securities Act? I. Real estate investment trust certificates II. Preorganization subscription agreements III. Shares of treasury stock IV. Voting-trust certificates issued by a corporation undergoing a reorganization
- II and III only
- III and IV only
- I, II, and IV only
- I, II, III, and IV
Correct answer: I, II, III, and IV
All four are securities, so the answer takes in I, II, III, and IV. Real estate investment trust certificates are interests in a pooled trust managed for the holders. Preorganization subscription agreements appear in the definition by name. Shares of treasury stock remain stock after the issuer reacquires them. Voting-trust certificates are named as well, and a reorganization does not change that. The short list of exclusions covers insurance contracts, fixed annuities, retirement plans, commodity futures, collectibles and trade confirmations, and nothing here falls on it.
- Under the Uniform Securities Act, which of the following are securities? I. A gold futures contract II. A put option on a gold futures contract III. A warrant to purchase shares of a common stock that trades in the OTC market. IV. Confirmation of a customer trade in listed common stock
- I, II, III, and IV
- I, II, and IV only
- II and III only
- III and IV only
Correct answer: II and III only
Securities are found in II and III. A put option on a gold futures contract is a security, because an option written on a futures contract is treated separately from the futures contract itself. A warrant to purchase shares of a common stock is named in the definition, and the market where the stock trades makes no difference. A gold futures contract is a commodity contract and falls outside the definition. Confirmation of a customer trade is only a report that a trade occurred, so it is not a security either.
- Which of the following is not defined as a security under the Uniform Securities Act?
- Common shares issued by a chartered bank
- A fixed annuity contract issued by a life insurer
- A bond floated by the federal government
- A bond issued by the government of another nation
Correct answer: A fixed annuity contract issued by a life insurer
A fixed annuity contract issued by a life insurer is not a security. The insurer guarantees the payout and bears the investment risk, so the contract is insurance rather than an investment instrument. Common shares issued by a chartered bank are stock, and bank stock is a security that happens to be exempt from registration. A bond floated by the federal government is a security, exempt from registration but squarely inside the definition. A bond issued by the government of another nation is a security on the same footing.
- Which of the following is not included in the definition of a security in the Uniform Securities Act (USA)?
- A whole life policy with a level death benefit
- A certificate to buy stock in an unformed firm
- A variable annuity that pays out from a pool of stocks
- A note that a company put out with an eight-month term
Correct answer: A whole life policy with a level death benefit
A whole life policy with a level death benefit is not included in the definition. Nonvariable life insurance is excluded, while its variable counterpart is not. A variable annuity that pays out from a pool of stocks is a security, because the contract owner carries the separate account's investment risk. A certificate to buy stock in an unformed firm is a preorganization subscription, which the act names outright. A note that a company put out with an eight-month term is commercial paper, and short-term paper is an exempt security rather than a non-security.
- Which of the following are primary transactions? I. John inherited securities of the XYZ Corporation from his father who, as a founder of the company, received the shares directly from the company as a result of stock options. II. John sold the securities he had inherited from his father to his neighbor Peter at the market price without charging a commission. III. John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. IV. John purchased shares in XYZ Corporation in a third market transaction.
- IV only
- I, II, and IV only
- I, II, III, and IV
- III only
Correct answer: III only
Only III is a primary transaction. The founder bought his shares directly from the corporation, so the corporation received the money, which is what makes a transaction primary. The inheritance of shares moves ownership without any payment to the company. The sale to a neighbor at the market price puts the money in the seller's pocket rather than the company's. A purchase in the third market is a trade in outstanding shares between investors. Each of those is a nonissuer transaction.
- Under the Uniform Securities Act, the term security includes I. single-payment insurance contract guaranteed by a highly rated insurance company. II. single-payment deferred variable annuity contract issued by an insurance company licensed to do business in this state. III. a valuable collection of coins and currency conservatively valued for estate purposes. IV. a client's $100,000 mortgage on his primary residence.
- I, II, III, and IV
- I, II, and IV only
- II only
- IV only
Correct answer: II only
The term security takes in II only. A single-payment deferred variable annuity is a security, because the contract owner bears the investment risk of the separate account that funds the benefit. A single-payment insurance contract guaranteed by an insurance company is a nonvariable contract and is excluded, however highly rated the insurer. A collection of coins and currency is a collectible held for its own value. A mortgage on a personal residence is a debt secured by a home, not an investment instrument, and neither one is a security.
- Under the Uniform Securities Act, which of the following is not defined as a security?
- An exchange option on a listed common stock
- An annuity contract with a payout the insurer fixes
- A listed option on a wheat futures contract
- A unit in a limited partnership holding real estate
Correct answer: An annuity contract with a payout the insurer fixes
An annuity contract with a payout the insurer fixes is not a security. The insurer guarantees the payments and carries the investment risk, which is what keeps a fixed annuity outside the definition. An exchange option on a listed common stock is a security, as options are named in the act. A listed option on a wheat futures contract is a security as well, because an option written on a futures contract is treated differently from the futures contract itself. A unit in a limited partnership holding real estate is a certificate of interest in a partnership, which the definition names.
- A securities transaction where there is no benefit to the issuer is called
- An exempt transaction, in which state registration is not required
- A nonissuer transaction, in which the selling owner keeps the proceeds
- A primary transaction, in which the issuing company raises new capital
- A solicited transaction, in which an agent recommends the purchase
Correct answer: A nonissuer transaction, in which the selling owner keeps the proceeds
A nonissuer transaction is one whose proceeds go to the selling owner rather than to the company that created the security, so the issuer gains nothing from it. A primary transaction is the opposite arrangement, because the issuing company is itself the seller and takes in the underwriting money. Whether an order was solicited describes how the agent obtained it and says nothing about who receives the sale proceeds. An exempt transaction is one relieved of state registration, and issuer and nonissuer trades alike can qualify for that relief.
- Under the Howey test, a Supreme Court case that established the standards for defining an investment contract, which of the following is a characteristic of a security? I. Entails an investment of money II. Carries expectation of profits III. Carries expectation, but no guarantee, of quarterly distribution of dividends or interest IV. Entails investor reliance on the efforts of others
- II, III, and IV
- I, II, and IV
- I, II, and III
- I, III, and IV
Correct answer: I, II, and IV
The Howey decision identifies a security by four marks: an investment of money, in a common enterprise, with an expectation of profits, derived from the efforts of others. The investment of money, the expectation of profits, and the reliance on the efforts of others all sit inside that test. An expectation of quarterly dividend or interest distributions does not, guaranteed or otherwise, so any grouping that carries that statement fails. A great many securities pay no periodic distribution at all and are securities all the same.
- Under the Uniform Securities Act, which of the following is a security?
- A rare oil painting created by the Spanish artist Picasso
- A checking account with overdraft credit at a Denver bank
- A bond issued by the national government of France
- A cashier's check payable to a local Chicago store
Correct answer: A bond issued by the national government of France
Any bond is a security under the Uniform Securities Act, and the identity of the issuer does not change that, so the debt obligation of a foreign sovereign qualifies. A bank deposit account is a banking product, and an overdraft line attached to it is a loan rather than an investment. A painting is tangible personal property with no issuer standing behind it and no common enterprise, so collectibles fall outside the definition. A cashier's check is a means of payment drawn on bank funds, and checks and currency are expressly not securities.
- The Uniform Securities Act defines all of the following as securities except
- Variable life insurance with a cash value and a stock fund
- A voting share of a recently issued common stock
- Term life insurance with a level premium and no cash value
- An unlisted option on a big bank's common shares
Correct answer: Term life insurance with a level premium and no cash value
Term life insurance pays a stated death benefit for a level premium and builds no cash value, so its owner has nothing to gain or lose on as an investment and the act treats it as a pure insurance contract. Variable life insurance is different, because its cash value rises and falls with a separate account and the policyowner carries that investment risk, which brings it inside the definition. An option is a security whatever it is written on and whether or not it is listed on an exchange. Common stock is the plainest example of a security there is.
- Joan owns and operates a jewelry store, and she has contracted to purchase 5,000 Swiss watches, paying the watch manufacturer in Swiss francs three months from the date of contract. To protect (hedge) her currency risk, she purchases call options on Swiss francs. Which of the following statements best describes her transaction in the Swiss franc calls in light of the Uniform Securities Act?
- A prohibited transaction, because the act bars trades in currency
- Not a securities transaction, because those calls hedged a commercial risk
- Not a securities transaction, because currency options sit outside the act
- A securities transaction, because a currency option is a security
Correct answer: A securities transaction, because a currency option is a security
The Uniform Securities Act counts an option as a security no matter what underlies it, so a call on Swiss francs is a security and buying one is a securities transaction. Currency options therefore sit inside the act rather than outside it. Joan's motive does not change the analysis, because hedging a commercial exposure is still the purchase of a security. The act places no ban on trading foreign currency options either; had she bought the francs themselves, the currency would not have been a security, but she bought options on it instead.
- If a broker-dealer purchases 100,000 shares of common stock from an individual investor, this is
- A private placement, because a small investor supplied all the shares
- A primary transaction, because the shares were originally created by that issuer
- A nonissuer transaction, because the corporation receives none of the sale money
- A prohibited transaction, because a dealer may not buy from customers
Correct answer: A nonissuer transaction, because the corporation receives none of the sale money
The seller is an individual investor, so the money goes to that investor and the company whose shares changed hands receives nothing, which is exactly what makes this a nonissuer transaction. A primary transaction requires the issuer to be the seller, and the fact that the issuer originally created the shares does not make a later resale primary. Broker-dealers buy stock from customers as a matter of routine and nothing in the act forbids it. A private placement is an offering of unregistered securities to a limited group of buyers, not a purchase from one seller.
- All of the following are defined as securities except
- A variable annuity funded by a separate account
- A voting trust certificate on listed shares
- A commodity futures contract on wheat grain
- An exchange-traded option on a wide stock index
Correct answer: A commodity futures contract on wheat grain
Commodity futures contracts, and the physical commodities behind them, are left out of the definition of a security in the Uniform Securities Act, so the wheat contract is the item here that does not qualify. An option is a security regardless of the underlying asset, which covers an index option traded on an exchange. A variable annuity puts the holder's money into a separate account and shifts investment risk onto the holder, so it is a security. Voting trust certificates are named in the statutory definition itself.
- Which of the following financial instruments meet the definition of a security under the Uniform Securities Act? I. Collateral trust certificates II. Investment contracts, including interests in oil and gas drilling partnerships III. Options listed on the Chicago Board of Options Exchange IV. Foreign currency options contracts traded on the Philadelphia Stock Exchange
- I, II, III, and IV
- I, III, and IV
- I, II, and III
- II, III, and IV
Correct answer: I, II, III, and IV
Collateral trust certificates and investment contracts, including fractional interests in oil and gas drilling programs, are named in the definition of a security in the Uniform Securities Act. Options are securities whatever asset they are written on, so listed equity options belong in the definition as well. Foreign currency itself is not a security, but an option on a foreign currency is, so the currency option contracts count too and no narrower grouping of these instruments can be right.
- As defined in the Uniform Securities act, which of the following is not an issuer?
- A company whose shares already trade on a national exchange
- A corporation that has proposed but not yet released shares
- A municipality that issues bonds for a wastewater project
- A broker-dealer that trades stock for its client accounts
Correct answer: A broker-dealer that trades stock for its client accounts
An issuer is a person who issues or proposes to issue a security of its own. A broker-dealer executing trades for client accounts is handling securities that other entities created, so in that role it is not an issuer, although it would become one if it offered its own shares to the public. A corporation that has only proposed an offering is an issuer under the act, because proposing to issue is enough. A company already trading on an exchange issued those shares and remains their issuer, and a municipality selling bonds to finance a public works project is the issuer of those bonds.
- Which of the following is defined as a security under the Uniform Securities Act?
- An investment contract in a common enterprise run by others
- A commodity futures contract on the spring soybean crop
- A modified endowment policy issued by an insurance firm
- An annuity contract with a certain monthly payment for life
Correct answer: An investment contract in a common enterprise run by others
The Howey decision made the investment contract the general test of what a security is, and the term serves almost as a synonym for security under the Uniform Securities Act. A fixed annuity promises a set dollar payment and leaves the investment risk with the insurer, which keeps it outside the definition. A modified endowment policy is a life insurance contract that lost favorable tax treatment, but it remains insurance. Commodity futures contracts are excluded from the definition along with the commodities themselves.
- Under the Uniform Securities Act, a registration statement for a securities issue may be filed by any of the following except
- Any person for whose benefit those securities will be sold
- The issuer whose own securities are being offered for sale
- A broker-dealer which underwrites the whole offering
- The state Administrator reviewing the whole offering
Correct answer: The state Administrator reviewing the whole offering
The Uniform Securities Act lets a registration statement be filed by the issuer, by any other person on whose behalf the offering is to be made, or by a registered broker-dealer. The Administrator is the official who receives and passes on those filings, so the Administrator cannot be the filer as well. An issuer registering its own securities is the most common filer of all. A selling shareholder for whose benefit the offering is made is expressly permitted to file, and so is the broker-dealer underwriting the issue.
- In order for a security to lawfully be sold or offered under the Uniform Securities Act, it must meet at least one of the following requirements except
- That the Securities and Exchange Commission has registered it
- That the act itself exempts this particular security
- That this state Administrator has qualified and registered it
- That the purchase falls within an exempt transaction
Correct answer: That the Securities and Exchange Commission has registered it
The act makes it unlawful to offer or sell a security in a state unless the security is registered under the act, is a federal covered security, is an exempt security, or is sold in an exempt transaction. Federal registration is not one of those alternatives, and registration by qualification exists precisely so that an issue with no federal filing can still be sold within a state. Qualification with the Administrator, an exemption attaching to the security itself, and an exempt transaction each satisfy the requirement on their own.
- Lucy, an agent of XYZ Securities, works out of an office in Ohio. She calls her client Clark, an individual investor and a resident of Kansas, and recommends that Clark purchase 500 shares of Perfect Pasta, Inc. common stock. Lucy read a report that Perfect Pasta plans to introduce a low carbohydrate pasta into the marketplace. Perfect Pasta, Inc., common stock is neither exchange traded nor traded on Nasdaq. At the time Lucy makes the recommendation, the stock is not registered with the Securities Departments of Ohio or Kansas. Which of the following statements best reflects this transaction?
- A violation, because she solicited an unregistered nonexempt stock
- No violation, because Kansas law alone governs this recommendation
- No violation, because Ohio never compelled this particular stock to register
- A violation, because this issuer never registered these securities in Kansas
Correct answer: A violation, because she solicited an unregistered nonexempt stock
Soliciting an order in a security that is neither registered nor exempt is a prohibited practice, and the agent commits it the moment she makes the recommendation. The registration failure belongs to the issuer rather than to the agent, so pinning the violation on a missing state filing misplaces the duty. The stock is nonexempt and unregistered, so no state's requirement is excused. The act reaches an offer made from a state as well as one received in a state, which is why the call is covered where it originated as surely as where it was answered.
- All of the following statements are consistent with the Uniform Securities Act except
- A security may register by coordination if a federal statement is filed
- A covered investment company may face a state-level notice filing
- A federal covered security may escape the consent to service of process
- Any security at all may be registered through state qualification
Correct answer: A federal covered security may escape the consent to service of process
A consent to service of process accompanies every securities filing made with the Administrator, notice filings for federal covered securities included, because it is what gives the state a way to serve legal process on an out-of-state filer. A claim that covered securities escape that consent is therefore the statement out of step with the act. Coordination is available exactly when a registration statement has been filed under the Securities Act of 1933 for the same offering. Qualification is the catch-all method open to any security, and state Administrators may require federal covered investment companies to make notice filings.
- Under the Uniform Securities Act, registration by coordination becomes effective
- Ten business days after that state registration is filed
- Immediately, as soon as the Administrator gets the registration file
- Thirty calendar days after that registration is filed, no exceptions
- When the federal registration is at last ruled effective
Correct answer: When the federal registration is at last ruled effective
Coordination ties the state effective date to the federal one, so the state registration takes effect at the same moment the federal registration statement is declared effective. The state filing must first have been on file with the Administrator for a set period, in most states at least ten days, but that waiting period is a condition of eligibility rather than the effective date itself. No thirty-day clock runs from the filing, and nothing takes effect on the day the registration file reaches the Administrator.
- Registration by qualification is effective
- When the linked federal registration first takes effect
- No sooner than ten business days following registration
- On the twentieth day after the state filing is first made
- On the date the state Administrator sets in its own order
Correct answer: On the date the state Administrator sets in its own order
Qualification is the one registration method whose effective date the Administrator fixes, because the Administrator is reviewing the offering on its merits and decides when that review is finished. No automatic twenty-day clock carries a qualification filing to effectiveness, and no ten-day waiting rule governs it either. Tying the state date to a federal effective date describes coordination instead, and an issue registering by qualification may have no federal registration statement to link to at all.
- An open-end investment company registered under the Investment Company Act of 1940 would most likely use the process known as
- Qualification, a full state merit review process
- Notice filing, a document and payment submission
- Coordination, a joint state and federal registration filing
- Consolidation, a combined filing that covers several states
Correct answer: Notice filing, a document and payment submission
A mutual fund registered under the Investment Company Act of 1940 is a federal covered security, and the most a state may ask of one is a notice filing made up of documents, a consent to service of process, and a fee. States are preempted from putting such a fund through a merit review, which is what qualification involves. Coordination is for an issue being registered with the SEC and with the state at the same time, and a fund already federally registered is not doing that. Consolidation is not a registration method the act provides at all.
- An agent solicits orders for a primary offering of a nonexempt security in his home state. Within days, he learns that the underwriting is not registered in that state. Relieved that no customer orders were placed, he ceases soliciting orders in this security. In this situation, the agent has acted
- Lawfully, because not a single customer transaction was completed
- Unlawfully, because soliciting an unregistered nonexempt issue is itself barred
- Lawfully, because he stopped soliciting immediately after learning that problem
- Unlawfully, because he never marked those order tickets solicited
Correct answer: Unlawfully, because soliciting an unregistered nonexempt issue is itself barred
The prohibition attaches to the act of soliciting, so the violation was complete the moment the agent asked customers to buy a nonexempt security that had never been registered in the state. Stopping once he learned the facts was the right response, but it does not undo conduct that had already broken the rule. Whether any order was executed goes to how much harm followed, not to whether the solicitation was lawful. How the tickets were marked has nothing to do with the registration status of the issue.
- If Perfect Pasta, Inc., a privately held company in State I that owns four restaurants wants to issue shares to public investors who are residents of State I, the company
- Must use coordination, filing with the federal agency at the same time
- Is exempt from registration, since every buyer lives in a single state
- Must use qualification, the state's own merit review path
- May use notice filing, as federally covered securities do
Correct answer: Must use qualification, the state's own merit review path
A private company selling its own shares only to residents of its own state has no federal registration statement to coordinate with, so qualification, the method that stands on its own at the state level, is the route it must take. Coordination requires a simultaneous filing under the Securities Act of 1933, which an intrastate offering does not make. Notice filing is reserved for federal covered securities and this company is not one. Selling entirely inside a single state may spare the company a federal registration, but it does not excuse registering with its own state.
- Under the registration provisions of the Uniform Securities Act, it is unlawful for an agent in the state to sell XYZ securities unless
- The purchaser has signed a waiver of the act's provisions
- The agent has submitted his consent to service of process
- XYZ is a nonexempt security, not yet registered by the Administrator
- XYZ is a federal covered security, so no state registration attaches
Correct answer: XYZ is a federal covered security, so no state registration attaches
A federal covered security is preempted from state registration, so an agent may lawfully sell it in the state even though it is not registered there. A security that is nonexempt and still unregistered is precisely what an agent may not sell. Filing a consent to service of process is one administrative step among several and puts nobody in a position to sell on its own. Any attempt to have a customer waive compliance with the act is void, so a signed waiver protects the agent from nothing.
- Under the Uniform Securities Act, if no stop order is pending, a registration under coordination will become effective
- Once the underwriters certify that offering price is fair
- The day that federal registration is declared effective
- When the Administrator signs an order making it effective
- Two full business days after that completed application
Correct answer: The day that federal registration is declared effective
Coordination is built so that the state and federal registrations take effect together, and with no stop order pending the state registration becomes effective automatically at the moment the federal registration statement is declared effective by the SEC. The Administrator signs nothing to bring that about, which is what separates coordination from qualification. No two-day clock runs from the state filing, and the fairness of the underwriting terms is reviewed by a self-regulatory body rather than as a condition of a state effective date.
- Securities of a new company's initial public offering have been SEC registered, and the registration statement is effective. The securities were not registered in State X before the effective date, and the Administrator has determined that an offering of the securities in State X is not considered to be in connection with the same offering. A broker-dealer in State X wishes to publicly offer the securities in that state. These securities must be registered with the Administrator of State X in which of the following ways?
- By qualification, the route left when coordination is unavailable
- By allocation, the path for multistate share offerings
- By coordination, since a federal registration statement was filed
- By notice filing, the procedure for covered securities
Correct answer: By qualification, the route left when coordination is unavailable
Coordination is available only for an offering that is being registered with the state and with the SEC as one and the same offering. Once the Administrator has determined that the sales proposed in the state are not part of that same offering, coordination is closed off and qualification is what remains. Notice filing belongs to federal covered securities, and nothing in the facts shows this issue to be one. There is no state registration method called allocation.
- Under the Uniform Securities Act, which of the following is true regarding the registration of securities?
- Coordination takes effect on whatever day the Administrator later sets
- A prospectus may reach the purchaser only after settlement
- An effective registration statement proves that its contents are exact
- Coordination is open only with a matched federal statement
Correct answer: Coordination is open only with a matched federal statement
Registration by coordination exists to synchronize a state registration with a federal one, so it is available only where a registration statement has been filed under the Securities Act of 1933 for that same offering. That same linkage is why coordination becomes effective when the federal registration does, rather than on a day the Administrator picks. The act forbids any suggestion that an effective registration means the Administrator has passed on the accuracy of the information filed. A prospectus must be delivered at or before delivery of the security, never afterward.
- Which of the following securities is most likely to register by qualification under the Uniform Securities Act?
- A stock offering by a private firm sold only inside its home state
- A bond offering by a listed issuer sold across fifteen states
- A stock offering by a public issuer sold across thirty states
- A bond offering by a national bank sold only inside its home state
Correct answer: A stock offering by a private firm sold only inside its home state
Qualification is the registration method used when there is no federal registration statement to coordinate with, and that is the ordinary situation for a company raising money entirely inside one state. Offerings spread across many states are registered with the SEC as well, so those issues are registered by coordination rather than by qualification. A national bank's securities are exempt securities under the act, so a bank offering would not be registered by any method at all, whatever its geographic reach.
- If required by the Administrator, a prospectus for securities registered by qualification must be given to each offeree
- at the time the registration statement is being filed
- before the sale of the security is completed
- whenever an offeree asks the agent for the prospectus
- after the customer has paid for the security
Correct answer: before the sale of the security is completed
The Uniform Securities Act lets the Administrator require, as a condition of registration by qualification, that a prospectus reach every offeree before the sale of the security is completed. Delivery is tied to the transaction, so it has to happen while the buyer can still act on what the document says. Nothing has been printed at the time the registration statement is being filed, so no prospectus exists to deliver at that point. Delivery is a condition the Administrator imposes on the offering as a whole, not something owed only whenever an offeree asks the agent for the prospectus; the duty runs to every offeree whether or not anyone asks. And a prospectus handed over after the customer has paid for the security arrives once the investment decision has already been made, which is the outcome the requirement exists to prevent.
- When a security registration statement filed under the Uniform Securities Act with the state Administrator becomes effective, this means
- the Administrator has passed on the accuracy of a filing
- the Administrator has found the price of the shares fair
- the securities described in it can now be sold in this state
- the issuer is now free to sell the securities in every state
Correct answer: the securities described in it can now be sold in this state
Effectiveness is a statement of legal status and nothing more: the securities described in it can now be sold in this state, as a new issue or in a secondary transaction. It does not mean the Administrator has passed on the accuracy of a filing, and the act makes it unlawful to tell a customer that effectiveness carries any such assurance. Neither has the Administrator found the price of the shares fair, because no state official passes on the merits or the pricing of an offering. And effectiveness is granted state by state, so it does not leave the issuer free to sell the securities in every state; each state's requirement stands on its own.
- The state Administrator may, by rule or order, require issuers of federal covered securities to file records with the state that are part of a registration statement filed with the SEC. This procedure is called
- Coordination, which links state to federal filings
- Qualification, which the state itself is reviewing
- Notification, which precedes any sale made in that state
- Notice filing, which sends federal records to that state
Correct answer: Notice filing, which sends federal records to that state
Federal covered securities do not register with the states at all, but the Administrator may still require the issuer to file records that were part of the federal registration statement, together with a fee and a consent to service of process. That procedure is notice filing, which sends federal records to that state. Coordination, which links state to federal filings, is a genuine state registration timed to a federal one, and a covered security has no state registration to coordinate. Qualification, which the state itself is reviewing, is the full state review used where there is no federal registration, so it cannot describe a covered issuer either. Notification, which precedes any sale made in that state, is a registration method for seasoned issuers, not a records filing.
- Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be
- either registered in the state or exempt under the state statute
- registered at the federal level or exempt from the federal rules
- registered already in one other state before this offer
- exempt from registration in every state except this one
Correct answer: either registered in the state or exempt under the state statute
Before a security may be issued in a state it must be either registered in the state or exempt under the state statute, with the remaining path being a sale made in a transaction the act exempts. Being registered at the federal level or exempt from the federal rules settles nothing here, because federal status and state status are separate questions and a security can satisfy the federal law and still owe a state filing. Having been registered already in one other state before this offer buys nothing either, since each state's registration stands alone. And a security that is exempt from registration in every state except this one is precisely the security that still has to be registered here.
- Which of the following statements regarding state registration of securities is true?
- Notification becomes effective ten days after it is first filed.
- Coordination becomes effective when the federal filing does.
- Qualification becomes effective thirty days after it is sent in.
- Notice filing becomes effective when the Administrator acts.
Correct answer: Coordination becomes effective when the federal filing does.
Coordination exists to line a state registration up with a Securities Act of 1933 registration of the same security. Once the Administrator holds the required material and no stop order is pending, coordination becomes effective when the federal filing does, so the two take effect at the same moment. Notification does not run on a ten-day clock measured from the state filing; no method in the act takes effect that way. Qualification does not ripen thirty days after it is sent in either, because a qualification registration becomes effective when the Administrator so orders. And notice filing is not made effective by an act of the Administrator, since there is no state registration for the Administrator to declare effective.
- Which of the following statements are true? I. It is unlawful for anyone to conduct business as a broker-dealer in a state unless also registered as an agent. II. A registration statement may be filed by an issuer itself, a broker-dealer, or any other person on whose behalf the offering is to be made. III. Registration of an agent is not effective when the agent is not associated with a broker-dealer registered under the act. IV. An agent's registration is automatically renewed one year after approval, provided no violations occurred during the year.
- I and II
- I and IV
- II and III
- III and IV
Correct answer: II and III
A registration statement may be filed by the issuer itself, by a broker-dealer, or by any other person on whose behalf the offering is to be made, and an agent's registration is not effective during any period when the agent is not associated with a broker-dealer registered under the act. That makes II and III the true pair. Statement I is false: a firm doing business as a broker-dealer registers as a broker-dealer, and a broker-dealer is not an agent, so no agent registration is required of it. Statement IV is false as well: a registration is not renewed automatically by a clean year, it expires and must be renewed by filing and paying again. Any pairing that carries I or IV fails on that statement alone.
- Broker-dealers are prohibited from
- Maintaining a market in numerous unlisted securities
- Acting as principal in an underwriting that they distribute
- Underwriting an offering through a selling syndicate
- Soliciting orders in a nonexempt stock that is unregistered
Correct answer: Soliciting orders in a nonexempt stock that is unregistered
A nonexempt security must be registered before it is offered or sold in the state, so soliciting orders in a nonexempt stock that is unregistered is the conduct the act forbids. Maintaining a market in numerous unlisted securities is ordinary dealer business, and nothing in the act limits how many securities a firm may make a market in. Acting as principal in an underwriting that they distribute is permitted, because a broker-dealer may take either side of a corporate underwriting, as principal or as agent. Underwriting an offering through a selling syndicate is routine distribution practice and is not restricted by the act.
- Which of the following statements best describes the effect of the NSMIA of 1996 on securities regulation?
- It preempts state registration for federal covered securities
- It expands the state Administrator's power over registrations
- It requires each new issue to be cleared at both levels
- It creates a new route for issues sold inside one state
Correct answer: It preempts state registration for federal covered securities
The National Securities Markets Improvement Act of 1996 redrew the line between federal and state authority: it preempts state registration for federal covered securities, leaving the states a notice filing, a fee and their antifraud powers. Saying it expands the state Administrator's power over registrations reverses the result, since the act cut that power back rather than enlarging it. Saying it requires each new issue to be cleared at both levels describes the dual system the act was written to end. And it creates a new route for issues sold inside one state is wrong because a single-state offering already had its route, qualification, which the act neither created nor changed.
- An issuer of federal covered securities, whose registration is effective under the Securities Act of 1933, would use which of the following procedures to permit sales of its securities in a specific state?
- Registering that issue by coordination in the state
- Making a notice filing with the Administrator for that state
- Registering the issue by qualification in the state
- Asking for an exemption from the Administrator of that state
Correct answer: Making a notice filing with the Administrator for that state
An issuer whose registration is effective under the Securities Act of 1933 holds a federal covered security, and a state may not require it to register. Clearance to sell in a particular state comes from making a notice filing with the Administrator for that state, along with the fee and the consent to service of process the Administrator asks for. Registering that issue by coordination in the state is unavailable, because coordination is itself a state registration and a covered security is not registered by the state. The same objection defeats registering the issue by qualification in the state, which is the full state review reserved for issues carrying no federal registration. Asking for an exemption from the Administrator of that state is beside the point, since the preemption comes from the federal statute and needs no state grant.
- When an issue is registered by coordination, it is also registered under the provisions of
- The Securities Exchange Act of 1934, covering secondary trading
- The Investment Company Act of 1940, covering managed portfolios
- The Securities Act of 1933, covering primary offerings
- The Investment Advisers Act of 1940, covering advisers
Correct answer: The Securities Act of 1933, covering primary offerings
Registration by coordination pairs a state registration with the federal registration of the same new issue, and new issues are registered federally under the Securities Act of 1933, covering primary offerings. The Securities Exchange Act of 1934, covering secondary trading, governs exchanges, broker-dealers and the trading markets, not the distribution being registered. The Investment Company Act of 1940, covering managed portfolios, governs how funds are organized and run. The Investment Advisers Act of 1940, covering advisers, registers those who are paid to give advice. A coordinated state registration is not coordinated with any of those three.
- Under the Uniform Securities Act, it is unlawful to sell
- A federal covered security that is not registered in that state
- A security registered under this act but not in adjacent states
- An unregistered note issued by a national commercial bank
- A nonexempt unregistered bond issued by a foreign company
Correct answer: A nonexempt unregistered bond issued by a foreign company
A nonexempt security has to be registered in the state before it may be sold there unless the transaction itself is exempt, and nothing in the question points to an exempt transaction, so a nonexempt unregistered bond issued by a foreign company cannot lawfully be sold. Where the issuer is incorporated makes no difference; what matters is the status of the security. A federal covered security that is not registered in that state may be sold freely, because the state is barred from requiring its registration. A security registered under this act but not in adjacent states may be sold in the state where it is registered, since registration elsewhere is not a condition of selling here. And an unregistered note issued by a national commercial bank is an exempt security, so no registration was ever owed.
- Which of the following statements regarding registration provisions is not true?
- The Administrator may not require an escrow of the offering proceeds.
- The Administrator may not set financial standards on a covered issue.
- The Administrator may permit omission of certain filing details.
- The Administrator may require subscriptions on a specified form.
Correct answer: The Administrator may not require an escrow of the offering proceeds.
This is the statement that is not true. The act expressly allows the Administrator, as a condition of registration by qualification or coordination, to require that the security be placed in escrow and that the proceeds be impounded until the issuer receives a specified amount, so the assertion that the Administrator may not require an escrow of the offering proceeds states the opposite of the rule. The other three describe real powers and real limits. The Administrator may not set financial standards on a covered issue, because that authority was taken away for federal covered securities. The Administrator may permit omission of certain filing details from a registration statement. And the Administrator may require subscriptions on a specified form, with a signed copy filed with the state.
- A security has been registered under qualification. Which of the following statements are correct? I. The registration is valid for one year from the effective date. II. The registration is valid for one year from the effective date, unless the underwriter or issuer still has some unsold shares. III. The registration is valid until the next December 31. IV. The registration statement may be amended to increase the number of shares in the offering as long as the public offering price and the underwriter's compensation are not changed.
- II and III
- II and IV
- I and III
- III and IV
Correct answer: II and IV
A registration under qualification runs for one year from its effective date, but it continues past that year while the issuer or an underwriter still holds shares from the offering that have not been sold. That is why II is right and I, which states the one-year rule with no exception, is not. The registration may also be amended to add shares to the offering so long as the public offering price and the underwriter's compensation are unchanged, which makes IV right, so the true pairing is II and IV. III is false: the December 31 expiration belongs to the registrations of broker-dealers, agents and investment advisers, not to the registration of a security. Any pairing that carries III fails on that statement.
- Securities of a nonexempt corporate issuer that are not registered with the SEC may only be registered with the Administrator in which of the following ways?
- Registration by federal coordination
- Registration by summary notification
- Registration by qualification
- Registration by certification
Correct answer: Registration by qualification
With no federal registration on file, the only route open is the state's own full review, registration by qualification, in which the issuer files complete disclosure with the Administrator and the registration becomes effective when the Administrator so orders. Registration by federal coordination cannot be used, because coordination needs a federal registration to run alongside and there is none here. Registration by summary notification and registration by certification are not procedures the act provides at all, so neither is available to any issuer.
- The Administrator may do all of the following with respect to federal covered securities except
- Collect a filing fee from an issuer of those securities
- Bring an action for fraud that occurs within that state
- Require a written consent to service of process
- Require the issuer to meet a financial standard
Correct answer: Require the issuer to meet a financial standard
The 1996 amendments left the states a short list of things they may still do about a federal covered security and took the rest away. What an Administrator may not do is require the issuer to meet a financial standard, because net worth, capitalisation and similar merit conditions are for the federal regulator alone once a security is covered. The other three remain: the Administrator may collect a filing fee from an issuer of those securities, may bring an action for fraud that occurs within that state because antifraud authority was expressly preserved, and may require a written consent to service of process as part of the notice filing.
- If an issuer of a nonexempt security wants to register simultaneously with the state and the SEC, which method would be used?
- Coordination, since the two filings clear jointly
- Notification, since the state must approve before any sale
- Qualification, since the state reviews it closely
- Notice filing, since the whole offering is federal covered
Correct answer: Coordination, since the two filings clear jointly
An issuer of a nonexempt security that wants its state and federal registrations to take effect at the same moment uses coordination, since the two filings clear jointly once the Administrator holds the required documents. Notification, since the state must approve before any sale, is not that method: it was a route for seasoned issuers and does not tie a state registration to a federal effective date. Qualification, since the state reviews it closely, is the stand-alone state review used where there is no federal filing, so nothing about it happens simultaneously. Notice filing, since the whole offering is federal covered, does not fit either, because this issue is nonexempt and is being registered rather than exempted from state registration.
- Which of the following practices is considered unlawful under the Uniform Securities Act?
- Taking indications of interest in an issue still in registration
- Soliciting orders in a nonexempt bond without registration
- Keeping the firm's required books and records in electronic form
- Accepting an unsolicited order from an individual investor
Correct answer: Soliciting orders in a nonexempt bond without registration
Unless the transaction is exempt, an agent may not ask a retail client to buy a security that the act requires to be registered and that has not been registered, so soliciting orders in a nonexempt bond without registration is the unlawful practice. Taking indications of interest in an issue still in registration is permitted, because an indication of interest is not an order and no sale may be made until the registration is effective. Keeping the firm's required books and records in electronic form is allowed as long as the records are preserved and can be produced. Accepting an unsolicited order from an individual investor is an exempt transaction, since the customer rather than the agent began it.
- Simus Fund, a new open-end investment company, is preparing its registration statement with the SEC. Under the provisions of the NSMIA of 1996, this company would qualify for sale in a state by
- Qualification, because the fund sells to state residents
- Coordination, because the fund also seeks federal review
- Notice filing, because this fund is a federal covered security
- Registration, because the fund is selling shares in that state
Correct answer: Notice filing, because this fund is a federal covered security
An open-end investment company that registers with the SEC issues a federal covered security, and the states may not impose their registration requirements on it. The fund clears itself for sale in a state by notice filing, because this fund is a federal covered security, which means the state receives the records, the fee and the consent to service of process. Qualification, because the fund sells to state residents, is the full state review kept for issues with no federal registration and cannot be demanded of a covered security. Coordination, because the fund also seeks federal review, is likewise a state registration, and there is no state registration to coordinate. Registration, because the fund is selling shares in that state, describes the very requirement the states lost.
- Which of the following statements relating to notice filing are correct? I. It is available only to federal covered securities. II. A notice filing is effective for one year, beginning from the later of filing with the Administrator or the effective date determined by the SEC. III. Renewal is accomplished by filing with the state a copy of records filed with the SEC, along with a signed consent to service of process. IV. Failure to pay required fees could lead to the issuance of a stop order.
- I, II, and III
- I, III, and IV
- II, III, and IV
- I, II, and IV
Correct answer: I, II, and IV
Notice filing is available only to securities that meet the definition of a federal covered security, which makes I correct. The filing runs for one year measured from the later of the filing with the Administrator or the effective date set by the SEC, which makes II correct. Failing to pay the required fees can bring a stop order, which makes IV correct, so the true set is I, II, and IV. III is the false statement: a renewal is not accomplished by sending the state a copy of the records filed with the SEC together with a signed consent to service of process, because the consent belongs to the initial filing and renewal turns on the fee and the records the Administrator requires at renewal. Any choice carrying III fails on that statement.
- Under the Uniform Securities Act, any securities registration statement must include I. the amount of securities to be offered in that state. II. a list of the other states in which the security will be registered. III. a copy of the prospectus or offering circular.
- Statements I, II, III only
- Statements I, II only
- Statements I, III only
- Statements II, III only
Correct answer: Statements I, II, III only
A registration statement filed under the act must state the amount of securities to be offered in that state, must identify the other states in which the security will be registered or offered, and must include the prospectus or offering circular to be used, so statements I, II, III only is the complete list. Leaving out any one of the three leaves the filing short of what the act demands: dropping the prospectus or offering circular removes the disclosure document itself, dropping the list of other states hides the scope of the distribution from the Administrator, and dropping the amount to be offered in the state removes the figure on which the filing fee is generally calculated. The statement must also disclose any adverse order or judgment entered against the offering.
- All of the following must be specified in a security's state registration statement except
- Any adverse order that has been entered against an issue by a state
- The total amount of the issue to be sold in other states
- The use the issuer expects to make of the proceeds of this offering
- The names of the other states in which the issue is sold
Correct answer: The total amount of the issue to be sold in other states
The registration statement has to say where else the security is going, but not how much of it goes there, so the total amount of the issue to be sold in other states is the item the act does not call for. Any adverse order that has been entered against an issue by a state must be disclosed, because the Administrator needs to know what other regulators have already done about the offering. The use the issuer expects to make of the proceeds of this offering must be stated as well. And the names of the other states in which the issue is sold are required, which is exactly the distinction being tested: the states are named, their amounts are not.
- Which of the following securities is most likely to register by qualification in the state of Virginia?
- Common stock of a Virginia issuer sold in adjoining states
- Common stock of a Virginia issuer with a federal clearance
- Common stock of a Virginia issuer sold to residents of one state
- Common stock of a Virginia issuer sold to buyers in seven states
Correct answer: Common stock of a Virginia issuer sold to residents of one state
Qualification is the cumbersome state-only route, and the issuer that has to use it is the one with no federal registration to lean on. Common stock of a Virginia issuer sold to residents of one state is an intrastate offering, which stays outside the federal registration requirement and therefore registers with Virginia by qualification. Common stock of a Virginia issuer sold in adjoining states crosses state lines, which pulls the offering into federal registration and makes coordination the sensible route. The same is true of common stock of a Virginia issuer sold to buyers in seven states. And common stock of a Virginia issuer with a federal clearance already holds the federal filing that coordination is built to run beside, so qualification would be the wrong tool for it.
- The National Securities Markets Improvement Act of 1996 (NSMIA) affects federal and state laws in that
- State registration rules still apply to each and every issue
- State antifraud powers give way to the newer federal statute
- The states and federal regulators have equal authority
- Federal law preempts state law over covered securities
Correct answer: Federal law preempts state law over covered securities
The 1996 act divided the work between the SEC and the state Administrators, and where the two overlap federal law preempts state law over covered securities, leaving the states their notice filings, their fees and their antifraud authority. State registration rules still apply to each and every issue is wrong, because registration is exactly what the states lost for covered securities. State antifraud powers give way to the newer federal statute is wrong in the other direction, since antifraud authority is the one thing the states expressly kept. And the states and federal regulators have equal authority misdescribes the whole scheme, whose point is that the two are not equal where they meet.
- One of the requirements of the Uniform Securities Act is that nonexempt securities must be registered prior to sale in the state unless the sale is made in an exempt transaction. Which of the following would most likely register by qualification?
- First mortgage bonds of a company that sells its shares in one state
- A rights offering by a company that trades its shares on an exchange
- Common stock issued by a national bank chartered in the state
- Equipment trust certificates sold by a rail line in the state
Correct answer: First mortgage bonds of a company that sells its shares in one state
An issuer whose stock has only ever been sold inside a single state is making an intrastate offering, which does not register federally, so its later capital raising in that state goes to the Administrator by qualification. First mortgage bonds of a company that sells its shares in one state is that issue. A rights offering by a company that trades its shares on an exchange involves an exchange-listed security, which is federal covered and needs no state registration at all. Common stock issued by a national bank chartered in the state is an exempt security under the act. Equipment trust certificates sold by a rail line in the state are exempt as well. None of those three would ever be put through qualification.
- Each of the following statements regarding registration of securities by coordination is true except
- The Administrator may allow a shorter wait on file
- The filing must carry a written consent to service of process
- The state must gain effectiveness ahead of the SEC
- The state and the federal registrations take effect as a pair
Correct answer: The state must gain effectiveness ahead of the SEC
Coordination ties the two registrations together, so the state registration becomes effective at the same moment the federal registration does; the state is never required to act first. The Act also requires the registration statement to contain or be accompanied by a consent to service of process, and although the statement must sit on file for at least 10 days, the Administrator may allow a shorter period.
- Under the Uniform Securities Act, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? I. Coordination II. Qualification III. Notice filing IV. Recapitulation
- II and IV
- I and III
- II only
- IV only
Correct answer: I and III
Coordination and notice filing draw the lightest look. In a coordination the SEC carries primary responsibility, so the states generally spot-check the file; for a notice filing on a federal covered security the Administrator may collect fees and copies of what went to the SEC but has no authority to review it. Registration by qualification is the opposite, becoming effective only on the Administrator's order after an active review, so any answer resting on it is wrong. Recapitulation is not a registration method under the Act at all.
- While several methods of registration are described under the Uniform Securities Act, which of the following would be most appropriate for federal covered securities?
- A notice filing and a state fee paid up front
- A state order after a full review of the file
- A joint filing made with the SEC and with this state
- A short filing open to any issuer that has a history
Correct answer: A notice filing and a state fee paid up front
Federal covered securities sit outside state registration, so a state may require only a notice filing and a fee. A full state review ending in the Administrator's order is registration by qualification, used by intrastate issues; a filing made with the SEC and the state at the same time is coordination; and the short-form route once open to seasoned issuers was registration by notification, which has nothing to do with federal covered status.
- Which method of securities registration would most likely be used to register an initial public offering that is intended to be offered for sale in several states?
- Notice filing, since the issue is a covered security
- Qualification, since one state is involved
- Notification, since the issuer is seasoned
- Coordination, since the SEC is involved here as well
Correct answer: Coordination, since the SEC is involved here as well
An offering sold in several states must be registered with the SEC, and coordination lets the state registration go effective at the same moment the federal one does. A notice filing reaches only federal covered securities, and a new public offering by an operating company is not one; qualification is the route for an issue sold inside a single state; and notification was a short-form filing for seasoned issuers, not for a first public offering.
- Under the registration provisions of the Uniform Securities Act, a currently effective registration statement may be amended to
- Raise the public offering price for the shares
- Increase the fees that are now paid to the underwriter
- Increase the number of shares in this offering
- Change the class of the security that is being offered
Correct answer: Increase the number of shares in this offering
Once a registration is effective it may be amended to increase the amount of securities offered, provided the public offering price and the underwriters' discounts and commissions stay the same. Raising the offering price, increasing underwriting compensation, or swapping in a different class of security all change terms the Administrator has already passed on, and each requires a fresh registration rather than an amendment.
- Registration statements for securities
- Expire on December 31 of each year and must be renewed before any other sales can be made
- May be amended after the effective date to add shares if the fees and price do not change
- Need not be filed at all if the shares are sold just inside one single state
- Stay in force for at least two years from the date on which they took effect
Correct answer: May be amended after the effective date to add shares if the fees and price do not change
A registration statement may be amended after its effective date to cover more shares as long as the offering price and the underwriting compensation are unchanged. A securities registration runs for one year from its effective date, longer only while the underwriters are still distributing, so it neither lasts two years by right nor lapses every December 31; that year-end expiration belongs to the registrations of agents, broker-dealers, and investment advisers. Selling inside a single state removes the federal filing, not the state one.
- All of the following must be specified in the state registration statement of a security except
- The share of the offering allotted to each other state
- Any stop order some other state has entered against it
- The amount of the security that will be offered in this state
- The other states in which the same offering will also be made
Correct answer: The share of the offering allotted to each other state
The Administrator needs the amount to be sold in this state, because the filing fee turns on it, the other states in which the offering is or will be made, and any adverse order a court, the SEC, or another state has entered. A state-by-state breakdown of the rest of the offering is not part of the registration statement.
- A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use
- A coordinated filing, because the shares list on Nasdaq
- A short notification, because the fund is seasoned
- A full qualification, because this fund sells here
- A notice filing, because this fund is federally covered
Correct answer: A notice filing, because this fund is federally covered
Any investment company registered under the Investment Company Act of 1940 is a federal covered security whatever market its shares trade in, so the state may require only a notice filing with a fee. Where the shares happen to be listed does not pull the fund into coordination, qualification is reserved for issues that are not federal covered, and notification is not available to an investment company.
- ABC Securities is a two-office broker-dealer in Idaho that intends to underwrite an initial public offering of 1 million shares of stock for Circular, Inc. If the issue will be offered exclusively to residents of Idaho, registration of this offering
- Uses notification, the short-form route
- Uses coordination, the joint SEC-filing route
- Uses qualification, the one-state route
- Uses notice filing, the covered-security path
Correct answer: Uses qualification, the one-state route
An offering sold only to residents of the issuer's own state is registered by qualification, which becomes effective on the Administrator's order. Notification was a short-form method a first-time local issuer could not use, coordination requires a simultaneous federal registration that an intrastate issue does not have, and a notice filing is limited to federal covered securities.
- If a manufacturing company in the registration process with the SEC is considering registering its securities in a state, the method that it would use to register in the state is
- Qualification, as the state review is the one needed
- Coordination, as the SEC filing is already under way
- Notice filing, as the issue is already covered
- Notification, as the issuer has a long history
Correct answer: Coordination, as the SEC filing is already under way
An issuer already registering with the SEC registers in the state by coordination, so both registrations become effective at the same time. Qualification is the route for an issuer that is not registering federally, a notice filing reaches federal covered securities such as investment company shares, and notification is not available for a first registration of this kind.
- Which of the following is exempt from state registration under the Uniform Securities Act?
- Common stock issued by a large national commercial bank
- Variable annuity contracts sold to the public by agents
- Limited partnership units sold to 500 people in a public offering
- Common stock of a local manufacturer sold just to state residents
Correct answer: Common stock issued by a large national commercial bank
Securities issued or guaranteed by a national or state commercial bank are exempt from registration under the Act. Variable annuities are securities and fall outside the insurance exemption, limited partnership interests sold to the general public carry no exemption, and a manufacturer's stock sold inside one state must still be registered with that state.
- As a result of the National Securities Markets Improvement Act of 1996 (NSMIA), certain issuer offerings are no longer subject to state registration. Issues exempt from registration with the state Administrator are I. those listed on the New York Stock Exchange. II. those listed on the NYSE American LLC (formerly known as the American Stock Exchange). III. those listed on the Nasdaq Stock Market System. IV. non-Nasdaq securities that are traded on the OTC Bulletin Board.
- I, III, and IV
- I and II only
- I and IV only
- I, II, and III
Correct answer: I, II, and III
NSMIA made securities listed on the New York Stock Exchange, on the NYSE American, and on the Nasdaq Stock Market federal covered, so no state may require them to register. Securities quoted on the OTC Bulletin Board are not federal covered, so any answer that includes them is wrong: those issues must be registered in every state where they are sold.
- A security that is exempt from the registration requirements of the Uniform Securities Act is also exempt from which of the following concerning the act? I. Civil liabilities provisions II. Antifraud provisions III. Requirements for filing advertising and sales literature
- II alone
- I and III
- III only
- II and III
Correct answer: III only
An exemption reaches the registration requirement and the requirement to file advertising and sales literature, and nothing else. No security is ever exempt from the antifraud provisions of the Act, and the civil liability that follows a fraudulent sale applies to exempt securities as fully as to any other, so no answer that frees an exempt security from either one can be right.
- Under the Uniform Securities Act, all of the following are exempt from registration except
- Revenue bonds issued by an airport authority in a city
- Common stock sold to the residents of one single state
- Equipment trust certificates of a regulated carrier
- Debt securities issued by a charitable organization
Correct answer: Common stock sold to the residents of one single state
Stock sold to the residents of a single state carries no exemption of its own and must be registered with that state's Administrator. Municipal revenue bonds such as those of an airport authority, equipment trust certificates of a regulated common carrier, and securities of a charitable or religious organization are all exempt securities under the Act.
- Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transactionexcept
- A sale of securities to a wealthy individual buyer
- A sale of securities to a licensed commercial bank
- A sale of unregistered shares in a trade that was unsolicited
- A sale of nonexempt securities to a dealer that is registered
Correct answer: A sale of securities to a wealthy individual buyer
Wealth alone does not turn a buyer into an institution: a sale to an individual is not an exempt transaction however large the net worth, unless the trade separately meets one of the listed conditions. A sale to a bank is exempt because the buyer is a financial institution, a sale to a registered broker-dealer is exempt on the same footing, and a genuinely unsolicited order is exempt because the customer, not the firm, began it.
- All of the following are exempt transactions under the Uniform Securities Act except
- A sale of securities made by the executor of an estate
- A sale of securities made by a trustee in bankruptcy
- A rescission offer made by an issuer to prior buyers
- A sale of a local firm's new shares to state residents
Correct answer: A sale of a local firm's new shares to state residents
The first sale of a local company's shares to residents of its own state is an issuer transaction, and the exempt list does not reach it; that offering must be registered. A sale by the executor of an estate and a sale by a trustee in bankruptcy are both fiduciary transactions the Act exempts, and a rescission offer is exempt as well.
- Under the Uniform Securities Act, all of the following are exempt transactions except
- A sale of some stock made by a court-named conservator
- An unsolicited order from an established retail customer
- A sale from a primary offering registered with the SEC
- An isolated nonissuer trade involving two private buyers
Correct answer: A sale from a primary offering registered with the SEC
A primary offering is a sale for the benefit of the issuer, and issuer transactions are not on the exempt list, whether or not the offering is registered with the SEC. A sale by a court-appointed conservator is an exempt fiduciary transaction, an unsolicited order is exempt because the customer began it, and an isolated nonissuer trade is exempt by its own terms.
- Under the Uniform Securities Act, bonds issued by which of the following are nonexempt securities?
- The Canadian city of Montreal in the province of Quebec
- The Canadian bottler of soft drinks sold in the country
- The Canadian province of Ontario in eastern Canada
- The national government of Canada seated in Ottawa
Correct answer: The Canadian bottler of soft drinks sold in the country
The Act exempts securities issued or guaranteed by a foreign government the United States recognizes, and for Canada the exemption extends to its provinces and to their political subdivisions, so bonds of Ontario, of Montreal, and of Canada itself are exempt. A Canadian corporation gets no such exemption: corporate paper from a friendly country is a nonexempt security.
- Transactions meeting certain conditions are exempt from the Uniform Securities Act's registration and advertising filing requirements. Which of the following transactions does not meet those conditions to qualify as an exempt transaction?
- A firm selling Treasury bonds to a rich client's IRA
- An offer of a security whose registration is on file
- A rights offering made to the holders if no commission is paid
- A sale of shares made by the executor of a considerable estate
Correct answer: A firm selling Treasury bonds to a rich client's IRA
Treasury securities are exempt securities, but the exemption belongs to the security and not to the trade: a broker-dealer selling them to an individual's retirement account is making an ordinary retail sale, which is not an exempt transaction. Had the buyer been an institution the transaction would have been exempt. A rights offering to existing holders on which no commission is paid is an exempt transaction, so is a sale by the executor of an estate, and so is an offer, as distinct from a sale, of a security whose registration statement is on file with both the SEC and the state and under no stop order.
- An investor who resides in New York reads an ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in
- Both states, since both tests apply
- New Jersey, since it originates
- New York, since it predominates
- Neither state, since the tests fail
Correct answer: Neither state, since the tests fail
An offer is not made in a state where a newspaper is circulated but not published, so nothing was offered in New York even though most copies are read there. Nor is an offer made in the state of publication when more than two-thirds of the paper's circulation is outside that state, so nothing was offered in New Jersey either, and neither Administrator sees an offer here.
- DMF Securities, a registered broker-dealer, is advertising securities through direct mail. Which of the following is considered an offer to sell securities in this state?
- A client here asks the firm about buying some of those shares
- A person in a nearby state receives the letter at his home address
- A resident of this state receives the letter at her own house
- A person whose mail moves from another state to a house right here
Correct answer: A resident of this state receives the letter at her own house
A mailed offer is made where the letter is addressed. A letter sent to a home address in this state is therefore an offer in this state, while a letter addressed to a home in another state is an offer in that other state, and forwarding it does not move the offer to wherever it lands. A customer's own inquiry is not the broker-dealer's offer to sell.
- What is the difference between an offer and a sale?
- An offer comes from a buyer and a sale comes from a bond dealer
- An offer is an attempt to sell and a sale is a binding contract
- An offer needs the manager's okay and a sale needs none
- An offer is a binding promise and a sale is provisional
Correct answer: An offer is an attempt to sell and a sale is a binding contract
An offer is an attempt to dispose of a security for value; the sale is the binding contract that follows once the offer has been accepted. The relationship is not the other way round, since the offer itself binds no one. Either side of a trade may make an offer, and an offer requires no manager's sign-off before it goes out, while the completed sale is what a firm must supervise.
- Under the Uniform Securities Act, Administrators of all of the following states have jurisdiction except
- The state from which payment for the stock was made
- The state into which an offer to sell was addressed
- The state in which the offer to sell was formally accepted
- The state from which the offer to sell was originally made
Correct answer: The state from which payment for the stock was made
The Administrator has jurisdiction where an offer originated, where it was directed, and where it was accepted. Where the buyer's money happened to come from is not one of those tests and does not give that state's Administrator jurisdiction.
- An agent works in Buffalo, New York and is registered in New York and Ohio. If the agent contacts a retail client in Ohio recommending the purchase of an unregistered non-exempt security, jurisdiction over this violation of the Uniform Securities Act would lie with the Administrator(s) of
- Neither one, New York or Ohio, yet
- New York alone, and not Ohio
- Ohio alone, and not New York
- Both New York and Ohio, equally so
Correct answer: Both New York and Ohio, equally so
A recommendation is an offer, and this offer originated in New York and was directed into Ohio, so both Administrators have jurisdiction rather than only the home state or only the state of the customer. Neither has to wait for a trade: offering an unregistered, nonexempt security in a solicited transaction is itself the violation.
- An agent based in Alabama directs a solicitation to a customer who lives in Connecticut while the customer is temporarily in Indiana. The customer does not accept the offer until he arrives back in Connecticut. According to the Uniform Securities Act, the Administrators of which of the following states have jurisdiction?
- Connecticut and Indiana, but nobody else
- Alabama and Connecticut, but nobody else
- Alabama and Indiana, exclusively
- Alabama, Connecticut and Indiana
Correct answer: Alabama, Connecticut and Indiana
Jurisdiction follows the offer. An offer reaches the state it comes from, the state it is directed into and received in, and the state where it is accepted. The solicitation came from the agent in Alabama, it was received while the customer was in Indiana, and it was accepted after he had returned to Connecticut, so all three Administrators may act. Stopping at Connecticut and Indiana ignores the state the solicitation came from. Stopping at Alabama and Connecticut drops Indiana, where the offer was actually received. Stopping at Alabama and Indiana leaves out the state where acceptance took place.
- As defined in the Uniform Securities Act, which of the following is not an offer or a sale?
- A company listed on an exchange declaring a split
- A holder gifting away his assessable stock
- An issuer signing a sales contract for new shares
- A dealer selling a nonexempt stock warrant
Correct answer: A company listed on an exchange declaring a split
A split hands shareholders more shares without asking them for anything of value, so the Act treats it as neither an offer nor a sale. Each of the others moves a security for consideration. Signing a contract to sell newly issued shares is a contract of sale. Selling a warrant is the sale of a security in its own right. Gifting assessable stock counts as both an offer and a sale, because the person receiving it can be assessed for money later.
- Which of the following involves an offer or sale?
- A stock dividend that does not cost a dollar
- A gift of shares which are assessable
- A pledge of shares held as collateral
- An exchange of shares handed down by a court
Correct answer: A gift of shares which are assessable
Assessable shares can require their holder to put up money later, so the person receiving the gift takes on an obligation and the Act treats the transfer as both an offer and a sale. The other three sit on the Act's list of things that are neither. A stock dividend that costs the holder nothing brings in no consideration. A bona fide pledge moves possession but leaves ownership where it was. Shares exchanged in a court-approved reorganization are excluded by name.
- According to the Uniform Securities Act, a sale is
- A solicitation asking anyone to buy shares
- An attempt to transfer ownership of shares
- A contract that passes a security over for value
- An offer that swaps a similar contract for value
Correct answer: A contract that passes a security over for value
A sale is every contract of sale, every contract to sell, and every disposition of a security for value, so ownership has to pass under a binding agreement before there is one. The other three describe the companion term, offer. A solicitation asking someone to buy only invites the other side to act. An attempt to transfer ownership is an attempt to dispose, which the Act calls an offer, not a sale. Offering to swap one contract for another of similar value is likewise still an offer until someone accepts it.
- Under the Uniform Securities Act, which of the following constitutes an offer of a security?
- Placing a tombstone notice in a big city paper
- Paying a stock dividend to owners at zero cost
- Signing an underwriting deal with an issuer
- Handing a prospectus to a prospective buyer
Correct answer: Handing a prospectus to a prospective buyer
A prospectus is the document by which a security is offered, so putting one in a prospective buyer's hands is an offer. A tombstone notice says on its face that it is not an offer and does no more than tell the reader where a prospectus can be obtained. A stock dividend that costs the owners nothing is excluded from the terms offer and sale. An underwriting agreement runs between the issuer and the underwriter, and no investor is approached until the underwriter takes the shares to market.
- Under the Uniform Securities Act, a sale includes all of the following except
- A pledge of the shares to secure a margin loan
- A contract of sale that covers the shares
- A trade of the shares made in return for value
- A contract to sell those shares next year
Correct answer: A pledge of the shares to secure a margin loan
A bona fide pledge assigns the shares as collateral and leaves title with the customer, so nothing is disposed of and no sale occurs. The other three are the statutory definition itself, which makes a sale out of every contract of sale, every contract to sell, and every disposition of a security in return for value.
- There is a stock that you believe is perfect for your customer's portfolio. However, the stock is not registered for sale in the customer's state of residence, nor is it exempt from registration. You suggest that the customer should enter an unsolicited order for the stock because you will be able to accept that. This is
- An order that the customer went and sent in himself
- An offer to sell securities to the customer
- A purchase offer made only by this customer
- An offer that arises only when the order is entered
Correct answer: An offer to sell securities to the customer
Offer takes in any solicitation of an offer to buy, and the solicitation counts whether or not the customer acts on it. By steering the customer toward sending in the order, the agent solicited it, so the order did not come from the customer on his own and the exemption the agent was counting on is unavailable. The agent, not the customer, made the approach, so this is not a purchase offer originating with the customer. And the offer exists from the moment of the suggestion rather than springing into being only once an order is entered.
- Under the Uniform Securities Act, which of the following fits the definition of a sale?
- An attempt to dispose of a security for value
- The solicitation of an offer to buy for value
- A written contract to dispose of that security for value
- The delivery of a prospectus that offers stock for value
Correct answer: A written contract to dispose of that security for value
Sale is defined as every contract of sale, contract to sell, or disposition of a security for value, so the written contract to dispose of the security is the sale. The three others fall under offer, which covers every attempt to dispose of a security and every solicitation of an offer to buy one. An attempt is not yet a contract, a solicitation only invites the other side to act, and handing over a prospectus is the ordinary way of offering shares. The sale happens when the offer is accepted.
- As defined in the Uniform Securities Act, the terms sale or sell would include
- Pledging shares as collateral for a broker loan
- Giving nonassessable shares away as a pure gift
- Receiving added shares as a stock dividend
- Reinvesting a cash dividend in more shares
Correct answer: Reinvesting a cash dividend in more shares
Turning a cash dividend into additional shares exchanges something of value for the stock, so a contract for value exists and the Act counts it as a sale. A stock dividend received at no cost brings in no consideration. A pledge of shares as collateral leaves ownership exactly where it was. An outright gift of nonassessable shares asks the person receiving them for nothing at all.
- As defined in the Uniform Securities Act, a sale or an offer to sell would not include
- A purported gift of stock that is not assessable
- A stock dividend that requires a cash outlay
- The sale of a subscription right on other shares
- A bonus share handed over with each purchase
Correct answer: A purported gift of stock that is not assessable
A gift of nonassessable stock asks nothing of the person receiving it, so it is simply a gift and neither an offer nor a sale. The Act reaches the other three. Selling a subscription right or warrant is a sale of that instrument and an offer of the underlying shares. A security handed over as a bonus is treated as part of the subject of the purchase. And a stock dividend escapes the definition only when the shareholder pays nothing at all, so requiring any cash outlay turns it into a sale.
- The Uniform Securities Act defined many terms. Among them is the term sale. Which of the following would be included in the definition of sale? I. An offer of common stock in a new issue properly registered or exempt from registration in the state II. A gift of assessable stock III. An investor exercising preemptive rights previously received directly from the issuer IV. An investor electing to forgo a cash dividend and receive the equivalent in stock instead
- I and II, since the fresh issue counts
- II and III, since a right costs money to use
- I and IV, since the dividend swap pays
- III and IV, since a dividend is paid in kind
Correct answer: II and III, since a right costs money to use
A gift of assessable stock is always a sale, and exercising preemptive rights buys shares for value, so those two belong inside the definition. The properly registered or exempt new issue is only an offer, because an offer becomes a sale only when consideration is exchanged, and registration status has nothing to do with it. Electing to take a stock dividend in place of a cash dividend is not a sale either, since nothing is paid over for the extra shares, so any answer carrying the new issue or the dividend election is wrong.
- Which of the following would be included in the Uniform Securities Act's definition of a sale?
- Donating warrants on nonexempt stock to a school
- Selling a fixed annuity to a taxable institution
- Selling shares for full value to a tax-exempt group
- Delivering refined gold to a jewelry maker for cash
Correct answer: Selling shares for full value to a tax-exempt group
A security has to change hands for value before there is a sale, and shares sold for full value are sold no matter who receives them, because the buyer's tax status is beside the point. Precious metals and fixed annuity contracts are not securities at all, so moving either one for cash cannot be the sale of a security. Donating warrants outright brings in no consideration, which leaves it a gift.
- Under the Uniform Securities Act, which of the following is an offer or a sale?
- Stock put up with a bank as collateral for a car loan
- Stock given by a mother to her son as a birthday gift
- Stock granted to holders in a ten for one split
- Stock handed over as a bonus on a land purchase
Correct answer: Stock handed over as a bonus on a land purchase
Any security handed over as a bonus on account of a purchase, even the purchase of something that is not a security, is treated as part of what was bought and so has been offered and sold for value. The other three are carved out by name: a bona fide gift between family members, a bona fide pledge of stock to secure a loan, and a stock split all sit outside the terms offer and sale.
- An automobile dealer advertises that anyone purchasing a new car this month will receive a $1,000 U.S. Treasury bond as a bonus. Under the Uniform Securities Act, the dealer is
- Offering a security for sale along with each car
- Offering a warrant to buy exempted securities
- Committing fraud against each buyer of a new car
- Breaking a rule that stops unfair competition
Correct answer: Offering a security for sale along with each car
A security given as a bonus on account of the purchase of any other thing is treated as having been offered and sold for value, so advertising the bond with the car is an offer of a security and the dealer is subject to the Act's registration requirements. Nothing in the advertisement is deceptive, so there is no fraud. The bond is a debt security that pays interest, not a warrant, since it carries no right to subscribe to anything. And the Act polices securities activity rather than competitive marketing practices.
- A customer living in one state receives a phone call from an agent in another state. A transaction between the two occurs in a third state. According to the Uniform Securities Act, under whose jurisdiction does the transaction fall?
- Administrators in the buyer's and agent's states
- The Administrators of these three states
- The Administrator of the execution state
- Administrators in the buyer's and trade's states
Correct answer: The Administrators of these three states
If any part of the transaction touches a state, that state's Administrator has jurisdiction over it. The offer came from the agent's state, it was received in the state where the customer lives, and the trade itself took place in a third state, so all three Administrators have authority here. Naming the state where the trade was executed on its own, or either pair drawn from the three, leaves out a contact the Act expressly reaches.
- In which of the following circumstances has John, an agent of AAA Securities Corporation, made an offer as defined in the Uniform Securities Act? I. John calls a long-standing client, Brenda, to indicate that a security on his firm's restricted list is suitable for her portfolio. John indicates that he cannot sell the securities unless Brenda requests them on an unsolicited basis. Brenda considers making the purchase but ultimately declines. II. John discovers that Brenda has inherited shares in a manufacturing firm trading on the New York Stock Exchange and suggests that she sell them to him in a private transaction in which no commission would be charged. III. John owned XYZ securities for several years and decided to transfer them to his college's endowment fund in lieu of giving a cash gift. He then took a tax deduction for the value of the securities transferred. IV. Baxter, as a reward for the years of John's service as his agent, transferred $5,000 worth of XYZ Corporation securities to John, claiming the transfer as a business expense on his tax form.
- II only
- I and IV
- I and II
- IV only
Correct answer: I and II
An offer takes in an attempt to dispose of a security for value and a solicitation of an offer to buy one. Telling a client that a restricted security suits her portfolio and inviting her to ask for it is a solicitation, and it stays one even though she declined, so the first situation is an offer and no answer may leave it out. Asking to buy her inherited shares in a private trade is an attempt to acquire securities from her for value, so that is an offer as well. The two transfers made as gifts, whatever their tax treatment, carry no consideration, so neither of them is an offer.
- Under the Uniform Securities Act, an offer is made in a state when it I. originates in that state. II. is broadcast by radio or TV from outside the state. III. is contained in a newspaper published outside the state but delivered to an address in that state.
- I and II, since a broadcast hits the state
- I and III, since a paper reaches the state
- II with III, since every medium counts
- I only, since origination is the point
Correct answer: I only, since origination is the point
An offer is made in a state when it originates there, and also when the offeror directs it into that state and it is received at the address it was sent to. The Act carves out both mass-media routes by name. A radio or television broadcast that originates outside the state is not an offer made in the state, and neither is a bona fide newspaper published outside the state, even though copies are delivered to addresses inside it. Any answer that adds either of those to the origination rule is wrong, and one that drops origination altogether is wrong twice over.
- Under the Uniform Securities Act, an offer and sale does not exist if it is I. the result of a class vote by stockholders regarding a merger or consolidation. II. a bona fide pledge or loan. III. an act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares. IV. a gift of nonassessable securities.
- I, II, III, and IV, since none is a sale
- I and II, since the others are sales
- I, II, and III, since the gift is a sale
- II and IV, since the others sell too
Correct answer: I, II, III, and IV, since none is a sale
All four sit on the Act's list of things that are neither an offer nor a sale: a class vote by stockholders on a merger or consolidation, a bona fide pledge or loan, an act incident to a judicially approved reorganization in which securities are issued in exchange for outstanding shares, and a gift of nonassessable securities. A stock dividend paid at no cost belongs on the same list. The only gift the Act does reach is a gift of assessable stock, because the person receiving it can be assessed for money, so no answer may treat the gift here as a sale.
- Nobody Walks Motor Company, a licensed automobile dealer, is running a promotion offering a $1,000 corporate bond at no additional cost to anyone who purchases a new car over the weekend. Under the Uniform Securities Act, in order to make this offer
- The dealer may pay its car salesmen only as agents
- The dealer has to register as a broker-dealer
- The dealer must offer this to used-car buyers
- The dealer needs no registration at all for a bond
Correct answer: The dealer has to register as a broker-dealer
A security delivered as a bonus on account of the purchase of any other thing is treated as offered and sold for value, so the dealer is offering securities and must register in the state as a broker-dealer before making the offer. Once registered it may confine the promotion to new cars, because nothing in the Act forces the deal to be extended to used-car buyers. Paying salespeople commissions for selling cars does not turn them into agents, since they are not selling securities. And the bond costing the buyer nothing extra is precisely why the Act folds it into the price rather than excusing it.
- An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of his state
- With one third of its copies there
- With all of its copies sold inside
- Under no circumstances at all
- Under state powers over fraud
Correct answer: Under no circumstances at all
A bona fide newspaper published outside the state is carved out of the definition of an offer made in the state, and the carve-out does not turn on how many copies reach readers there, so on these facts the Administrator never has jurisdiction. The circulation test runs the other way around: a paper published inside the state falls outside the Administrator's reach when more than two thirds of its circulation over the past year was outside the state. The antifraud provisions add nothing here either, because they reach only conduct in connection with an offer that was made in the state to begin with.
- An Administrator may deny or revoke a security's exemption
- Only after written notice and a hearing for parties
- For a federal covered security with a guilty issuer
- Only after the Administrator proves the claim
- Summarily where a hearing follows right after
Correct answer: Summarily where a hearing follows right after
The Administrator may deny or revoke the exemption of a specific security by summary order, so long as the issuer is promptly notified and the matter is set down for hearing on request afterward. Prior written notice and a hearing are therefore not required. The burden of establishing an exemption rests on the person claiming it rather than on the Administrator, so nothing turns on the Administrator proving the claim. And an exemption that comes with federal covered status is beyond the Administrator's reach entirely, whatever the issuer has done under state law.
- Under the Uniform Securities Act, the Administrator has the power to I. examine files of registered persons who have their offices out of state. II. designate an officer who will then have the power to take evidence regarding investigations. III. sentence willful violators to up to three years in prison.
- I and II, since a court alone may impose prison
- II and III, since distant files are closed
- I, II, and III, since the powers are that broad
- I and III, since sentencing may be ordered
Correct answer: I and II, since a court alone may impose prison
The Administrator may examine the records of any registered person, whether that office sits inside the state or outside it, so files kept out of state are not closed to it. The Administrator may also vest a designated officer with the power to take evidence, subpoena witnesses, and compel testimony. Sentencing is not an administrative power at all. The Administrator can refer evidence for criminal prosecution, but only a court may convict a violator and send anyone to prison, so no answer that carries the prison power can be right.
- The Administrator has authority to
- Cancel the state registration of an issue listed on a large exchange
- Enter a cease and desist order without any hearing first
- Enter a stop order upon all registrations with no notice
- Arrest and hold anyone ignoring a subpoena issued in an open inquiry
Correct answer: Enter a cease and desist order without any hearing first
A cease and desist order may be entered before any hearing is held; it is the stop order that requires notice and an opportunity to be heard first, so entering one without notice is beyond the Administrator's power. A security listed on a large national exchange is federal covered and is therefore not registered with the state at all, which leaves no state registration available to cancel however the issuer's officers may have behaved. The Administrator has no arrest power either; when a subpoena is ignored, the remedy is to ask a court to compel compliance.
- Under which of the following circumstances may an Administrator revoke an adviser's registration?
- The adviser has quit and shuttered its whole business
- The adviser was declared incompetent by a state court
- The adviser was convicted last year of a nonsecurities felony
- The adviser cannot be located anywhere after a careful search
Correct answer: The adviser was convicted last year of a nonsecurities felony
A recent felony conviction is grounds for revocation and the felony does not have to involve securities, so a conviction last year on an unrelated charge costs the adviser its registration. Revocation is punitive and follows wrongdoing. The other three call for cancellation instead, which carries no finding of fault: an adviser declared mentally incompetent by a court, one that cannot be located after a reasonable search, and one that has gone out of business all have their registrations cancelled rather than revoked.
- The Administrator of a state securities department conducted a hearing regarding misconduct by an investment adviser registered at the state level. The Administrator required the adviser, as well as several clients who had lodged complaints against the adviser, to take a sworn oath that their testimony was true. Does the Administrator have the power to require sworn oaths?
- Yes, but only the adviser can be sworn, as a client is not a registrant.
- No, only a judge in a state court may swear a witness under oath.
- Yes, the act does give him the power to swear in any witness now.
- No, an oath of that nature finds no support in the act and binds nobody.
Correct answer: Yes, the act does give him the power to swear in any witness now.
The Uniform Securities Act gives the Administrator the power to administer oaths and affirmations, so putting the adviser and the complaining clients under oath is squarely within the office. That power comes from the statute rather than from a court, so it is not reserved to a judge. It also does not stop at registrants: a client who has never been registered is a witness like any other and can be sworn just as the adviser can. And because the act supplies the power, an oath taken at an administrative hearing is fully supported and binds the person who takes it.
- The Uniform Securities Act does not grant the Administrator the authority to commence an action against a broker-dealer registered in her state based upon
- Suspicion that the firm has broken the securities laws of this state
- A shareholder who has no role in the management failing to pay his debts
- Discovery that the liabilities of the firm have gone past its assets
- A finding nine years ago by another state that the president broke a law
Correct answer: A shareholder who has no role in the management failing to pay his debts
The Administrator acts against the firm and the people who control it, so the private debts of a shareholder who takes no part in managing the broker-dealer give her nothing to proceed on. Insolvency of the firm itself, whether liabilities that have outgrown assets or an inability to pay obligations as they come due, is a statutory ground. So is a finding entered by another state within the past ten years that the president of the firm violated that state's securities law. Suspicion of a violation is enough to begin, which is precisely why the office holds investigative and subpoena power.
- The Administrator could deny or revoke the registration of a broker-dealer if
- An officer of the firm has willfully failed to file its advertising
- One officer of the firm disregarded a federal rule 22 years earlier
- One officer of the firm was convicted of a misdemeanor over unpaid parking tickets
- A stockholder of the firm was convicted of a securities misdemeanor 125 months ago
Correct answer: An officer of the firm has willfully failed to file its advertising
Failing on purpose to file advertising material that the Administrator requires is a willful violation of the act, and a willful violation is a listed ground for denial or revocation. The federal rule violation fails on timing, because the act reaches back ten years and twenty-two is far outside that window. The securities misdemeanor fails for the same reason once the calendar is checked, since 125 months is more than ten years. Unpaid parking tickets fail on subject matter, because only a misdemeanor involving securities or money counts.
- While the Administrator has great power, the Uniform Securities Act does place some limitations on the office. Which of the following statements regarding those powers is not true?
- An Administrator who is conducting an investigation may compel a witness to testify
- An Administrator enforces another state's subpoena only where her own law is broken
- Any Administrator may by order refuse anybody convicted of any felony within ten years
- An Administrator may hold an investigation of a serious violation only in open session
Correct answer: An Administrator may hold an investigation of a serious violation only in open session
Investigations do not have to be public. The act leaves it to the Administrator to decide whether a proceeding is open or closed, so the claim that an investigation of a serious violation may be held only in open session is the statement that is not true. The rest are accurate: a witness can be compelled to testify during an investigation, a felony conviction inside the past ten years supports an order refusing registration, and one state enforces another state's subpoena only where the conduct alleged would break its own law as well.
- Which of the following statements regarding a cease and desist order are true? I. It is an order to stop a specified activity immediately. II. If the registered agent continues to violate the statute, the registered agent may become the subject of a court-issued injunction. III. It may be issued by the state Administrator.
- I and II only
- I and III only
- I, II, and III
- II and III only
Correct answer: I, II, and III
All three statements hold. A cease and desist order is the Administrator's own instrument, issued without any court, and it directs the recipient to stop the specified activity at once. If the agent carries on regardless, the next step is judicial: the Administrator applies to a court of competent jurisdiction for an injunction, with the court's contempt power standing behind it.
- An Administrator may deny or suspend a registration in all of the following situations except
- The applicant was convicted last year of a securities misdemeanor
- The applicant holds the knowledge and the skills but not enough experience
- The applicant did not supervise its agents or its representatives
- The applicant received an adverse order from another state within 10 years
Correct answer: The applicant holds the knowledge and the skills but not enough experience
Experience by itself is not a qualification standard. An applicant who is qualified through training and knowledge cannot be turned away merely for a thin record, so that situation is the exception the question asks for. Each of the others is a listed ground for denial or suspension: a securities-related misdemeanor conviction within the past ten years, an adverse order entered by the Administrator of another state within the past ten years, and a failure to supervise agents and investment adviser representatives.
- Under the Uniform Securities Act, a state securities Administrator who believes that a registered investment adviser representative is about to violate a provision of the act would initially
- Issue an order to cease and desist from this conduct now
- Suspend or revoke the license that he holds in the state
- Ask a court with jurisdiction to appoint a receiver for his accounts
- Enter an order that bars the representative from this state for life
Correct answer: Issue an order to cease and desist from this conduct now
The opening move is the Administrator's own cease and desist order, which may be issued with or without a prior hearing and is built to stop a violation before it happens. Suspending or revoking the license is a penalty that requires notice, an opportunity for a hearing, and findings, so it cannot be the first step, and a lifetime bar is the same objection in stronger form. Asking a court to appoint a receiver over the accounts is a judicial remedy granted on a proper showing, not an initial response.
- Under the Uniform Securities Act, an Administrator who believes a violation has occurred or is about to occur may I. issue a cease and desist order without a prior hearing. II. bring action to obtain an injunction and have a receiver appointed over the alleged violator's accounts. III. seek a court order requiring the alleged violator to make restitution to others.
- I and II only
- II and III only
- I and III only
- I, II, and III
Correct answer: I, II, and III
All three are within reach. The Administrator may issue a cease and desist order with or without a prior hearing. He may also bring an action in the appropriate court to enjoin the conduct, and on a proper showing that court may appoint a receiver or conservator over the defendant's assets. The same showing lets the court order rescission, restitution, or disgorgement in favor of the people harmed.
- According to the Uniform Securities Act, under which of the following circumstances may an Administrator cancel an agent's registration?
- A self-regulatory agency has censured the agent for churning an account
- An insider trading lawsuit names the agent as a defendant
- A court has ruled that this agent is mentally incompetent
- The Administrator has ruled that cancellation is in the public interest
Correct answer: A court has ruled that this agent is mentally incompetent
Cancellation is not a penalty. It clears away a registration that no longer describes anybody, which is why a court ruling that the agent is mentally incompetent triggers it. Being named as a defendant in an insider trading lawsuit involves alleged wrongdoing, and wrongdoing leads to suspension or revocation instead; a censure by a self-regulatory agency sits in the same category. A public interest finding belongs to disciplinary orders, and cancellation needs none because nobody is being disciplined.
- An Administrator has specific authority under the Uniform Securities Act to do all of the following except
- Enforce another state's subpoena when the conduct also violates her law
- Issue an injunction on an emergency basis to prevent a violation of this act
- Suspend the registration of a security that pays out excess commissions
- Require that the offering proceeds stay in escrow until a set amount is sold
Correct answer: Issue an injunction on an emergency basis to prevent a violation of this act
Injunctions are judicial orders. The Administrator can ask a court for one but cannot enter one herself, on an emergency basis or otherwise. The other three are genuine statutory powers: the proceeds of an offering may be impounded in escrow until the issuer sells a stated amount, a security's registration may be suspended where the offering pays out excessive commissions and suspension serves the public interest, and a sister state's subpoena is enforced where the conduct alleged would break her own state's law too.
- Which of the following statements is true?
- An Administrator may suspend a pending registration upon a summary basis
- An Administrator may cancel a registration on the grounds for revocation
- An Administrator may not modify or vacate an order without first holding a hearing
- An Administrator may enter a stop order without giving prior notice or any hearing
Correct answer: An Administrator may suspend a pending registration upon a summary basis
A registration that is still pending may be suspended summarily, which means without prior notice, while the proceeding runs. A stop order is the opposite case: prior notice and an opportunity for a hearing come first. An order may be modified or vacated whenever the Administrator finds that the conditions producing it have changed, and no hearing is needed for that. Cancellation is not disciplinary, so the grounds that support revocation are not grounds for cancellation.
- The Administrator of State X receives a phone call warning that, within the next couple of weeks, a scam is going to be perpetrated in his state by someone from State Y. The tipster even supplies the Administrator with names of people who will be involved and ends the conversation by telling the Administrator that he himself is a resident of State Z. Which of the following would most likely be done?
- The Administrator would publish a warning for all residents
- The Administrator would hand the case to federal regulators
- The Administrator would go before a court of law for the injunction
- The Administrator would at once open up an investigation of the tip
Correct answer: The Administrator would at once open up an investigation of the tip
A tip that names names is exactly what the investigative power exists for, so the Administrator opens an investigation at once. Going before a court is premature, because an injunction requires a showing that conduct has occurred or is about to occur and a phone call is not that showing. Publishing a warning for residents before anything is established would be premature as well. The involvement of several states does not hand the case to federal regulators either, since state Administrators investigate conduct aimed at their own residents and cooperate with one another.
- Under the Uniform Securities Act, which of the following is not a reason for canceling an agent's registration?
- A court has now adjudged this agent to be mentally incompetent
- The agent has stopped doing business as a registered agent
- The agent has taken part in an unethical business practice
- The agent cannot be traced after a search by the Administrator
Correct answer: The agent has taken part in an unethical business practice
Taking part in an unethical business practice is misconduct, and misconduct produces a disciplinary order of denial, suspension, or revocation rather than cancellation. The other three are the standard cancellation triggers: a court adjudication of mental incompetence, an agent who cannot be traced after a reasonable search, and an agent who has stopped doing business. Cancellation carries no finding of wrongdoing and no public interest test.
- Under the Uniform Securities Act, all of the following statements regarding a broker-dealer withdrawing its registration are true except
- It becomes effective 30 days after the notice is filed
- It bars the broker-dealer from registering again at a later date
- It has to be delivered to the Administrator in writing
- It cannot take effect while a revocation proceeding is under way
Correct answer: It bars the broker-dealer from registering again at a later date
Withdrawal does not close the door on the future. A broker-dealer that withdraws keeps the right to apply again at a later date, so that statement is the false one. The filing has to be delivered in writing, it becomes effective thirty days afterward, and it cannot take effect while the Administrator has a revocation or suspension proceeding under way. The Administrator also keeps jurisdiction over the firm for a year after withdrawal.
- When an Administrator acts summarily to suspend the registration of a security, which of the following statements is true under the Uniform Securities Act?
- The registrant gets prompt notice with a right to be heard
- This order takes effect only after a hearing has been held
- A hearing must be arranged within 10 days of the registrant's request
- A broker-dealer may fill only unsolicited orders while it is in force
Correct answer: The registrant gets prompt notice with a right to be heard
Acting summarily means acting first, so the order takes effect immediately and the registrant must be notified promptly of the order and of the opportunity to be heard. Because it is immediate, it does not wait on a hearing. The hearing itself has to be arranged within fifteen days of a written request, not ten. And once trading in a registered security is summarily suspended, all trading in it stops, unsolicited orders included.
- It is a violation of the Uniform Securities Act if an agent
- Sells an exempt security that carries no state registration
- Recommends a security that afterward falls sharply in price
- Makes a truthful representation about some material fact when selling
- Files an application for registration that contains a false statement
Correct answer: Files an application for registration that contains a false statement
Filing an application for registration that contains a false statement is a violation whoever files it, whether agent, broker-dealer, investment adviser, or representative. A truthful representation about a material fact is the ordinary work of selling securities, because the act forbids the material misstatement rather than the representation. Selling an exempt security that carries no state registration is proper, since exempt securities need none. And a recommendation that afterward loses money is not by itself a violation.
- Under the Uniform Securities Act, all of the following are grounds for suspension, denial, or revocation of an issuer's registration statement except
- The offering is enjoined by a court under a state securities act
- The underwriters are to receive an unreasonable payment
- The registration statement is complete in every respect
- The issuer has never paid the filing fee that the state requires
Correct answer: The registration statement is complete in every respect
A registration statement that is complete in every respect satisfies the requirement, so completeness can never be a ground for suspending, denying, or revoking it. Incompleteness would be. Each of the others appears in the act as a ground: a filing fee that was never paid, underwriting compensation that is unreasonable, and an offering that a court has enjoined under a state or federal securities act.
- Under the Uniform Securities Act, which of the following would not be an appropriate cause for an agent's registration to be canceled by the Administrator?
- The agent has died in the course of the registration year
- A court has found that the agent has broken a securities statute
- The agent cannot be found after a search of their records
- A court has found that the agent is no longer mentally competent
Correct answer: A court has found that the agent has broken a securities statute
Cancellation is ministerial and carries no accusation, so a court finding that the agent has broken a securities statute calls for revocation instead. Death, a court finding that the agent is no longer mentally competent, and an inability to find the agent after a reasonable search are the cancellation triggers, because in each of them there is no longer a registrant to hold the registration.
- The Uniform Securities Act provides that the state Administrator may deny the registration of a broker-dealer for all of the following reasons except
- The applicant brings insufficient practical experience
- The applicant is not able to pay off the debts it owes
- The applicant has willfully violated a rule that the act sets out
- The applicant is under a court order barring it from the business
Correct answer: The applicant brings insufficient practical experience
Registration cannot be denied for inexperience alone where the applicant is qualified by training and knowledge, so insufficient practical experience is the exception here. The standard illustration is refusing an investment adviser registration to a firm only because its history is entirely as a broker-dealer. Insolvency, meaning an inability to pay debts as they come due, is a listed ground, as is a willful violation of the act and a court order enjoining the applicant from the securities business.
- To protect the public, the Administrator may do all of the following except
- Require an applicant to take an oral exam before licensing
- Require a broker-dealer to post a bond of permissible size
- Limit a firm that cannot show advisory skill to the brokerage side
- Deny the registration of an agent who holds too little net capital
Correct answer: Deny the registration of an agent who holds too little net capital
Agents carry no net capital requirement at all. That requirement belongs to broker-dealers, and even for them the Administrator may not set a figure above the federal one, so no registration can be denied over an agent's net capital. The rest are genuine: an applicant may be made to take an oral examination, a broker-dealer may be required to post a bond within the permitted limits, and a firm applying as both broker-dealer and adviser may be held to the brokerage side when it cannot show the qualifications to give advice.
- Before taking any disciplinary action, with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following? I. Obtain the approval of the appropriate state court. II. Find that the action is in the public interest. III. Cite a cause listed in the act.
- I and II only
- I and III only
- II and III only
- I, II, and III
Correct answer: II and III only
Two findings must precede any disciplinary order touching a registration: that the action serves the public interest, and that a cause listed in the act applies. Neither is a matter for a court. Judicial approval enters only when the Administrator seeks a court remedy such as an injunction or the appointment of a receiver over an adviser's assets, and that is never a precondition to discipline.
- The Administrator may deny a person's registration as an investment adviser representative if the person meets which of the following criteria? I. Has a recent securities-related criminal record II. Has recently been convicted of a felony not related to the securities industry III. Has lost a civil lawsuit within the last year IV. Was convicted of any misdemeanor within the last year that did not involve securities or money
- I and IV only
- I and II only
- II and III only
- III and IV only
Correct answer: I and II only
A recent securities-related criminal record and a recent felony conviction of any kind both support denial, because the act reaches any felony plus any misdemeanor involving securities or money within the past ten years. A misdemeanor with no securities or money element does not count however recent it is, and losing a civil lawsuit is not a conviction at all and will rarely affect a registration.
- An Administrator may summarily suspend a registration pending final determination of proceedings under the Uniform Securities Act. However, the Administrator may not enter a final order without I. appropriate prior notice to the registrant. II. an opportunity for a hearing. III. findings of fact and conclusions of law. IV. prior written acknowledgment of the registrant.
- I, II, and III
- I, II, and IV
- I, III, and IV
- II, III, and IV
Correct answer: I, II, and III
Before a final order the Administrator owes the registrant appropriate prior notice, an opportunity for a hearing, and written findings of fact together with conclusions of law. What the act never requires is the registrant's written acknowledgment; an order does not wait on the person it is aimed at agreeing to receive it.
- Under the Uniform Securities Act, which of the following would most likely be a cause for denial of a registration?
- No degree from any college that grants accredited degrees
- A felony conviction for securities fraud twelve years ago
- A non-financial misdemeanor conviction recorded exactly seven years ago
- An order of another state's Administrator that took away a registration
Correct answer: An order of another state's Administrator that took away a registration
An order of another state's Administrator that took away a registration is itself a listed ground, and other states will act on it. A securities felony conviction twelve years old falls outside the ten-year window the act uses, and the date of conviction is what counts rather than the date a sentence ended. A misdemeanor with no securities or money element is not a ground at any age, and the act sets no educational standard, so a missing degree is irrelevant.
- Which of the following accurately describes a cease and desist order as authorized by the Uniform Securities Act?
- An order by the state Administrator directing a person to end an unfair practice
- An order by a federal agency directing a licensee to end advertising
- An order by the presiding judge directing a business to end a deceptive practice
- An order by one brokerage firm directing a rival to end undercutting
Correct answer: An order by the state Administrator directing a person to end an unfair practice
A cease and desist order under the Uniform Securities Act is an administrative directive by the state Administrator to a person believed to be engaged in, or about to engage in, conduct the Act forbids, and it may be entered with or without a prior hearing. Federal agencies have cease and desist powers of their own, but the Act being tested here governs the state Administrator, and it says nothing about advertising. A judge does not issue this order at all; a court issues an injunction, which is what the Administrator applies for when its own order is ignored. And a brokerage firm has no authority whatever to order a competitor to change how it does business.
- A registration of an agent can be denied or revoked if it is in the public interest and a registrant I. failed to include the fact that he was convicted of a non-securities-related misdemeanor within the last two years. II. has willfully violated the securities laws of a foreign jurisdiction. III. is qualified on the basis of knowledge and training but lacks requisite experience. IV. has engaged in dishonest or unethical practices in the securities business.
- I and III
- II and IV
- II only
- IV only
Correct answer: II and IV
Denial, suspension or revocation must be in the public interest and must rest on a ground the Act lists, and two of the four circumstances qualify: willfully violating the securities laws of a foreign jurisdiction, and engaging in dishonest or unethical practices in the securities business. That is why II and IV is the pairing that fits. A misdemeanor unconnected with securities is not a listed ground, so omitting it is not a basis for action; only a felony, or a securities-related misdemeanor, within the past 10 years reaches that standard. Lack of experience is expressly insufficient on its own, since the Administrator may weigh knowledge and training but may not act on inexperience alone. Naming either of those circumstances asserts a ground the Act does not give.
- Under the Uniform Securities Act, which of the following statements are true about the authority of an Administrator? I. A cease and desist order may be issued prior to a hearing. II. A cease and desist order may be issued after a hearing. III. A cease and desist order is valid for a maximum of 30 days. IV. A cease and desist order may be used to suspend the offering of a security.
- I and IV
- I, II, and III
- I and II
- I, III, and IV
Correct answer: I and II
The Administrator may enter a cease and desist order after notice and a hearing, and may also enter it summarily, before any hearing at all, when circumstances warrant. Both routes are open, so I and II is what the Act supports. The Act attaches no expiration to such an order, so there is no maximum life of 30 days to be included in the answer. The order also runs against a person and that person's conduct; suspending the offering of a security is the work of a stop order, which is aimed at the security itself. Any combination carrying the 30-day life, or the suspension of an offering, states something the Act does not.
- The state securities Administrator has the authority to
- Redraft, expand, and repeal the clauses of the Act when state policy has shifted
- Grant, extend, and enforce an injunction of its own against a broker
- Issue, apply, and withhold from publication a rule which she has kept to herself
- Adopt, amend, and rescind the rules and orders needed under this Act
Correct answer: Adopt, amend, and rescind the rules and orders needed under this Act
The Act empowers the Administrator to adopt, amend, and rescind the rules, forms and orders needed to administer it, and that rulemaking authority is the whole of the power described here. Changing the text of the Act belongs to the state legislature that enacted it, so no administrative act can redraft or repeal a clause of the statute. Every rule, form and order the Administrator makes must be published, so a rule kept private is not something the office may produce. And injunctive relief comes from a court of competent jurisdiction on the Administrator's application, so the Administrator can neither grant nor enforce one.
- The Administrator may I. deny a registration if the registrant does not have sufficient experience to function as an agent. II. limit a registrant's functions to that of a broker-dealer if, in the initial application for registration as an investment adviser, the registrant is not qualified to act as an investment adviser. III. take into consideration that the registrant will work under the supervision of a registered investment adviser or broker-dealer in approving a registration. IV. deny a registration if it is prudent in view of a change in the state's political composition.
- II and III
- II only
- III and IV
- IV only
Correct answer: II and III
Two of the four powers described are real. The Administrator may find that an applicant is not qualified to act as an investment adviser and limit that registration to broker-dealer activity, and the Administrator may take into account that the applicant will work under the supervision of a registered adviser or broker-dealer. That makes II and III the accurate pairing. Insufficient experience standing alone is expressly not a basis for denial, so that circumstance never qualifies. The political composition of the state is not a ground either, because every denial must rest on the public interest and a statutory ground rather than on who holds office. Any pairing built on one of those two claims a power the Administrator does not have.
- Under the Uniform Securities Act, all of the following could be cause for disciplinary review action by the state securities Administrator except
- An applicant for adviser registration omits a fraud conviction from twelve years earlier
- An adviser firm engages the representatives it uses as independent contractors
- A registered investment adviser conceals the bankruptcy petition that he filed this week
- A registered representative is suspended from the securities business by FINRA
Correct answer: An adviser firm engages the representatives it uses as independent contractors
Nothing in the Act requires that an investment adviser representative be a salaried employee, and independent contractor arrangements are ordinary among independent planners, so an adviser firm that engages the representatives it uses as independent contractors has done nothing that invites discipline. The other three all do. A suspension imposed by another regulator such as FINRA is something Administrators act on. The Administrator's power to deny for a conviction runs to the past 10 years, but the duty to disclose a felony or a securities-related misdemeanor is not limited to that window, so leaving a twelve year old fraud conviction off an application is a failure to disclose. A bankruptcy filing is likewise a required disclosure, and concealing it is itself the violation.
- Under the Uniform Securities Act, which of the following statements regarding investigations conducted by the Administrator are true? I. Information regarding violations must be kept confidential. II. Investigations may be conducted across state lines. III. The Administrator may obtain a court order to have a receiver appointed over a violator's assets.
- I, II, and III
- II only
- II and III
- I and II
Correct answer: II and III
The Administrator's investigative reach is not bounded by the state line, and the Administrator may apply to a court of competent jurisdiction to have a receiver appointed over the assets of a person believed to have violated the Act. Those two powers together make II and III the accurate combination. Confidentiality is where the remaining statement fails: the Act empowers the Administrator to publish information concerning violations, so there is no duty to keep that information confidential, and any combination including it asserts an obligation the Act never imposes. Naming the cross-border power by itself is incomplete as well, because it leaves out the receivership remedy the Act expressly grants.
- When the Administrator issues a cease and desist order,
- The person named in the order also loses his state registration for good
- The person named in the order must refund every client who paid for the security
- The person named in the order may keep trading until the hearing is finally held
- The person named in the order must break off that activity without delay
Correct answer: The person named in the order must break off that activity without delay
A cease and desist order means what its name says: the person it names must break off the activity it describes without delay and refrain from it going forward. It is not a revocation and not a suspension, so registration survives the order and can be reached only in a separate proceeding brought for that purpose. It carries no rescission remedy either, so it does not order money returned to anyone who paid for the security. And because the Administrator may enter the order summarily, without prior notice or hearing, there is no interval during which the conduct may continue while a hearing is awaited.
- On determining that a registrant or applicant for registration is no longer in existence or has ceased doing business as either an agent or a broker-dealer, the Administrator may
- Cancel the registration because the business named in it went out of existence
- Revoke the registration because the adviser has willfully broken the Act
- Suspend the registration since the business named in it has an inquiry pending
- Withdraw the registration because the business has gone to another state
Correct answer: Cancel the registration because the business named in it went out of existence
When a registrant or applicant is no longer in existence, has ceased doing business, or cannot be located, the Administrator cancels the registration or the application. Cancelling the registration because the business named in it went out of existence is the nonpunitive termination the Act provides for exactly this situation. Revocation and suspension are sanctions instead, and each requires a finding that a statutory ground exists and that action is in the public interest, while a firm that has simply wound up has violated nothing. Withdrawal is not an act of the Administrator at all, because a withdrawal is requested by the registrant and becomes effective on its own terms.
- Fusion Financial is a broker-dealer registered in States A, B, and C, with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted by the Uniform Securities Act, the Administrator of State B could do all of the following except
- Inspect the books and records held at the firm's principal office in State B
- Issue an injunction that bars the firm from selling inside State A
- Take testimony from the complaining customer at her own home over in State A
- Subpoena a witness employed by another dealer who lives in State C
Correct answer: Issue an injunction that bars the firm from selling inside State A
An injunction is a judicial remedy. An Administrator who wants one applies to a court of competent jurisdiction, which may then grant it, so issuing an injunction that bars the firm from selling is the one action beyond the Administrator's reach here. Everything else falls squarely inside the Act's grant of investigative power. The Administrator may inspect the books and records of a registrant kept in the home state, may take testimony from a complaining customer in another state, and may subpoena a witness wherever that witness happens to live. The Act extends that authority both within and outside the Administrator's own state.
- The issuance of a stop order by a state securities Administrator requires
- A criminal indictment brought against the issuer of the security
- An injunction order granted by the trial court hearing the issuer's case
- An opportunity for a hearing offered to the registrant the order affects
- A written consent obtained from the underwriters of the offering
Correct answer: An opportunity for a hearing offered to the registrant the order affects
A stop order may not be entered without an opportunity for a hearing offered to the registrant the order affects, and that opportunity is what the Act requires; while the order stands, the security may not be sold to the public. No court order forms part of the process, so an injunction is neither required nor available to the Administrator, who must apply to a court if injunctive relief is wanted. Criminal charges are brought by the prosecuting authorities rather than by the Administrator, so no indictment is needed first. And no consent from the underwriters or anyone else is a precondition, because the order is entered over the objection of the parties rather than with their agreement.
- There are many reasons why the Administrator might deny an application for registration as an agent. It is unlikely, however, that the application would be denied if
- The applicant is insolvent and cannot satisfy his creditors as they fall due
- The applicant was convicted for a felony seven years before applying
- The applicant pleaded guilty to a charge of securities fraud eight years ago
- The applicant has turned in the application complete in each respect
Correct answer: The applicant has turned in the application complete in each respect
A complete application is what the Act calls for in the first place, so an applicant who has turned in the application complete in each respect has given the Administrator no reason to deny it; it is the incomplete filing that is a ground for denial. Insolvency is a listed ground, and an applicant who cannot satisfy creditors as they fall due may be denied on that basis. A felony conviction within the past 10 years is a ground whatever the felony concerned, so a conviction seven years before the application qualifies. A guilty plea to securities fraud eight years earlier is a securities-related conviction inside the same 10 year window and is sufficient as well.
- An applicant for registration as an investment adviser discloses on its application to the Administrator that it plans to use palm readers to help determine which investments are most suitable for their clients. Under the Uniform Securities Act, the Administrator
- May deny the application only for a reason the Act itself spells out plainly
- May deny the application only after the SEC has evaluated the method
- Must decide whether the method of analysis has any merit before acting on it
- Must obtain a performance record to show the method works as claimed
Correct answer: May deny the application only for a reason the Act itself spells out plainly
Denial has to rest on law. The Act lists the grounds, among them felony convictions, outstanding injunctions and insolvency, and the Administrator may deny the application only for a reason the Act itself spells out plainly. Nothing in the Act forbids an unusual method of analysis, and the Administrator is not empowered to pass on whether a method has merit, so deciding the worth of palm reading lies outside the authority granted. The SEC plays no part in a state registration of this kind and is not consulted before a state application is acted on. Past performance data may matter to other questions, but it is not something the Administrator may demand as the price of registration.
- Which of the following would subject an agent to a denial of registration?
- Being arrested but not charged for embezzling money from a former employer
- Not paying the registration fee the state requires with the form
- Being convicted of a misdemeanor far removed from securities six years ago
- Losing a civil action a tenant brought over his rented apartment
Correct answer: Not paying the registration fee the state requires with the form
Failure to pay the fee that accompanies the application is a ground for denial, so not paying the registration fee the state requires is what would subject this agent to denial. An arrest is not a conviction, and the Act speaks to convictions, so being taken into custody without a charge being brought establishes nothing. A misdemeanor conviction matters only when the offense involves securities, so a misdemeanor far removed from securities does not qualify however recent it may be. And a civil judgment arising from the agent's dealings as a landlord has nothing to do with the securities business and is not a listed ground.
- An applicant for registration as an IAR in this state was convicted four years ago of a nonfinancially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will
- Record the offense as a felony because his present state grades it
- Turn the application down now since any felony bars a person from the field
- Record the offense as the misdemeanor it was in the state of the conviction
- Censure the adviser for even wanting to employ someone with a past
Correct answer: Record the offense as the misdemeanor it was in the state of the conviction
The Administrator works from what the applicant's record actually shows, and the record shows the disposition entered by the state where the case was decided. Because that state treated the conduct as a misdemeanor, the Administrator records the offense as the misdemeanor it was in the state of the conviction, and a nonfinancial misdemeanor is not a statutory disqualification. How this state would grade the same conduct is beside the point, since no record of a felony exists to act on. Turning the application down therefore rests on a felony that is not there. And there is no basis for censuring the adviser over the hire, because nothing improper has taken place.
- Under the Uniform Securities Act, the Administrator is required to provide which of the following in a disciplinary proceeding? I. Appropriate prior notice II. Opportunity for a hearing III. Written findings of fact and conclusions of law
- I and II, but not III
- I and III only
- II and III, but not I
- I, II, and III
Correct answer: I, II, and III
In a disciplinary proceeding the Administrator owes the registrant all three protections: appropriate prior notice, an opportunity for a hearing, and written findings of fact and conclusions of law. That is why I, II, and III is the complete answer. Even an order entered summarily, effective the moment it issues, drops none of the three; the registrant is notified when the order issues and may request the hearing, and the findings and conclusions still have to be written out. Any answer that leaves out the written findings, or the prior notice, or the hearing, describes a proceeding the Act would not permit.
- While a student at college nine years ago, Joe was convicted of possession of marijuana (a misdemeanor in that state) and received a suspended sentence. Joe now resides in a different state where the same offense is a felony. If Joe disclosed the matter on his application to ABC Securities, Joe's registration may
- Not be denied, since the trial state recorded a misdemeanor against his name
- Not be denied, because the conviction predates the ten-year window
- Be denied, because the conviction turned on a controlled substance
- Be refused, because his new home state calls that identical offense a felony
Correct answer: Not be denied, since the trial state recorded a misdemeanor against his name
Only a felony conviction within the past 10 years, or a securities-related misdemeanor in that period, is a ground for denial, and Joe's record shows neither. His registration may not be denied, since the trial state recorded a misdemeanor against his name, and the disposition entered where the case was decided is what the Administrator acts on. The age of the conviction is not the reason: nine years falls inside the ten year window rather than before it, so a conviction that did qualify would still be reachable. That his new home state would call the same conduct a felony does not rewrite a record entered elsewhere. And the substance involved is not what the Act measures; the grade of the offense and its connection to securities are.
- Under the Uniform Securities Act, the Administrator may deny or revoke a registration if an agent I. submits an incomplete application. II. willfully violates a provision of the Uniform Securities Act. III. has no prior sales experience. IV. was convicted of a non-securities-related misdemeanor four years ago in another state. That crime, however, is a felony in this state.
- I, II, and III
- I and II
- I, III, and IV
- I and IV
Correct answer: I and II
An incomplete application is a ground for denial, and a willful violation of a provision of the Act is a ground for denial, suspension or revocation, so I and II is the pairing that fits. Having no prior sales experience is expressly not enough by itself, because the Administrator may consider training and knowledge but may not act on inexperience alone. The out-of-state conviction fails for a different reason: the Administrator reads the record as the convicting state entered it, and that state entered a misdemeanor unrelated to securities, which is not a listed ground however this state would grade the same conduct. Any combination carrying either of those rests on something the Act does not make actionable.
- The Administrator may take disciplinary action against a registered person when the registrant has done any of the following except
- Broke a provision of the federal securities laws while taking orders
- Followed a course of dealing that was unethical although it was not unlawful
- Turned down an application for a personal loan from a longtime retail client
- Failed to supervise an employee who engaged in a prohibited practice
Correct answer: Turned down an application for a personal loan from a longtime retail client
There is no duty anywhere in the Act to lend a client money. Even in the narrow circumstances where a broker-dealer or investment adviser is permitted to make a loan to a customer, it is never obliged to, so having turned down an application for a personal loan is not something the Administrator may act on. The other three are all actionable. A state Administrator may discipline a registrant for breaking the federal securities laws as well as the state act. Failing to supervise an employee who engages in a prohibited practice is itself a violation by the supervisor. And unethical dealing is a ground in its own right, which is why conduct can be actionable even though no statute was broken.
- Under the Uniform Securities Act, a state securities Administrator can I. start an investigation against a registrant even if a violation has not yet occurred. II. subpoena witnesses living in the Administrator's state only. III. subpoena witnesses living outside the state. IV. begin an investigation only after a violation of the act has occurred.
- I, II, and III
- II and IV
- I, III, and IV
- I and III
Correct answer: I and III
The Administrator's investigative authority is broad. An investigation may be opened to determine whether a violation has occurred or is about to occur, so it need not wait for a completed violation, and the subpoena power reaches witnesses wherever they live, including outside the state. That is the pairing I and III describes. Limiting subpoenas to residents of the Administrator's own state understates the authority the Act grants, and requiring that a violation already have occurred before an investigation may begin contradicts the preventive purpose of the section. Any combination built on either of those describes a narrower office than the Act creates.
- An Administrator could use which of the following as a reason for issuing an order denying the registration of a security in her state? I. The issuer's enterprise or method of business includes or would include activities that, although legal in the state of incorporation, are illegal in the Administrator's state. II. The company has not been paying dividends. III. The offering would be made with unreasonable amounts of underwriter and seller discounts.
- I and III
- III only
- I, II, and III
- I and II
Correct answer: I and III
Registration of a security may be denied when the issuer's business, though lawful where the company was incorporated, would be illegal in the Administrator's own state, and it may also be denied when the offering carries unreasonable amounts of underwriter and seller compensation. Those two grounds together are what I and III names. The absence of dividends is not a ground at all, because the Act calls for full disclosure rather than a judgment about how attractive an investment is, and many registered issuers pay nothing. Naming the compensation ground by itself leaves out the illegality ground, which the Act treats as equally sufficient.
- If an agent's registration is revoked for a violation of the act, the Administrator may deny a future application submitted by the agent for registration as I. an agent. II. a broker-dealer. III. an investment adviser.
- I and II only
- I, II, and III
- II and III, but not I
- I and III, but not II
Correct answer: I, II, and III
A revocation follows the person rather than the job title. Once an agent's registration has been revoked for a violation of the Act, the Administrator may deny that person's later application to register in any capacity, whether as an agent, as a broker-dealer or as an investment adviser, which is why I, II, and III is the answer. That is what is meant when the sanction is described as a bar from the industry. Any answer leaving one of the three capacities out implies the person could re-enter through that door, and the Act creates no such opening for a revoked registrant.
- Among the powers granted to the Administrator under the Uniform Securities Act is the power to
- Appoint a SIPC trustee to liquidate a failed brokerage company
- Prosecute an agent criminally for having cheated a client and her spouse
- Compel testimony and the handing over of documents by issuing a subpoena
- Refuse an agent's registration for a lack of market experience
Correct answer: Compel testimony and the handing over of documents by issuing a subpoena
The Act expressly gives the Administrator subpoena power, which is how evidence is gathered in an investigation, so compelling testimony and the handing over of documents by issuing a subpoena is the power that is unquestionably granted. Criminal cases are a different matter: the Act is silent on any power in the Administrator to prosecute, and the usual course is a referral of the evidence to the attorney general or the appropriate prosecutor. Lack of experience is never enough on its own to justify refusing a registration, since the Administrator may weigh knowledge and training instead. And appointing a trustee under the federal investor protection scheme is not a state function and has nothing to do with the Act.
- The Administrator of a state's securities department strongly believes that the registration statement for a security contains a substantial amount of misleading information and that investing in the security is likely to cause immediate and egregious harm to its investors. Under these circumstances, the Administrator may
- Enter a stop order immediately and refuse a hearing for as long as she pleases
- Enter a stop order now, then convene the hearing exactly 30 days later
- Wait for the full hearing to be concluded before any stop order can be entered
- Enter a stop order at once, provided the registrant is given a hearing
Correct answer: Enter a stop order at once, provided the registrant is given a hearing
The Administrator may act on a belief that a registration statement is misleading and that investors face immediate harm, and the order may take effect on issue, but the person affected must be given an opportunity for a hearing. Entering a stop order at once, provided the registrant is given a hearing, is therefore what the Act allows. Refusing a hearing indefinitely is not open to the Administrator, because appropriate prior notice, the opportunity to be heard, and written findings of fact and conclusions of law are all owed. Nor must the Administrator stand by until a hearing has concluded, since the Act permits summary action. And no fixed 30 day scheduling rule exists; the matter is set down for hearing on the registrant's written request.
- Under the Uniform Securities Act, the Administrator may do all of the following except
- Issue a stop order that denies a registration statement its effect
- Revoke an exemption that the state had lately allowed an issue
- Issue a summary order that halts a firm's improper stock sales
- Issue an injunction that compels the wrongdoer to obey the statute
Correct answer: Issue an injunction that compels the wrongdoer to obey the statute
An injunction issues only from a court of competent jurisdiction, so the Administrator cannot itself order a wrongdoer to obey the statute; the remedy is to apply to that court, and if relief is granted the Administrator may then ask that a receiver be named over the defendant's assets. Acting on its own the Administrator may enter a stop order denying effectiveness to a registration statement, may enter a summary order halting improper sales, and may revoke an exemption the state had previously allowed.
- Under the Uniform Securities Act, as a result of a hearing, the disciplinary actions that may be taken by the Administrator include which of the following? I. Permanent revocation of a registration II. Bar from employment with any registrant III. Restriction on a registrant's performance of any activity in the advisory or brokerage business
- I, II only
- I, III only
- I, II, III
- II, III only
Correct answer: I, II, III
After notice and a hearing the Administrator may impose the full range of remedies on a registrant, so permanent revocation of the registration, a bar from association with any registrant, and a restriction limiting the advisory or brokerage activities the person may perform are all available. Every one of the three is authorized by the act, so any combination that leaves one of them out understates the Administrator's authority.
- An agent's license can be revoked if he is any of these except
- Convicted of a felony that had no link to securities
- Established to be under twenty-one years of age upon entry
- Declared insolvent by a court after review of the accounts
- Convicted of a misdemeanor that had to do with bonds
Correct answer: Established to be under twenty-one years of age upon entry
The Uniform Securities Act sets no age qualification beyond legal age, so being under twenty-one when a person joins a firm is not a ground for revoking a registration. A conviction for any felony is a ground whether or not securities were involved, a conviction for a misdemeanor involving securities such as bonds is a ground, and a judicial finding of insolvency is a ground against any securities professional.
- Under the Uniform Securities Act, which of the following concerning the withdrawal of an agent's registration is not true?
- Sixty days must elapse after the filing before a withdrawal is effective
- A pending proceeding lets the Administrator choose the effective date by order
- The Administrator acts for one whole year after a withdrawal becomes effective
- An agent who withdraws must still answer for conduct done while licensed
Correct answer: Sixty days must elapse after the filing before a withdrawal is effective
Withdrawal becomes effective on the thirtieth day after the application is filed, not the sixtieth, provided no proceeding is pending or instituted. Where a proceeding is pending the Administrator fixes the effective date by order, the Administrator keeps jurisdiction to begin a revocation or suspension proceeding for one year after the withdrawal takes effect, and the former agent stays answerable for conduct that occurred while he was licensed.
- Under the Uniform Securities Act, the Administrator has the power to do all of the following except
- Administer an oath to the witness who offers testimony
- Subpoena a witness who lives in some other state
- Require a firm to hand over the official records
- Indict a violator who has knowingly broken the statute
Correct answer: Indict a violator who has knowingly broken the statute
Charging a person with a crime is not an administrative power. The Administrator may refer evidence to the attorney general or the appropriate district attorney, but an indictment is returned by a grand jury. What the act does give the Administrator is authority to administer oaths, to subpoena witnesses wherever they reside, to take evidence, and to compel production of the official records a firm is required to keep.
- An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state
- With only the facts it had when the firm once registered
- Because a broker of the firm was convicted of investment fraud
- After it learns the firm was suspended in a second state
- Within two years of the date the firm's withdrawal took effect
Correct answer: After it learns the firm was suspended in a second state
A suspension entered against the firm by the securities administrator of another state is itself a statutory ground for a proceeding here. Facts the Administrator already held when the firm first registered cannot support a later proceeding, since only newly discovered facts can. One salesperson's fraud conviction reaches the firm only where that person is an officer, director, or partner, or where the firm failed to supervise. Jurisdiction over a withdrawn registration runs for one year, not two.
- If it is in the public interest, under the Uniform Securities Act, an agent's registration may be suspended by the Administrator for all of the following reasons except
- A court order that bars the agent from dealing
- A plain charge that the agent defrauded a client
- A conviction for a willful breach of the statute
- A ruling that the agent never oversaw his team
Correct answer: A plain charge that the agent defrauded a client
An accusation proves nothing, and a person is presumed innocent until the charge is established, so an unproven claim that the agent defrauded a client will not support a suspension. A conviction for a willful breach of the act supplies the proof an accusation lacks, a court order barring the agent from dealing is an independent ground, and a determination that the agent failed to supervise those under him is a ground as well.
- In order for the Administrator to suspend an agent's registration, compliance with the requirements of the Uniform Securities Act would not require that
- counsel be appointed by the court for a broker unable to pay
- notice of the contemplated action and hearing be given to the agent
- the agent be given a fair chance to be heard before judgment
- the broker-dealer that employs the agent be told of the final order
Correct answer: counsel be appointed by the court for a broker unable to pay
A suspension proceeding is administrative rather than criminal, so no court appoints counsel and an agent who wants a lawyer pays for one. The act does require notice of the contemplated action and of the hearing, an opportunity to be heard before any order is entered, with the matter set for hearing within fifteen days of a written request, and notification of the employing broker-dealer, which is told when the action begins and again when the order is final.
- A state-registered investment adviser is the subject of an injunction requested by the Administrator. As a result,
- the representatives of an adviser may also lose their own licenses
- the registration of the adviser is suspended at once by law
- a hearing must be held fifteen days after a signed petition
- a receiver over the adviser's assets can be appointed upon request
Correct answer: a receiver over the adviser's assets can be appointed upon request
The Administrator cannot compel obedience on its own, so it applies to a court of competent jurisdiction, and where the court grants a temporary or permanent injunction it may on the Administrator's request appoint a receiver or conservator over the defendant's assets. The injunction only orders the specified conduct to stop; it cancels no registration, so neither the adviser's registration nor those of its representatives is affected. The fifteen-day hearing right attaches to a summary order, not to an injunction.
- The Uniform Securities Act invests the office of the Administrator with a number of powers. However, the act does not permit the Administrator to
- require that a prescribed form be used to register securities
- inspect a firm's branch during business hours with no warning
- grant an injunction once it has evidence of a violation
- enter a cease and desist order without any prior notice
Correct answer: grant an injunction once it has evidence of a violation
An injunction is judicial relief that only a court can grant, however strong the evidence of a violation may be; the Administrator's route is to petition that court. The act does let the Administrator enter a cease and desist order without prior notice, prescribe the forms on which securities are registered, and inspect the offices of a registered firm during business hours without announcing the visit.
- The Uniform Securities Act invests the Administrator with many powers over the activities of agents and broker-dealers. Which of the following actions does not fall within the Administrator's powers?
- Issuing a subpoena to the witness in a distant state
- Suspending a registration without a prior chance of a hearing
- Examining a broker whose office is in a second state
- Entering a cease and desist order without a preceding hearing
Correct answer: Suspending a registration without a prior chance of a hearing
A registration may not be suspended unless the person has notice and an opportunity to be heard; even a summary order entered pending final determination carries the right to a hearing on written request. The Administrator's subpoena power reaches witnesses wherever they live, a cease and desist order may be entered before any hearing takes place, and a firm registered in the state may be examined even though its office sits elsewhere.
- Which of the following statements relating to termination of registration of a securities professional registered under the Uniform Securities Act is true?
- The Administrator can act for one year after a withdrawal is effective
- A registrant who is found mentally unfit may have his registration revoked
- An applicant can be denied registration only for lack of useful experience
- A registration in effect may be withdrawn only when coercion is proved
Correct answer: The Administrator can act for one year after a withdrawal is effective
A registrant may ask to withdraw, and the withdrawal takes effect thirty days later where no proceeding is under way, but the Administrator keeps the right for one full year to begin an action over conduct that occurred while the person was registered. Mental incompetence leads to cancellation, which is nonpunitive, rather than revocation. Thin experience is not by itself a ground for denial, and a withdrawal is a voluntary request, never something extracted by coercion.
- Under the Uniform Securities Act, the state Administrator may, by order, deny, suspend, or revoke an investment adviser's registration for
- a client complaint about the adviser that no one has ever proved
- a conviction for a crime handed down more than fifteen years ago
- a shortage of any practical experience as an adviser to retail clients
- a breach of another state's securities laws within the last five years
Correct answer: a breach of another state's securities laws within the last five years
A violation of any state or federal securities or commodities law within the past ten years is a ground for an order denying, suspending, or revoking a registration, and no hearing is required for such an order, so breaching a sister state's securities laws five years ago falls inside the window. A conviction more than fifteen years old falls outside it. Thin experience is not a statutory ground at all, and an unproven client complaint is an allegation rather than a finding.
- Under the Uniform Securities Act, violations of the act may result in all of the following except
- a court order that the violator refund the cash taken
- a bar that keeps the wrongdoer out of securities dealing
- an arrest of the person at fault by the Administrator
- the appointment of a receiver over the firm's own assets
Correct answer: an arrest of the person at fault by the Administrator
The Administrator may impose some sanctions itself and may ask a court to impose others, so an order of restitution to injured customers, the naming of a receiver over the firm's assets, and a bar from securities dealing are all possible consequences of a violation. Arrest is not among the Administrator's tools: evidence of criminal conduct is referred to a prosecutor, and any arrest is made by law enforcement.
- There are several ways that a securities professional's registration can be terminated. Nonpunitive termination of a securities professional's registration could be done through I. cancellation. II. suspension. III. revocation. IV. withdrawal.
- I and II
- I and IV
- II and III
- III and IV
Correct answer: I and IV
Termination is nonpunitive when it comes by cancellation, which the Administrator enters where a person has died, been dissolved, been declared mentally incompetent, or cannot be found, and when it comes by withdrawal, which the registrant requests. Suspension and revocation are disciplinary sanctions imposed for cause, so any pairing that includes one of them describes punishment rather than a nonpunitive end to a registration.
- In conducting investigations, the Administrator may not
- investigate acts in another state that broke only its own law
- publish the facts of a violation that the violator loudly protests
- require a person to submit a signed declaration that is sworn
- compel a witness to produce the records that a broker-dealer keeps
Correct answer: investigate acts in another state that broke only its own law
The Administrator may gather evidence inside the state and beyond it, but the purpose must be to determine whether the act was violated in his own state; conduct that offended only another state's law belongs to that state's Administrator. Within his own jurisdiction he may publish information about a violation however loudly the violator objects, may require statements to be filed in writing and under oath, and may compel production of the records a firm keeps.
- Under the Uniform Securities Act, the Administrator may designate another official in the department to
- enter a cease and desist order against a registered agent
- grant an exemption from registration to a new stock issue
- revise the recordkeeping rules that apply to a state registrant
- deliver a subpoena to the witness on the Administrator's behalf
Correct answer: deliver a subpoena to the witness on the Administrator's behalf
Serving a subpoena is a ministerial act, so the Administrator may direct another official in the department to carry it out. Discretionary authority cannot be handed off that way: whether an exemption from registration is granted and whether a cease and desist order is entered are decisions the act commits to the Administrator. Recordkeeping requirements are fixed by the act and the rules under it, so no official in the department revises them.
- Which of the following statements is not true regarding criminal penalties under the Uniform Securities Act?
- The Administrator sends proof to a prosecutor and files no case
- A knowing breach of the act can bring a criminal penalty
- A civil recovery by a customer rules out a criminal case
- An indictment must be returned within five years of the conduct
Correct answer: A civil recovery by a customer rules out a criminal case
Criminal penalties stand on their own and may be imposed in addition to any other penalty assessed or damages recovered, so a customer's civil recovery does not shield the violator from prosecution. The Administrator has no prosecuting power and refers evidence to the attorney general or district attorney, an indictment must be returned within five years of the conduct, and it is a willful violation of any provision of the act that exposes a person to criminal penalties.
- The Uniform Securities Act provides for all of the following except
- no state registration for a stock that is federal covered
- a forfeiture of three times the money the client invested
- criminal penalties of up to three years in state prison
- the power to subpoena a witness during a formal inquiry
Correct answer: a forfeiture of three times the money the client invested
The act creates civil liability rather than a civil penalty measured as a multiple of the money a client put in, and treble damages appear nowhere in it. A buyer's remedy is rescission or damages, which returns the price paid plus interest, less any income received, together with court costs and reasonable attorney's fees. The act does provide criminal penalties of up to three years in prison and a fine of up to $5,000, it leaves federal covered securities outside state registration, and it gives the Administrator subpoena power.
- In order for a surety bond to meet the requirements of the Uniform Securities Act, it must provide that
- a customer who can prove a violation may recover against the bond
- the bond that another agent posted will do because bonds move freely
- the Administrator renews the bond each year on behalf of the firm
- cash or marketable securities must always take the place of the bond
Correct answer: a customer who can prove a violation may recover against the bond
Every bond required under the act must provide for suit on it by any person who has a cause of action against the registrant, so a customer who proves a violation may recover against the bond. The Administrator must accept cash or securities deposited in lieu of a bond, but a surety bond satisfies the requirement on its own, so no deposit is compelled. A bond is written for a named registrant and cannot be borrowed from another, and keeping it in force is the registrant's own obligation.
- A client sues an agent for selling an unregistered nonexempt security. Shortly before the case comes to trial, the client dies.
- The cause of action passes to the heirs who choose to press it
- The cause of action dies since the plaintiff did not reach the trial
- The cause of action is decided at once for the client who died
- The cause of action survives the death of either party to the action
Correct answer: The cause of action survives the death of either party to the action
The act states that every cause of action under it survives the death of any person who might have been a plaintiff or a defendant, so the client's death changes nothing about whether the case may be tried. Survival happens by operation of the statute and does not wait on an election by the heirs, the suit is not extinguished by the death, and nothing about a party's death entitles either side to judgment.
- A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true?
- A material change to the wrap fee program passes to the Administrator
- Appendix 1 of Form ADV Part 2A likewise goes to the investors
- The wrap fee sponsor must file its annual report with the SEC
- An annual filing of the Form reaches the Administrator in ninety days
Correct answer: The wrap fee sponsor must file its annual report with the SEC
A state-registered adviser makes its filings with the Administrator rather than the SEC, so offering wrap fee programs creates no annual reporting duty to the Commission. The wrap fee brochure is Appendix 1 of Form ADV Part 2A, and the information in it must also reach the people who invest through the program. Material changes are filed promptly with the Administrator, and the annual updating amendment, which carries nonmaterial information as well, is due within ninety days of the end of the adviser's fiscal year.
- Keshawn is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Keshawn just opened an account with a new customer, someone who has never invested in securities. In an effort to curb the customer's anxiety over market fluctuations, Keshawn explains a program he worked out with EIR that provides a cash deposit to a customer's account whenever the price of a stock in that account declines by more than 5%. This program is
- Lawful, provided the customer is given all the terms up front
- Forbidden, since no broker may guarantee a customer against market losses
- Allowed, provided the customer's account has now been approved for margin
- Acceptable, since the broker may spend his own funds for this
Correct answer: Forbidden, since no broker may guarantee a customer against market losses
Guaranteeing a customer against loss is a prohibited practice under the NASAA statements of policy, and a promise to deposit cash whenever a position falls more than five percent is exactly such a guarantee. Margin approval has nothing to do with the prohibition, handing the customer all the terms up front does not make a guarantee permissible, and the source of the money is irrelevant, since an agent may not share in a customer's losses either.
- Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Which of the following is not a common way for making this disclosure?
- A thirty-second radio ad read out to name each fee charged
- A fee schedule posted on the firm's public website for clients
- A table of charges set out in the customer's account agreement
- A printed list of every fee given to the client beforehand
Correct answer: A thirty-second radio ad read out to name each fee charged
Broker-dealers disclose their charges in a form a client can study and keep, such as a schedule posted on the firm's website, a table set out in the account agreement, or a printed list handed over before the account is used. A thirty-second radio commercial is not a disclosure method at all, because a listener cannot retain a spoken recitation of charges, cannot go back to it, and the format cannot carry the detail regulators expect the disclosure to hold.
- Stephanie Whitworth, an agent with a nationally known broker-dealer, has uncovered an unusual investment opportunity that she believes is perfect for one of her clients. When presenting the recommendation to the client, it becomes clear that the client is concerned about the potential of loss. To alleviate that concern, Whitworth tells the client that she agrees to repurchase the security from the client anytime within the next 60 days at the original purchase price. In so doing, Whitworth
- Has acted appropriately because no profit was promised
- Has acted appropriately by disclosing the market risks
- Has committed the prohibited practice of guaranteeing against loss
- Has committed the prohibited practice of recommending wash trading
Correct answer: Has committed the prohibited practice of guaranteeing against loss
An agent may not offer to buy a security back at the client's cost or at any set price that shields the client from loss. NASAA's Statement of Policy on Dishonest or Unethical Business Practices treats such an offer as guaranteeing a customer against loss, and it is prohibited whether or not the agent is ever called on to honor it. The absence of a promised profit is no defense, because the prohibition reaches guarantees against loss on their own terms. Disclosing market risk does not cure it either, since the repurchase promise removes the very risk being disclosed. A wash sale is something else entirely: a matched sale and repurchase used to manufacture a tax loss or the appearance of trading, and nothing of that kind happened here.
- A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means
- The firm considers these securities suitable for retirement plans
- The firm predicts these securities will outperform other holdings
- The firm has obtained clearance from the Administrator to offer them
- The firm has excused its agents from checking a client's suitability
Correct answer: The firm considers these securities suitable for retirement plans
A firm may compile and publish its own list of securities it has evaluated for retirement accounts. Nothing in the Uniform Securities Act forbids it, so long as the approval is plainly the firm's own judgment. What the firm may not do is imply that any regulator passed on the securities: no Administrator clears or endorses an issue, and saying so is misrepresentation. The list is also not a suitability determination for any particular customer, so each agent still has to decide whether a listed security fits the individual whose IRA it is going into. An internal approval is not a registration exemption either, since a listed security registers or qualifies for an exemption on its own terms. And it is not a forecast: selecting a security as suitable for retirement money says nothing about whether it will outperform anything else.
- James Douglas, an agent with Government Securities Specialists (GSS), a broker-dealer registered in this state, sells his client 10 U.S. government bonds due to mature in 30 years. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following statements may Douglas legally make?
- The bonds are guaranteed by the U.S. government against any market or price loss
- The bonds are guaranteed by the U.S. government to hold their market value
- The bonds are guaranteed by the U.S. government to beat the inflation rate
- The bonds are guaranteed by the U.S. government as to the principal and interest
Correct answer: The bonds are guaranteed by the U.S. government as to the principal and interest
United States government securities carry the full faith and credit of the government for the timely payment of principal and interest, so stating that, and nothing more, is an accurate statement of fact and is permitted. The guarantee stops there. It does not promise that a 30-year bond will hold its market value; if rates rise the price falls, and a client who sells before maturity takes a real loss. It says nothing about purchasing power, so no agent may claim the bonds will beat inflation. And it is not a guarantee against a decline in the market, which is precisely the risk the holder keeps.
- NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Which of the following statements correctly identify those delivery requirements? I. The brochure must be delivered to prospective and new advisory clients at least 48 hours prior to entering into the advisory contract. II. The brochure must be delivered to prospective and new advisory clients no later than entering into the advisory contract. III. Annual delivery of the brochure to existing clients must be made within 90 days of the end of the adviser's fiscal year. IV. Annual delivery of the brochure to existing clients must be made within 120 days of the end of the adviser's fiscal year.
- I, III, and IV
- II and IV
- I and III
- I, II, and III
Correct answer: II and IV
The Model Rule sets the outside limit for initial delivery at the time the client enters into the advisory contract, which is statement II. Statement I misstates the rule: delivery 48 hours in advance is optional, and its only effect is to relieve the adviser of offering the five-business-day penalty-free withdrawal right. Annual delivery to existing clients is due within 120 days of the end of the adviser's fiscal year, which is statement IV. The 90 days in statement III is the deadline for filing the annual updating amendment with the Administrator, not for delivering the brochure. Any choice built on statement I or statement III therefore fails.
- MaryJo Barkley is the CEO of MJB Securities. MJB is distributing an offering of ABC common stock to investors. Barkley has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of
- The authorization of the offering by the underwriter
- The registration of this security with the state Administrator
- The qualification of her firm as an underwriting broker-dealer
- The material facts about the issuer's own operations
Correct answer: The registration of this security with the state Administrator
Telling investors that registration signals state approval is a misrepresentation of the security's registration. The Administrator neither approves nor endorses an offering, and it is unlawful to state or imply otherwise. This is not a misrepresentation of material facts, which concerns statements about the issuer and its business rather than the status of a filing. Nothing was said about her firm's standing as an underwriting broker-dealer, so its qualification is not in issue. And the issuer's own authorization of the offering is a corporate act that was not misstated at all.
- As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that any time within six months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be
- A permitted buy-back deal, provided the clients are all accredited
- A permitted arrangement, provided that no profit was ever promised
- A prohibited offer of rescission made to those clients
- A prohibited guarantee against a loss to those clients
Correct answer: A prohibited guarantee against a loss to those clients
An offer to repurchase at the original cost, with or without interest added, removes the client's exposure to loss, and that is the prohibited guarantee against loss. The clients' status does not change the analysis, because a guarantee is no more permissible for accredited investors than for anyone else. Neither does the absence of a promised profit, since the prohibition reaches guarantees against loss by themselves. And this is not an offer of rescission: a rescission offer arises only where a sale was made in violation of the Act and unwinds that sale at cost plus interest for that reason, and rescission offers are required in such cases rather than forbidden.
- NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Which of the following statements correctly identify the delivery requirements?
- The brochure may be delivered when the contract is signed, provided the client may cancel without penalty within five business days
- The brochure may be delivered when the quarter ends, provided the client may cancel without penalty within five business days
- The brochure may be delivered when the trade clears, provided the client may cancel without penalty within five business days
- The brochure may be delivered when the customer is billed, provided the client may cancel without penalty within five business days
Correct answer: The brochure may be delivered when the contract is signed, provided the client may cancel without penalty within five business days
The outside limit for the initial brochure is the moment the client enters into the advisory contract, and delivery at that moment is permitted only where the contract lets the client terminate without penalty within five business days. Delivery keyed to any later event fails, because by then the client has already contracted without the disclosure the rule exists to provide: billing the customer, the close of a quarter, and the clearing of a trade all come after the contract is in force. Delivering at least 48 hours ahead of signing is also permitted, but that is an alternative that buys the adviser out of the five-day withdrawal right, not the deadline the rule sets.
- A prospective client would like information on the post-secondary schools attended by those employees of an investment adviser who will be making advisory decisions. That information can be found by requesting
- Form ADV Part 2A
- Form ADV Part 1A
- Form ADV Part 2B
- Form ADV Part 1B
Correct answer: Form ADV Part 2B
Post-secondary education is disclosed in the brochure supplement, Form ADV Part 2B, which must be prepared for each supervised person who formulates advice and has direct client contact and for each supervised person with discretion over client assets. It gives that person's name, year of birth, formal education after high school, and business background for the preceding five years. Part 2A is the firm brochure and describes the advisory business, fees, and conflicts rather than any individual's schooling. Part 1A and Part 1B are the check-the-box regulatory filings, and neither carries the educational history of the people making the advisory decisions.
- An agent is discussing a guaranteed security with a customer. That means
- A party other than the issuer guarantees principal, interest, or dividends
- A party other than the issuer guarantees profits, appreciation, or returns
- The issuer of the security guarantees principal, interest, or dividends
- The agent for the customer guarantees principal, interest, or dividends
Correct answer: A party other than the issuer guarantees principal, interest, or dividends
A guaranteed security is one on which a party other than the issuer, typically a parent company or an insurer, has guaranteed the payment of principal, interest, or dividends. A guarantee from the issuer itself adds nothing, since the issuer already owes those payments. A promise from an agent acting for the customer is not what makes a security guaranteed either; it is the separate prohibited practice of guaranteeing a client against loss. The guarantee also never extends to profits, appreciation, or returns, because capital gains sit outside it. And since the guarantee is only as good as the guarantor, it can never rule out a loss.
- According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of
- Each officer of a broker-dealer that is under common control with it
- Each holder of an account that this adviser manages for fees
- Each member of the group that decides the advice for clients
- Each person who is employed by this adviser, whatever the duties are
Correct answer: Each member of the group that decides the advice for clients
The brochure must give the education and business background of each member of the investment committee or group that determines the general investment advice given to clients, along with anyone who exercises that judgment alone. It does not extend to the adviser's whole payroll, so clerical and administrative staff who take no part in formulating advice are outside it. The backgrounds of officers at a broker-dealer under common control are not required either, though the affiliation itself is disclosed as a conflict. And the identity or background of the adviser's own clients, institutional or otherwise, has no place in the document at all.
- A state-registered investment adviser would be permitted to
- Make the annual delivery 150 days after each fiscal year
- Use Part 2 of Form ADV to satisfy the brochure requirement
- Skip the brochure when a new client is an accredited buyer
- Deliver the brochure a week after the contract is signed
Correct answer: Use Part 2 of Form ADV to satisfy the brochure requirement
Part 2 of Form ADV is written in plain English precisely so that it can serve as the disclosure brochure, and a state-registered adviser may deliver it rather than produce a separate document. The other permissions do not exist. Initial delivery must be no later than entry into the advisory contract, so a week afterward is late; the 48-hour rule is an optional earlier delivery that relieves the adviser of the five-business-day penalty-free withdrawal right. Annual delivery to existing clients is due within 120 days of the fiscal year end, not 150. And no client's wealth or accredited status excuses the brochure.
- Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may guarantee investment results
- Under conditions that the advisory contract spells out
- Under conditions, when past results support the claims
- Under no conditions unless the Administrator agrees
- Under no conditions, whatever disclosures are given
Correct answer: Under no conditions, whatever disclosures are given
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers bars an adviser from guaranteeing that a client will realize a gain or will not suffer a loss, and the prohibition admits of no exception. A documented system, a record of consistent past results, and full disclosure of the method's limitations all leave the guarantee prohibited. Because the ban is absolute, the Administrator has no power to license one, so nothing filed with it can create permission. Neither can the advisory contract: private agreement cannot authorize what the rule forbids.
- Operating as a broker-dealer requires making a number of disclosures for the protection of their customers. One of those required disclosures is not
- The schedule of fees and charges applied to an account
- The capacity in which the firm acted for that customer
- The conflicts of interest that the firm has in serving a buyer
- The total net income the firm earned in its latest fiscal year
Correct answer: The total net income the firm earned in its latest fiscal year
A broker-dealer's own earnings are its own business, and there is no requirement that it tell customers what it made last year. The other three must be disclosed. The firm has to publish the schedule of fees and charges that apply to accounts, so a customer can see what non-commission costs are coming. It has to disclose the capacity in which it acted on a transaction, agent or principal, because that determines whether the customer paid a commission or a markup. And it has to disclose the conflicts of interest that arise in serving that customer, so the customer can weigh a recommendation against the firm's own stake in it.
- In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to
- Build a hidden markup into every client's trades
- Recover expenses the firm incurs for each client
- Keep commissions low and make up the difference in fees
- Lift the firm's net income far beyond its stated target
Correct answer: Recover expenses the firm incurs for each client
Miscellaneous fees exist to reimburse the firm for out-of-pocket costs it incurs in executing a transaction or performing a service, such as clearing charges, execution facility fees, transfers, wires, and postage and handling. They are not a hidden markup, because they are itemized and disclosed in advance, which is the opposite of hidden. They are not a device for holding commissions down and recouping the difference elsewhere, since commission rates are set separately from cost recovery. And while collecting them does help the bottom line, that is a by-product; a schedule built to push net income past a target rather than to recover costs would not be reimbursement at all.
- Under the Uniform Securities Act, which of the following may an agent lawfully tell a customer?
- The issue is exempt from registration because it carries no risk
- The issue is registered, so the state has approved it
- The issue is exempt from registration under this state's own law
- The issue is registered, so the risk is fully covered
Correct answer: The issue is exempt from registration under this state's own law
An exempt security is one that does not have to register, and an agent may say exactly that. An accurate statement about a security's exempt status is neither misleading nor fraudulent. What may never be said is anything that ties registration to official blessing: it is unlawful to state or imply that registration means the state has approved an issue or has covered the risk in it, because the Administrator does not pass on the merits of an offering. It is equally wrong to explain an exemption by claiming the security carries no risk, since exemption turns on the type of security or the type of transaction and never on safety.
- When a broker-dealer is acting as a principal in a securities transaction
- It is acting as the contra party in the transaction
- It is charging the customer a commission on that one trade
- It is acting as an agent for the customer's account
- It is barred from making a profit on that particular trade
Correct answer: It is acting as the contra party in the transaction
Principal and agent are the two capacities a broker-dealer can occupy. Acting as principal means trading for its own account and taking the other side of the customer's order, which makes the firm the contra party to the trade, and it is paid through a markup or markdown built into the price. Acting as an agent for the customer's account is the other capacity, and it is the one the firm is not in here; commissions belong to that agency capacity, so a commission is not what it charges on a principal trade. Nor is it barred from profiting, since earning a markup is permitted so long as the price is fair and the capacity is disclosed.
- Niesha is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrators of 22 states. Niesha likes the future prospects of Afinet, a company whose common stock trades in the over-the-counter market. She is so positive on the future performance of the stock that she tells her customers, "If Afinet hasn't increased by $5 per share in the next six months, I will make up the difference out of my own pocket." One of Niesha's customers mentions this great opportunity to a person she meets at a local social gathering. This person works for the Administrator of Niesha's state and tells her,
- Niesha's promise removes the risks from that purchase
- Niesha's promise is lawful after her broker-dealer approves it
- Niesha's promise violates the ban on any performance guarantee
- Niesha's promise should be confirmed in writing first
Correct answer: Niesha's promise violates the ban on any performance guarantee
Offering to make up a shortfall out of your own pocket is a guarantee of performance, and NASAA prohibits any securities professional from making one; the size of the promise and the source of the money are beside the point. An Administrator's employee would therefore identify the violation rather than help the customer act on the offer. Putting it in writing changes nothing, because a prohibited promise is no more permissible written down. The broker-dealer's approval changes nothing either, since a firm cannot authorize what the rule forbids. And describing the offer as taking the risk out of the purchase simply repeats the inducement the prohibition exists to stop.
- Which of the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser's brochure?
- Dana Reyes, an individual who pays $150 a quarter for impersonal advice
- Valued Life, an insurance company licensed to do business in this state
- Bigville Bank, a state bank whose deposits are all insured
- KAPCO Growth Fund, a mutual fund sold to retail purchasers
Correct answer: KAPCO Growth Fund, a mutual fund sold to retail purchasers
The brochure rule excuses delivery in two situations. One is a client that is an investment company registered under the Investment Company Act of 1940, which is why the mutual fund is exempt. The other is a client who receives only impersonal advisory services costing less than 500ayear;theindividualherepays150 a quarter, which is $600 a year, so that exemption does not reach her. Neither a bank whose deposits are insured nor an insurance company licensed in the state is a registered investment company, and nothing in the rule excuses delivery merely because a client is an institution.
- Which of the following statements regarding the brochure delivery requirements of the NASAA Model Rule for investment advisers are true? I. The brochure must be updated each time Part 1A of Form ADV is updated. II. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. III. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year.
- I and III
- II and III
- II only
- I, II, and III
Correct answer: II and III
The brochure is derived from Part 2A of Form ADV, so it does not have to be updated every time Part 1A changes. Part 1A carries regulatory census information that often has no bearing on what a client needs to know, which makes statement I wrong and defeats any choice that includes it. Statement II is correct: delivery is not required to investment company clients or to clients who receive only impersonal advice costing less than $500 a year. Statement III is correct as well, since a brochure or a summary of material changes must reach every client within 120 days of the end of the adviser's fiscal year, so an answer naming statement II by itself leaves out a true requirement.
- The NASAA Model Brochure Rule for investment advisers states that delivery of the brochure and related brochure supplements need not be made to I. clients who receive only impersonal advice and who pay less than $500 in fees per year. II. individual clients meeting the definition of accredited investor. III. an investment company registered under the Investment Company Act of 1940. IV. an employee benefit plan with assets in excess of $1 million.
- I and III
- II and IV
- I, II, and III
- I, III, and IV
Correct answer: I and III
Delivery is excused in exactly two cases. The first is impersonal advisory services costing the client less than 500ayear,whichisstatementI.ThesecondisaclientthatisaninvestmentcompanyregisteredundertheInvestmentCompanyActof1940,whichisstatementIII.StatementIIiswrongbecauseaccreditedinvestorstatusisaprivate−offeringconceptwithnoroleinthebrochurerule.StatementIViswrongbecausetheruledrawsnolineat1 million of plan assets; a large employee benefit plan receives the brochure like any other client. Any choice carrying statement II or statement IV therefore fails.
- As an agent of a registered broker-dealer, one of the benefits of selling a security registered with the Administrator is
- Being able to give the buyer a prospectus with the material facts
- Being able to promise the buyer that the state approved the issue
- Being freed of any need to register in that same state
- Being safe from a civil suit brought by the same buyer
Correct answer: Being able to give the buyer a prospectus with the material facts
Registering a security with the Administrator produces a prospectus, and the agent may hand the buyer that document with the material facts about the issuer and the offering in it. That is the practical benefit. Registration is not a clearance: the Administrator approves no offering, and telling a buyer that it has is a misrepresentation. Registration of the security also has nothing to do with the agent's own licensing, since an agent must register in a state based on where the agent does business. And it is no shield in court, because a registered offering can still be the subject of a civil suit for many reasons.
- Under the Uniform Securities Act, an agent may tell a customer that the registration of a particular security indicates approval by the Administrator
- In any case where the Administrator has reviewed that filing
- In no case, whatever the process of that registration
- In no case, unless the issuer stays financially sound
- In any case where the registration was made by qualification
Correct answer: In no case, whatever the process of that registration
It is unlawful to state or imply that registration means the Administrator has approved a security or a person, or has found the registration statement to be true and accurate, so an agent may never say it. Registration by qualification changes nothing, because it is the most demanding of the three methods but still involves no clearance on the merits. Nor does the Administrator's review of a filing help: it does examine registration statements, but examining one is never approving it, and no agent may describe that examination as approval. And the issuer's solvency, however reassuring, is not a regulatory endorsement of anything.
- Broker-dealers are required to disclose the capacity in which they acted on any transaction with a retail customer. That disclosure is always made
- On the fee schedule handed to that new customer
- On the monthly statements that the firm sends the customer
- On the new account form signed by that customer
- On the trade confirmation that the firm sends the customer
Correct answer: On the trade confirmation that the firm sends the customer
State and federal rules require the capacity disclosure, agent or principal, to appear on the trade confirmation, which reaches the customer at or promptly after the execution of each transaction. The new account form is completed before any trade exists, so it cannot report the capacity in which the firm acted on one. The fee schedule lists standard charges and deliberately omits commissions, markups, and markdowns, so capacity is not reported there either. And a monthly statement summarizes positions and activity for a period rather than carrying the trade-by-trade disclosure the rule requires.
- Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests proceeds of a sale be wired to her bank account. II. a commission charge when a client sells an exchange-listed security. III. the fee charged by the firm when customers transfer their accounts to another broker-dealer. IV. fees for providing advisory services when acting in the capacity of an investment adviser.
- I, II, and III
- I, III, and IV
- I and III
- II and IV
Correct answer: I and III
The fee disclosure covers the miscellaneous charges a customer would otherwise have no easy way to learn, including the fee for wiring sale proceeds to a bank account, which is statement I, and the fee charged when a customer transfers the account to another firm, which is statement III. Three categories are deliberately left off the template: commissions, markups and markdowns, and advisory fees charged by a firm that is also registered as an investment adviser. Those are disclosed on the confirmation or under the advisory contract instead, which makes statement II and statement IV wrong, and any choice containing either of them wrong as well.
- When an agent has competing interests or loyalties between his customers and an issuer of securities, it is considered
- A possible conflict of interest needing disclosure
- A customary business courtesy requiring no comment
- An unethical practice the Administrator sanctions severely
- An automatic disqualification from the pending transaction
Correct answer: A possible conflict of interest needing disclosure
Competing loyalties between the customer and the issuer put the agent in a possible conflict of interest needing disclosure. The Uniform Securities Act does not bar the agent from the business; it requires that the conflict be told to the customer so the customer can weigh it. Treating the situation as a customary business courtesy requiring no comment is what turns a lawful conflict into a violation, because the silence is the offense. Holding competing interests is not by itself an unethical practice the Administrator sanctions severely, and nothing in the act makes it an automatic disqualification from the pending transaction.
- An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue-chip company. Under the Uniform Securities Act,
- the agent has correctly described a guaranteed corporate bond
- a third-party guarantee never protects the principal of bonds
- the agent has committed fraud by naming another company
- an agent must never suggest an unknown corporate issuer
Correct answer: the agent has correctly described a guaranteed corporate bond
Guaranteed, as the Uniform Securities Act uses the word, means guaranteed as to payment of principal, interest, or dividends by someone other than the issuer, so the agent has correctly described a guaranteed corporate bond. On a bond the third-party promise reaches both the interest and the principal; the guarantee is limited to dividends only when the guaranteed security is a stock. Naming the blue-chip guarantor states a true fact about the terms of the issue, so no fraud occurs, and no rule keeps an agent from recommending an issuer the client has never heard of when the recommendation is suitable.
- A customer of a broker-dealer viewing a trade confirmation notices that there was a commission subtracted from the proceeds of the sale of her stock. This tells the customer that the broker-dealer
- acted in an agency capacity on her behalf
- took the stock into its own account first
- acted in a principal capacity for its account
- charged a fee that state rules plainly forbid
Correct answer: acted in an agency capacity on her behalf
A commission is what a firm charges for arranging a trade between its customer and someone else, so the deduction on the confirmation tells her the firm acted in an agency capacity on her behalf. Had the firm instead taken the stock into its own account first, or otherwise acted in a principal capacity for its account, the confirmation would show a markdown rather than a commission, because a principal makes its money on the spread. A commission on an agency sale is an ordinary, permitted charge, so the firm has not charged a fee that state rules plainly forbid.
- Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests that a stock certificate be issued in his name. II. a commission charge when a client buys a security on a listed exchange. III. the interest charged by the firm on money owed by customers in their margin accounts. IV. fees for providing advisory services to high-net-worth individuals.
- I and III
- II and IV
- I and II
- I and IV
Correct answer: I and III
The NASAA model fee disclosure template covers the service and account charges a customer cannot easily see anywhere else, so it reaches the charge for issuing a stock certificate in the client's name and the interest the firm charges on a margin debit balance. Three categories sit outside the template because the customer learns of them another way: commissions, markups and markdowns, and advisory fees charged by a firm that is also registered as an investment adviser. That leaves out the commission on the listed exchange purchase and the advisory fee billed to a high-net-worth client, so any grouping resting on either of those is wrong.
- All of the following statements regarding the disclosure investment adviser brochure rule of the Uniform Securities Act are true except
- The brochure must carry the handwritten signature of a partner of the firm
- Delivery at signing works if a client can cancel within five business days
- The brochure must contain essentially the information presented in Form ADV Part 2A
- Delivering the brochure 48 hours before the advisory contract avoids a refund right
Correct answer: The brochure must carry the handwritten signature of a partner of the firm
The brochure rule says nothing about signatures, so the statement that is not true is that the brochure must carry the handwritten signature of a partner of the firm. Everything else stated is accurate. The brochure must contain essentially the information presented in Form ADV Part 2A, together with Part 2B where a supervised person gives advice to that client. Delivering the brochure 48 hours before the advisory contract avoids a refund right, and an adviser that delivers later may still proceed, since delivery at signing works if a client can cancel within five business days without penalty.
- Under the Uniform Securities Act, it is legal for an agent to tell a customer that
- a security registered with the Administrator can lawfully be sold here
- an exempt security is treated by the Administrator as inherently safer
- the Administrator has passed on the merits of a registered security
- the Administrator has looked at her credentials and approved of her
Correct answer: a security registered with the Administrator can lawfully be sold here
Effectiveness is a statement about legal compliance and nothing more, so an agent may lawfully say that a security registered with the Administrator can lawfully be sold here. The other three statements all imply an official blessing that does not exist. Registration involves no review of quality, so no agent may say that the Administrator has passed on the merits of a registered security. Exemption turns on the kind of security or transaction rather than on risk, so it is untrue that an exempt security is treated by the Administrator as inherently safer. The same principle governs people, which is why an agent may not say that the Administrator has looked at her credentials and approved of her.
- Jim contracts with XYZ Advisory Services for the design of a financial plan and investment advice. He pays an up-front fee when the contract is signed and receives XYZ's disclosure brochure at that time. After three days, Jim decides to cancel the investment advisory service with XYZ. According to the Uniform Securities Act, which of the following statements is true?
- the firm must cancel and refund the fee less a prorated amount
- the firm may keep the entire fee because Jim signed a contract
- the firm must cancel and refund every dollar Jim paid at signing
- the firm may enforce that contract against Jim for its full term
Correct answer: the firm must cancel and refund the fee less a prorated amount
Jim received the brochure at signing rather than at least 48 hours beforehand, so he keeps a five-business-day right to cancel without penalty, and cancelling on the third day falls inside it. The firm must cancel and refund the fee less a prorated amount reflecting the advisory work actually performed before the cancellation. Refunding every dollar Jim paid at signing ignores the services already rendered. Because the refund right is in force, the firm may not keep the entire fee, and it may not enforce that contract against Jim for its full term.
- In the securities industry, the term contra party refers to
- the party standing on the opposite side of a securities transaction
- the party that opposes a broker-dealer in a civil damages complaint
- the party named as the executing broker on the trade confirmation
- the party that opens a formal inquiry into a registered brokerage
Correct answer: the party standing on the opposite side of a securities transaction
A trade is a contract between a buyer and a seller, and the contra party is simply the party standing on the opposite side of a securities transaction: the seller when you are buying, the buyer when you are selling. It is a trading term rather than a litigation term, so it does not describe the party that opposes a broker-dealer in a civil damages complaint, nor the party that opens a formal inquiry into a registered brokerage. It is also not the party named as the executing broker on the trade confirmation, which only identifies who handled the order.
- The NASAA Model Brochure Rule for investment advisers requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations except I. when the service provided is an individual supervisory service. II. when the client is an investment company. III. when the contract is for an impersonal advisory service requiring payment of less than $500. IV. when the client is an individual with a net worth of more than $1 million.
- II and III
- III and IV
- I, III, and IV
- I, II, and III
Correct answer: II and III
The NASAA model brochure rule excuses delivery in exactly two situations, and the correct grouping pairs them: the client is a registered investment company, and the contract is for impersonal advisory services calling for payment of less than $500. An individual supervisory service is the personal relationship the brochure exists to describe, so the brochure must be delivered there. A client's net worth changes nothing at all, because the rule turns on the kind of client and the kind of service rather than on wealth. Any grouping that carries the supervisory service or the wealthy individual is therefore wrong.
- A corporation offering securities registered under the Uniform Securities Act may make which of the following statements? I. "The Administrator has passed on the merits of these securities as an investment." II. "The Administrator has released our securities for sale to the public." III. "The Administrator has passed on the accuracy of the information in our prospectus." IV. "The Administrator has declared this prospectus effective."
- II and IV
- I and III
- II and III
- I and IV
Correct answer: II and IV
Registration under the Uniform Securities Act is a compliance milestone rather than an endorsement, so the issuer may say that the Administrator has released the securities for sale to the public and that the Administrator has declared the prospectus effective. Both statements describe the effective date and claim nothing more. The issuer may not say that the Administrator has passed on the merits of the securities as an investment, and it may not say that the Administrator has passed on the accuracy of the prospectus, because the Administrator neither approves an offering nor verifies what the registration statement contains.
- Which of following legal or disciplinary actions occurring within the past 10 years would not have to be disclosed on an investment adviser's brochure?
- A civil judgment ordering payment of unpaid parking fines
- A FINRA proceeding that barred the person from membership
- A misdemeanor conviction that arose in an investment-related business
- A federal agency finding of an investment-related statutory violation
Correct answer: A civil judgment ordering payment of unpaid parking fines
An investment adviser's brochure must carry material legal and disciplinary events from the past ten years, and materiality turns on whether the event bears on the advisory business. A civil judgment ordering payment of unpaid parking fines says nothing about how the adviser handles client money, so it stays out of the brochure. The other three all reach the advisory relationship and must be disclosed: a misdemeanor conviction that arose in an investment-related business, a federal agency finding of an investment-related statutory violation, and a FINRA proceeding that barred the person from membership.
- Clay Tompkins is registered as an agent with Integrity Asset Management (IAM), a FINRA-member broker-dealer. Tompkins is attempting to convince a prospect to transfer his account to IAM but is not having great success. When he returns to his office, he sends an email to the prospect listing the benefits of using IAM with him as the agent. Which of the following statements would be prohibited?
- Passing the qualification exam last month keeps me current on market changes
- Passing my qualification exam last month let the state grant my registration
- Passing the qualification exam was the last step in my state registration
- Integrity Asset Management is a FINRA member registered in a dozen states
Correct answer: Passing the qualification exam last month keeps me current on market changes
The qualification exam tests securities law and product knowledge, not the state of the market, so writing that passing the qualification exam last month keeps me current on market changes is a misstatement of material fact and is prohibited. The other three statements are ordinary facts an agent is free to put in an email. Passing my qualification exam last month let the state grant my registration, and passing the qualification exam was the last step in my state registration, both describe how registration actually works and imply no special standing. Reciting that Integrity Asset Management is a FINRA member registered in a dozen states is likewise a plain statement of the firm's status.
- A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees except
- Markups and markdowns charged on principal trades
- Interest charged on margin account debit balances
- Charges for overnight delivery of account statements
- Safekeeping charges on customer funds and securities
Correct answer: Markups and markdowns charged on principal trades
Three charges sit outside the NASAA model fee disclosure template because the customer learns of them another way: commissions, markups and markdowns charged on principal trades, and advisory fees at a firm that is also an investment adviser. Markups and markdowns show up on the trade confirmation instead. Everything a customer pays for the privilege of keeping the account belongs on the schedule, which is why interest charged on margin account debit balances, charges for overnight delivery of account statements, and safekeeping charges on customer funds and securities all appear there.
- The NASAA Model Rule on investment adviser brochures contains one condition where verification of receipt of a readable copy of the brochure and supplements by the customer is required. That is the case
- Of an initial delivery to a prospective client in electronic form
- Of an annual delivery to an established client in electronic form
- Of an initial delivery to a prospective client in paper form
- Of an annual delivery to an established client in paper form
Correct answer: Of an initial delivery to a prospective client in electronic form
The NASAA model rule lets an adviser deliver the brochure and its supplements electronically, and it attaches a verification condition at exactly one point in the relationship. In the case of an initial delivery to a prospective client in electronic form, the adviser must obtain verification that a readable copy of the brochure and supplements was received. No such condition applies to an annual delivery to an established client in electronic form, and none applies to either delivery in paper form, because a printed brochure handed or mailed to the client raises no question about whether it could be read.
- Under the Uniform Securities Act, a guaranteed security is protected by someone other than the issuer against loss of all of these except
- Principal placed in an equity issue
- Principal repaid on a debt security
- Interest promised on a debt instrument
- Dividends payable on an equity holding
Correct answer: Principal placed in an equity issue
A guaranteed security is one where a third party stands behind payment of principal, interest, or dividends, and that list is the whole of the protection. The guarantee never covers principal placed in an equity issue, because the market value of a stock is precisely the risk the third party does not assume. It does cover dividends payable on an equity holding, interest promised on a debt instrument, and principal repaid on a debt security at maturity. Capital gains are never part of such a guarantee, and neither is protection against a falling market price.
- Associated Wealth Managers (AWM) is registered with the Administrator as a registered investment adviser. Therefore, if there have been any material changes, AWM must send a copy of its brochure or a summary of the changes
- To all nonexempt clients within 120 days of its fiscal year end
- To all nonexempt clients within 100 days of its fiscal year end
- To all nonexempt clients within 150 days of its fiscal year end
- To all nonexempt clients within 180 days of its fiscal year end
Correct answer: To all nonexempt clients within 120 days of its fiscal year end
Whether an adviser is state registered or federal covered, the annual brochure obligation runs on the adviser's own fiscal calendar. If there have been material changes, the brochure or a summary of those changes must go to all nonexempt clients within 120 days of its fiscal year end, and no other interval appears anywhere in the rule. Material changes must also reach the Administrator through a prompt amendment to Form ADV, but that filing is a separate obligation from the client delivery this question asks about.
- Which of the following statements regarding Form ADV Part 2 is true?
- It goes to clients each year unless no material change occurred
- It must reach every client 48 hours before an advisory contract
- It must travel with the adviser's brochure in every client mailing
- It goes to clients whenever the adviser first receives their money
Correct answer: It goes to clients each year unless no material change occurred
Form ADV Part 2 is the adviser's brochure, and the annual obligation is conditional: it goes to clients each year unless no material change occurred, with delivery due within 120 days of the adviser's fiscal year end. The 48-hour rule is an alternative rather than a command, because an adviser may instead deliver at signing and give the client five business days to cancel without penalty. Delivery is never keyed to the arrival of client money, and nothing travels with the adviser's brochure, because Part 2 is the brochure itself.
- An agent tells a customer that by investing in U.S. Treasury bonds, he is guaranteed to be able to sell them at a higher price in the future. Which of the following statements is true?
- It is prohibited, because the agent has promised the customer a profit
- It is permitted, because the Treasury stands behind each bond it sells
- It is prohibited, because a Treasury bond is unsuitable for the buyer
- It is permitted, because the customer plans to hold it until maturity
Correct answer: It is prohibited, because the agent has promised the customer a profit
Telling a customer he is guaranteed to sell later at a higher price is a promise about future price, and it is prohibited because the agent has promised the customer a profit. No securities professional may guarantee a result, whatever words are used. The reason given matters as much as the verdict. It is true that the Treasury stands behind each bond it sells, but only for interest and for principal at maturity, never for the market price along the way, so that backing does not make the promise permitted. Treasury bonds are widely suitable for income investors, so a ban resting on the claim that a Treasury bond is unsuitable for the buyer misstates the rule, and the customer's plan to hold it until maturity does not turn a forbidden promise into a permitted one.
- Toby is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Toby has a customer who is concerned about the possible decline in the value of her invested capital. Toby has suggested a U.S. Treasury bond maturing in 15 years, telling the client that you cannot lose money on a Treasury security. Toby has
- Made a false statement, since Treasury bond prices shift with rates
- Given sound advice, since a Treasury bond cannot default on payment
- Made a suitable recommendation, since the Treasury repays the full principal
- Made an unsuitable recommendation, since her capital sits idle fifteen years
Correct answer: Made a false statement, since Treasury bond prices shift with rates
A customer worried about a decline in her invested capital was told she cannot lose money on a Treasury security, and Toby made a false statement, since Treasury bond prices shift with rates. A 15-year bond sold before maturity can bring back less than she paid, or more. It is true that a Treasury bond cannot default on payment, but that is not sound advice here, because default is not the risk she asked about. The government's promise to repay the full principal operates only at maturity, so it does not make the blanket assurance accurate. Her capital does not sit idle for fifteen years either, because the bond pays interest and can be sold at any time at the going price.
- With regard to an investment adviser's brochure, disclosure must be made to all current clients and to prospective clients regarding material disciplinary action. Which of the following would not have to be disclosed?
- A $100,000 civil fine for misusing a newsletter publisher's content without permission
- A fine exceeding $2,500 from a self-regulatory body limiting a supervisor's activities
- A permanent court order entered against the firm over an investment-related activity
- A state order revoking a management person's registration for repeat rule violations
Correct answer: A $100,000 civil fine for misusing a newsletter publisher's content without permission
Material disciplinary disclosure in an adviser's brochure reaches events that bear on the advisory business, and a $100,000 civil fine for misusing a newsletter publisher's content without permission does not. An intellectual property dispute says nothing about how the firm handles client assets, and neither the Uniform Securities Act nor the NASAA model rules treat it as disclosable. The other three all qualify: a permanent court order entered against the firm over an investment-related activity, a state order revoking a management person's registration for repeat rule violations, and a fine exceeding $2,500 from a self-regulatory body limiting a supervisor's activities.
- An agent tells a customer that by investing in U.S. Treasury bonds, he is guaranteed to make money. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following statements is true?
- Unethical, because the promise guarantees the client against any loss
- Ethical, because Treasury bond prices cannot decline below face value
- Ethical, because a written risk disclosure reached the client beforehand
- Unethical, because an agent cannot recommend a long-term government bond
Correct answer: Unethical, because the promise guarantees the client against any loss
Treasury bonds carry the full faith and credit of the United States for interest and for principal at maturity, yet their prices still rise and fall with interest rates. Telling a customer he is guaranteed to make money is therefore unethical, because the promise guarantees the client against any loss, and the NASAA statement of policy treats a guarantee against loss as a dishonest or unethical practice. The claim that Treasury bond prices cannot decline below face value is simply untrue. A written risk disclosure does not cure a guarantee, and an agent recommending a long-term government bond has done nothing improper by itself.
- Caelan is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Caelan is excited about the prospects of a specific stock. For those customers for whom this stock is suitable, Caelan assures them that this stock will double within the year. To back up this claim, Caelan provides a lawyer's letter stating that, for each investor, there will be a cash deposit made to the lawyer's escrow account sufficient to equal the promised return should it not actualize. In this case, Caelan
- Has committed the prohibited act of guaranteeing a specific result to customers
- Has cured the promise by obtaining a written confirmation letter from attorneys
- Has properly protected these customers by funding an escrow account for them
- Has satisfied the rule because a supervisor reviewed the escrow letter first
Correct answer: Has committed the prohibited act of guaranteeing a specific result to customers
Caelan assured suitable customers that the stock would double within the year, and no funding arrangement changes what that assurance is: Caelan has committed the prohibited act of guaranteeing a specific result to customers. The prohibition attaches to the promise itself rather than to whether the customer eventually loses money, so an escrow deposit has not properly protected these customers in any sense the rules recognize. A lawyer's letter memorializes the promise instead of curing it, and no supervisor has authority to approve a performance guarantee, so a review before the fact changes nothing.
- A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following except
- Advisory fees billed by a dually registered brokerage business
- Issuance fees charged for a physical stock certificate request
- Late payment charges assessed on an overdue account balance
- Annual fees charged on an inactive retail brokerage account
Correct answer: Advisory fees billed by a dually registered brokerage business
The NASAA model fee disclosure schedule leaves out three things a customer learns about elsewhere: commissions, markups and markdowns, and advisory fees billed by a dually registered brokerage business, which belong in the advisory contract instead. The schedule exists to surface the account service charges that are otherwise easy to miss, so issuance fees charged for a physical stock certificate request, late payment charges assessed on an overdue account balance, and annual fees charged on an inactive retail brokerage account all appear on it.
- A customer calls his agent to inquire about something he read on a recent trade confirmation. It said, "The firm acted as a contra party to the trade," and the customer does not know what that means. The agent would explain that the broker-dealer
- Bought or sold those shares from its own principal account
- Could not determine the other party to the completed trade
- Acted as his agent and charged him a full commission
- Placed its own interests above his own on this trade
Correct answer: Bought or sold those shares from its own principal account
Every trade is a contract between a buyer and a seller, and the contra party is whoever stands opposite. When the confirmation says the firm was the contra party to the trade, the firm bought or sold those shares from its own principal account, meaning the firm was itself the buyer or the seller. That is the opposite of a trade where the firm acted as his agent and charged him a full commission, since an agency trade puts the firm between two other parties. The phrase says nothing about whether the firm could determine the other party to the completed trade, and it carries no suggestion that the firm placed its own interests above his own on this trade.
- According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,
- The schedule belongs on the firm's public site with no password needed
- The schedule belongs behind the client login page to guard client data
- The schedule belongs in the customer's hand or the mail rather than online
- The schedule belongs online in place of any printed version for a customer
Correct answer: The schedule belongs on the firm's public site with no password needed
Transparency is the whole point of the NASAA advisory on service and maintenance fees: a retail customer or prospect should be able to reach the schedule without creating an account, signing in or entering a password, which is why it belongs on the open part of the firm's site. Putting it behind the client login page defeats that, and there is nothing confidential in it, since it lists charges rather than account data. Confining it to hand delivery or the mail makes the schedule harder to reach instead of easier, and posting it electronically does not end the firm's obligation to furnish a printed version to a customer who asks.
- When a security is registered with the Administrator, it means that
- The security has won approval on its merits from the state regulators
- The security is exempt from advertising filing in the state
- The security counts as federal covered and files no notices
- The security is cleared for lawful sale to investors inside the state
Correct answer: The security is cleared for lawful sale to investors inside the state
Registration with the Administrator is clearance to sell and nothing more: it means the security is lawfully salable to investors in that state. No state regulator passes on merit or approves an issue, and telling a customer otherwise is itself a prohibited representation. Registration does not lift the advertising filing requirement either, since that relief belongs to exempt securities and exempt transactions. And a security that registers with the state is by definition not federal covered; federal covered securities are the ones that notice file instead of registering.
- You receive a note from your firm congratulating you on passing the exam and indicating that they have received notice from the Administrator that your registration as an agent is effective. At this point, you could not
- Tell prospects that you have passed all of the state exams
- Begin accepting orders for securities from clients who live in the state
- Tell prospects that the state has approved you as an agent
- Begin soliciting new brokerage business from those who live in the state
Correct answer: Tell prospects that the state has approved you as an agent
An effective registration is permission to do business, not a seal of approval, so telling a prospect that the state has approved you misrepresents what registration means and is prohibited. Stating the plain fact that you sat for and passed the required examinations is accurate and permitted. Once the firm confirms that the registration is effective you may do what a licensed agent does, which includes soliciting new brokerage business from people who live in the state and accepting their securities orders.
- In reviewing prospectuses and registration statements, the Administrator
- Guarantees that all the disclosure made in that prospectus is adequate
- Neither approves nor disapproves of any of the issues being registered
- Certifies the accuracy of the facts stated in a prospectus
- Passes on the investment merits of the offering it reviews
Correct answer: Neither approves nor disapproves of any of the issues being registered
The Administrator's role in a registration review is to insist on full disclosure so that investors can judge an offering for themselves. The office neither approves nor disapproves of the issue, which is exactly what the disclaimer on the front of every prospectus says. It does not guarantee that the disclosure made is adequate, it does not certify that the facts stated in the prospectus are accurate, and it does not pass on the investment merits of what is being registered.
- NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Unless qualifying for an exception, a registered investment adviser shall deliver, I. within 90 days of the end of its fiscal year, a free updated brochure and related brochure supplements, which include or are accompanied by a summary of material changes. II. within 120 days of the end of its fiscal year, a free updated brochure and related brochure supplements, which include or are accompanied by a summary of material changes. III. within 120 days of the end of its fiscal year, a summary of material changes that includes an offer to provide a copy of the updated brochure and supplements and information on how the client may obtain a copy of the brochures and supplements. IV. not later than entering into a new advisory agreement, a summary of material changes that includes an offer to provide a copy of the updated brochure and supplements and information on how the client may obtain a copy of the brochures and supplements.
- Items II and III
- Items III and IV
- Items I, II, and III
- Items I, III, and IV
Correct answer: Items II and III
The model rule sets an annual obligation measured from the adviser's fiscal year end and gives the adviser a choice of what to send. Within 120 days of that year end the adviser delivers either a free updated brochure and supplements accompanied by a summary of material changes, or a summary of material changes carrying an offer to provide the updated brochure and supplements together with instructions for obtaining them. Ninety days is the deadline for the annual updating amendment filed with the Administrator, not for brochure delivery. And what a new advisory agreement calls for is the brochure itself at or before the contract is entered into, not a summary offering materials the client has never seen.
- In the securities industry, when a person is acting in an agency capacity, the form of compensation received is
- A markup or markdown built into the customer's price
- An annual fee assessed against held assets
- A recurring charge for keeping the account
- A commission the customer pays for arranging a trade
Correct answer: A commission the customer pays for arranging a trade
Acting in an agency capacity means the firm arranges a trade between its customer and someone else rather than trading with the customer out of its own account, and the pay for that service is a commission. When the firm takes the other side as a dealer, in a principal capacity, its compensation instead comes out of a markup or a markdown worked into the price the customer pays. An annual fee measured against assets is how investment advisers are typically paid, and a recurring account charge is a service charge on the account rather than compensation for executing a trade.
- When the compensation arrangements or incentives for the broker-dealer or its agents could affect whether employees recommend or offer a particular security or transaction to a client, it is required that the firm
- Reduce the incentive to typical industry levels
- Refuse to recommend that security to any of its customers
- Disclose the potential conflict to the customer
- Accept orders in that security if the customer asks first
Correct answer: Disclose the potential conflict to the customer
Some products pay the firm and its people more than comparable products do, and that is a potential conflict of interest. The Act does not forbid recommending them; what it requires is that the conflict be disclosed to the customer, who can then weigh the recommendation knowing how the firm is paid. Nothing obliges the firm to stop recommending the security, nothing limits it to unsolicited orders in the security, and no rule trims a firm's compensation down to some typical industry level.
- In general, a broker-dealer will disclose its fee schedule
- After the customer asks the branch to provide it
- At the time the customer's new account is opened
- Once the first trade for the client settles
- Through the agent who then passes it onward
Correct answer: At the time the customer's new account is opened
The Act sets no hard deadline, but the practice NASAA describes is that the fee schedule reaches the customer when the account is opened, so that the customer knows the costs before doing any business. Waiting until the customer asks the branch for it, or until a trade has settled, leaves the customer paying charges he had no chance to see beforehand. Handing the schedule to the agent is not disclosure to the customer at all.
- In general, a broker-dealer will disclose any changes to its fee schedule
- By telling clients before the change takes effect
- Within thirty days after that change takes effect
- By filing a revised schedule with the state regulator
- Whenever a client next asks about the current charges
Correct answer: By telling clients before the change takes effect
Fee changes are disclosed ahead of time: clients are told before the new charges apply, commonly about a month in advance, so that nobody is billed at a rate he has not seen. Telling clients thirty days after the fact reverses that sequence. There is no obligation to file a revised schedule with the state, and waiting until a client happens to ask about charges leaves every other client uninformed.
- NASAA has developed a model fee disclosure schedule and related accessibility guidelines to help investors better understand and compare various broker-dealer service and maintenance-related fees. Which of the following are considered acceptable methods of disclosure? I. Charts II. Lists III. Tables
- I and III only
- I, II only
- II and III
- I, II, and III
Correct answer: I, II, and III
The NASAA model fee disclosure template exists so that a customer can read and compare a firm's service and maintenance charges, and it accepts three presentations of the information: a chart, a list or a table. Because all three are acceptable, any answer that leaves one of them out is too narrow. What matters is that whichever presentation the firm chooses follows the model format.
- A new client of your broker-dealer makes her first purchase. After receiving the confirmation of the trade, she calls to inquire why she was not charged any commission. The most likely reason is
- The commission was put into the price and not printed
- Your firm waives every charge on the first trade in an account
- Your firm acted as principal and charged her a markup
- The commission line was left off by someone in the back office
Correct answer: Your firm acted as principal and charged her a markup
A broker-dealer can arrange a trade for a customer in an agency capacity or sell to the customer out of its own account in a principal capacity, and the confirmation has to state which. A commission appears when the firm acted as a broker; when the firm acted as a principal its compensation is the markup worked into the price and no commission line appears, which is the ordinary reason a customer sees none. A commission is never worked into the price instead of being printed, because that is what a markup is and the two are not interchangeable. Firms do not waive their charges on an opening trade as a matter of course, and a clerical omission on a confirmation is far less likely than the routine principal trade.
- Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except
- The regulator can request a copy at each examination
- It must be filed with the state securities regulator
- The firm's website is one acceptable place for it
- A change must be announced before it takes effect
Correct answer: It must be filed with the state securities regulator
The fee disclosure document has to be kept current, any change to it has to be announced to customers before that change takes effect, and a firm may show its charges in several ways, its own website among them. A state examiner can also ask to see the document when the firm is examined. What the Act does not require is that the document be filed with the state at all: the schedule is a disclosure made to customers, not a submission made to the regulator.
- Which of the following pairs are correctly matched? I. Broker = dealer II. Broker = agency III. Dealer = agency IV. Dealer = principal
- II and IV only
- I and III only
- II and III only
- III and IV only
Correct answer: II and IV only
Securities firms are called broker-dealers because they can work in either of two capacities. As a broker the firm acts in an agency capacity, arranging a trade between its customer and someone else and charging a commission for the service. As a dealer it acts in a principal capacity, buying from or selling to the customer out of its own account and earning a markup or a markdown. Broker and dealer are therefore not the same thing, and pairing dealer with agency reverses the relationship.
- After a string of losing recommendations, an agent's client is threatening to close the account and move it to a competing broker-dealer. In an effort to save the account, the agent promises a return of no less than 10% over the next 12 months and offers to make up any deficit personally. In so doing,
- The agent is excused because the client accepted an offer in writing
- The agent must escrow enough personal funds to cover it
- The agent must give a disclaimer about his past results
- The agent has violated the ban on guaranteeing a client against loss
Correct answer: The agent has violated the ban on guaranteeing a client against loss
Promising a client a floor under his return and offering to make up the shortfall personally is a guarantee against loss, and guaranteeing performance is a prohibited practice for an agent however the promise is documented. A written acceptance by the client does not cure it, because a client cannot consent to conduct the Act forbids. Setting money aside to back the promise does not cure it either, since escrowing funds makes the guarantee good rather than lawful. A disclaimer about past results is beside the point: the agent said nothing about past performance, he promised a future one.
- Trade confirmations sent by broker-dealers to their customers must always include
- The security's current price in the market
- The amount of markup or markdown that was included
- The amount of commission the customer paid
- The number the customer uses when filing his taxes
Correct answer: The amount of commission the customer paid
Every confirmation shows the amount of commission, because a customer is entitled to know what the agency service cost. The price shown is the price at which the trade was executed, not whatever the security happens to be worth in the market afterward. A markup or markdown has to be disclosed in certain situations rather than on every confirmation, so it is not something a customer will always find there, and the number the customer uses for tax filing belongs on the account record rather than on the trade confirmation.
- Active Technicians (AT) is a state-registered investment adviser. In its brochure supplement, it would include information relating to each of the following individuals except
- A manager holding discretion over accounts of clients she has never met
- A director active in the business who neither advises nor meets clients
- A representative who advises institutional clients face to face
- A representative who advises retail clients in monthly meetings
Correct answer: A director active in the business who neither advises nor meets clients
A brochure supplement covers the supervised people a client actually deals with or who make decisions for that client: anyone who gives investment advice and has direct contact with a client, retail or institutional alike, and anyone who exercises discretion over a client's assets even without ever meeting the client. Someone who takes an active part in running the business but gives no advice, meets no clients and holds no discretion is not described in a supplement. If that person later took on client contact or discretionary authority, a supplement would have to be prepared.
- Under the Uniform Securities Act, an investment adviser's current clients must be delivered a brochure
- Every year, whether or not it has custody or discretion
- Each quarter, if it has both custody and any discretion
- Every year, provided that it has neither custody nor discretion
- Within 48 hours following each renewal of the advisory contract
Correct answer: Every year, whether or not it has custody or discretion
The brochure obligation to existing clients runs on an annual cycle tied to the adviser's fiscal year, and it applies the same way to every adviser: whether the firm holds custody of client assets or exercises discretion over them makes no difference to it. Delivery is not quarterly, it is not triggered by the renewal of a contract, and it is not confined to firms that have neither custody nor discretion. Custody and discretion do change other obligations, such as an adviser's financial requirements, but not this one.
- It would not be a prohibited practice under the Uniform Securities Act for an agent to tell a client that
- Her commission is arranged so she earns nothing until clients gain
- Registration of the shares means the state approves them
- Passing her licensing exams proves that she is qualified
- A registered nonexempt security is legal to sell within this state
Correct answer: A registered nonexempt security is legal to sell within this state
Registration is what makes a nonexempt security legally salable in the state, and telling a client so is simply accurate. The other three statements are all prohibited. Registration is never approval, and suggesting that the state has blessed a security misrepresents what it actually did. Passing a qualification examination is a licensing requirement rather than evidence of skill, and it may not be offered to a client as proof of ability. And an agent may not be compensated on the basis of a client's gains, so an arrangement under which she earns nothing until the client profits is not permitted.
- Delivery of the brochure and related brochure supplements required by subsections of the NASAA Model Rule on investment adviser brochures need not be made to clients who receive only impersonal advice and who pay less than
- $300 in yearly advisory fees
- $400 per year in advisory fees
- $500 in yearly advisory fees
- $600 per year in advisory fees
Correct answer: $500 in yearly advisory fees
The brochure rule excuses delivery in two situations. One is the client who receives only impersonal advisory services and pays less than $500 a year for them; the other is a client that is a registered investment company such as an open-end or closed-end fund. The figure written into the rule is $500, so a client who receives only impersonal advice and pays under that amount need not be given the brochure, while a client paying more than it must be. No other annual amount carries that effect.
- The Uniform Securities Act defines a guaranteed security as one
- Where a third party guarantees the purchaser a promised minimum yearly profit
- Where a third party guarantees payment of principal and interest or dividends
- Where the issuer itself agrees to pay all principal and interest
- Where the sponsoring underwriter promises to buy it back at cost
Correct answer: Where a third party guarantees payment of principal and interest or dividends
A guaranteed security under the Act is one on which a party other than the issuer stands behind the payments, meaning principal and interest on a bond or dividends on a stock. The guarantee runs to payment and not to profit: nobody may guarantee that an investor will make money, so a third-party promise of some minimum yearly profit is not what the term means. A promise by the issuer to pay its own obligations is simply the security itself, since a guarantee has to come from someone else. And an underwriter's promise to buy the security back is a repurchase arrangement rather than a guarantee of the payments the security owes.
- Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it
- Skipped the annual Part 2A brochure absent a material change
- Delivered the Part 2A brochure 150 days from fiscal year-end
- Distributed Form ADV Parts 1A and 1B to clients within 120 days
- Filed a brochure with the regulator and let clients ask for one
Correct answer: Skipped the annual Part 2A brochure absent a material change
Under the NASAA model rule an adviser need not send the annual brochure or the summary of material changes at all when nothing material has changed since those materials last went out, so an adviser in that position is in compliance having sent nothing. Where delivery is required the deadline is 120 days after the end of the fiscal year, not 150 days. The client-facing brochure is Form ADV Part 2A with the Part 2B supplements; Parts 1A and 1B make up the registration form filed with the regulator and are not client disclosure. And putting a brochure on file and waiting for clients to ask for it is not delivery to clients.
- A customer of a broker-dealer viewing a trade confirmation notices that there was a markup added to the price of 100 shares of stock recently purchased. This tells the customer that the broker-dealer
- Was acting as an agent of the person selling the shares
- Was charging the buyer an unlawful extra fee
- Was obliged to get the buyer's consent first
- Was acting as a dealer trading out of its own inventory
Correct answer: Was acting as a dealer trading out of its own inventory
A markup on a confirmation tells the customer that the firm took the other side of the trade itself. Firms act either as brokers, arranging a trade for a customer and charging a commission, or as dealers, buying from and selling to the customer out of their own inventory and earning a markup or markdown, and the capacity is always stated on the confirmation. Because the firm sold these shares to the customer it was not the seller's agent; it was the seller, the contra party to the trade. A markup is an ordinary and lawful form of dealer compensation rather than an extra fee, and no separate written consent is needed for a firm to trade as principal.
- A prospective customer enters a branch office of Extraordinary Profits, Inc. (EPI), a broker-dealer registered with the Administrator. If the prospect wants to know the cost of obtaining certificates for securities she plans to purchase, the firm would most likely hand her a copy of
- NASAA's own model list of fees and charges
- The list of charges the Administrator would allow
- EPI's own schedule of its fees and charges
- The account application form used at EPI's office
Correct answer: EPI's own schedule of its fees and charges
NASAA drafted a model template so that firms disclose their service and maintenance charges in a form customers can compare, but the document this customer actually receives is EPI's own schedule of its fees and charges, prepared on that template. NASAA publishes the model, not a list of any particular firm's charges, and the Administrator keeps no roster of charges a firm is allowed to impose. The account application is a separate document, and while it may be handed over at about the same time if the prospect opens an account, it is not where the cost of obtaining certificates appears.
- NASAA has created a Model Rule dealing with the creation of and delivery requirements for an investment adviser brochure. Under that rule, existing customers of the adviser, unless exempt, should expect to receive a copy of the adviser's brochure
- Within 90 days after the end of each fiscal year
- Within 120 days after the end of its fiscal year
- Before the closing day of every calendar year
- Before a new advisory contract is ever signed
Correct answer: Within 120 days after the end of its fiscal year
For clients already under contract the brochure obligation is annual and runs off the adviser's fiscal year: the updated brochure, or a summary of material changes offering it, goes out within 120 days after that year ends. Ninety days is a real deadline in the model rule, but it belongs to the annual updating amendment filed with the Administrator rather than to client delivery. The last day of the calendar year is when a state-registered adviser's registration expires, which makes it a renewal date and not a delivery date. Delivery no later than the signing of the advisory contract is the rule for a brand new client; someone who is already a client passed that point long ago.
- NASAA has created a template for registered broker-dealers to disclose their fee schedules to existing and prospective customers. Which of the following charges would be disclosed?
- The markups and markdowns added on principal trades
- The schedule of the commissions arising on all agency trades
- The advisory fees collected by this dual registrant
- The yearly fee charged for keeping the customer account open
Correct answer: The yearly fee charged for keeping the customer account open
The NASAA fee disclosure template covers what a firm charges for servicing an account, and the yearly fee charged for keeping a customer account open is exactly that kind of service charge. Three categories sit outside the template because they are disclosed to the customer elsewhere: commissions on agency trades, the markups and markdowns taken on principal trades, and the advisory fees a dually registered firm collects from its advisory clients.
- For larger accounts, a broker-dealer is least likely to waive its normal fee for
- Transferring the entire account to another brokerage
- Providing safekeeping for the cash and securities on deposit
- Keeping the account open through another whole calendar year
- Transmitting account balances to the customer's bank
Correct answer: Transferring the entire account to another brokerage
No rule fixes which charges a firm gives up, but the practice is consistent. A large account tends to have the small service charges dropped to keep the relationship, so safekeeping, transmitting balances out to the customer's bank and the yearly charge for keeping the account open are all commonly waived. Transferring the entire account to another brokerage ends the relationship instead of preserving it, so that is the charge a firm is least likely to waive.
- NASAA has created a template for registered broker-dealers to disclose their fee schedules to existing and prospective customers. For those broker-dealers that are also registered as investment advisers, which of the following charges would not be disclosed?
- Charges applied when the account goes to another firm
- Fees earned for advisory services by this dually registered firm
- Interest charged on the balance borrowed within a margin account
- Charges raised when balances are wired for a customer
Correct answer: Fees earned for advisory services by this dually registered firm
Three items are left out of the broker-dealer fee disclosure document: commissions, markups and markdowns, and the fees earned for advisory services by a firm registered both as a broker-dealer and as an investment adviser. Those advisory fees belong in the adviser's brochure instead. Account transfer charges, wire charges and the interest charged on a margin balance are all part of the template and must appear in it.
- Which of the following statements may be made by an agent of a broker-dealer? I. "I am a registered agent for XYZ broker-dealer." II. "I am a registered agent for XYZ broker-dealer, meaning my qualifications have been approved by the appropriate regulatory agencies." III. "This security I am recommending to you is registered on both the state and federal levels." IV. "This security I am recommending to you is registered on both the state and federal levels, meaning that both the SEC and the appropriate states have given their approval of this issue."
- II and IV
- I, II, and III
- I and III
- I, III, and IV
Correct answer: I and III
An agent may state the plain fact of registration, his own or a security's, so the bare statement that he is a registered agent of a named broker-dealer and the bare statement that the security is registered at the state and federal levels are both proper. What he may not do is dress registration up as an endorsement. Saying that registration means the regulatory agencies approved his qualifications, or that the SEC and the states approved the issue, misrepresents registration as approval, which no regulator ever grants.
- Under the Uniform Securities Act, when one is referring to a security that is guaranteed, the guarantee applies to I. capital gains to be expected by holding the specified security. II. dividends to be paid on the specified stock. III. interest and principal payments on the specified bond. IV. reimbursement by the firm for any losses suffered while holding that security.
- II only
- IV only
- III and IV
- II and III
Correct answer: II and III
The Uniform Securities Act defines a guaranteed security as one on which someone other than the issuer guarantees payment of principal, interest or dividends. The guarantee therefore reaches the dividends promised on a stock and the interest and principal promised on a bond, and those two together are the whole of it. Capital gains are never covered, and a guarantee is not a promise by the firm to make the holder whole for a loss suffered while holding the position.
- A person registered in State C as an agent with Approved Retirement Investments (ARI), a registered broker-dealer, would be violating ethical standards
- By saying that her registration means the Administrator has approved her
- By noting that the Administrator registers, but does not approve, agents
- By paying the annual registration renewal fee at the required renewal time
- By naming the broker-dealer she represents when she first calls a prospect
Correct answer: By saying that her registration means the Administrator has approved her
The Administrator registers securities professionals; it does not approve them or pass on their merits. An agent who tells the public that her registration means the Administrator has approved her is presenting registration as an endorsement, and that is an unethical practice. Describing registration accurately, paying the annual renewal fee when the registration is renewed, and naming the broker-dealer she represents are all ordinary, expected parts of doing business and violate nothing.
- Under the Uniform Securities Act, the investment adviser brochure rule requires
- Delivery of Form ADV Part 1 or Part 1B before the advisory agreement is signed
- Delivery of a brochure or summary of material changes within 120 days of the fiscal year end
- Delivery of the brochure to a client within 5 business days after it is signed
- Delivery of the brochure to every client no less than 48 hours before the contract is signed
Correct answer: Delivery of a brochure or summary of material changes within 120 days of the fiscal year end
The NASAA model brochure rule requires an annual delivery: a brochure, or a summary of material changes, goes to every client within 120 days of the end of the adviser's fiscal year, and nothing need be sent if there were no material changes. Form ADV Part 1 and Part 1B are registration filings rather than client documents. The 48 hour figure is only one of two ways to satisfy delivery at the start of a relationship, so it is not what the rule requires of every client: the brochure may instead be delivered at the signing, provided the client keeps a five business day right to cancel without penalty. Delivery after the contract is formalized is never enough on its own.
- While making a sales presentation of a mutual fund, the registered agent states to a customer that reinvesting the dividends will ensure selling shares at a profit. Making such a statement is
- Barred only when an agent, in addition, puts the promise in writing
- Allowed only if the customer signs a risk acknowledgment first
- Barred outright, because no agent can assure a customer profit
- Allowed once the agent notes that past results do not assure profit
Correct answer: Barred outright, because no agent can assure a customer profit
Telling a customer that reinvesting dividends will ensure the shares are sold at a profit assures an investment result, and no agent can assure a customer profit. The statement is barred outright, and an agent who makes it can face a proceeding. Nothing cures it. Putting the promise in writing compounds the violation rather than being the only way to commit it, a signed acknowledgment of risk cannot license a promise the agent has no power to keep, and adding a line about past results does not turn an assurance into a forecast.
- Securities regulators know that one of the most important ways to protect investors is requiring securities professionals to disclose information pertinent to the relationship with customers. When opening a new account, it is expected that a broker-dealer will disclose
- The number of branch offices this firm runs and where each one sits
- The year in which the firm was founded and first opened
- The names of the officers who direct the firm every day
- The schedule of fees and charges the firm will apply to the account
Correct answer: The schedule of fees and charges the firm will apply to the account
Disclosure at account opening is aimed at what will actually affect the customer's dealings with the firm, and the schedule of fees and charges the firm will apply to the account has to be available no later than the opening. When the firm was founded, how many branches it runs and where they sit, and who its senior officers are may all be interesting, but none of them changes what the customer pays or how the account is handled, so none is part of the required opening disclosure.
- When an agent has a personal relationship with the issuer of a security and has a bias toward recommending that issuer's stock, it would be considered
- A conflict of interest that the agent has to disclose fully
- An unethical practice that the regulator has to be told about at once
- A misuse of inside information that this firm has to report
- A breach of the state securities statute an agent has to cure quickly
Correct answer: A conflict of interest that the agent has to disclose fully
A personal tie to an issuer that pulls an agent toward recommending that issuer's stock is a conflict of interest that the agent has to disclose fully. Once the customer knows of it, the customer can decide how much weight the recommendation deserves, and nothing has been violated. It becomes an unethical practice only if the tie is concealed, and there is no separate duty to report a disclosed bias to the regulator. Nothing in the facts says the agent obtained nonpublic information, and a disclosed bias breaches no provision of the act.
- Under the Uniform Securities Act, the Administrator has the authority to I. issue stop orders. II. approve new issues. III. review standard registration forms.
- I and II, but not III
- I and III, but not II
- II, but not I or III
- III, but not I or II
Correct answer: I and III, but not II
During the waiting period the Administrator reviews the standard registration forms an issuer files and may enter a stop order against the offering, so both of those powers belong to the Administrator. Approving a new issue does not. Clearing a security for sale is not an endorsement of it, and the act forbids anyone from suggesting that registration carries the Administrator's blessing.
- Acme Manufacturing Company's latest stock offering is registered with both the SEC and the states. This would permit a registered agent to make the comment that
- Two sets of regulators have looked this offering over more closely
- The buyer will receive a state prospectus and a federal prospectus
- The security may lawfully be sold in this jurisdiction
- The stock is probably headed for an exchange quotation
Correct answer: The security may lawfully be sold in this jurisdiction
Registration is what makes the offer and sale lawful, so an agent may say the security may lawfully be sold in this jurisdiction. He may not convert that into a claim about quality: saying two sets of regulators looked the offering over more closely implies a vetting or approval that neither the SEC nor the Administrator performs. A single prospectus serves both the federal and the state filings, so there is no pair of documents, and nothing in the facts points to any exchange quotation.
- Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are I. presenting a chart with all of the fees. II. preparing a list of all of the fees. III. displaying the fees in tabular form.
- II and III, but not I
- I, but not II or III
- I and III, but not II
- All of I, II and III
Correct answer: All of I, II and III
The disclosure has to let a customer see easily what the charges are and how they are computed, and the format is left to the firm. A chart, a plain list and a table each do that job, so all three are among the common ways of presenting the schedule. None of the three is mandated and none is ruled out, which is why no narrower combination is right.
- When recommending a corporate security, an IAR indicates that the top officers of the company were responsible for the rapid growth of LJB Corporation, a well-known, successful firm in the same industry. Under the Uniform Securities Act, all of the following statements by the agent are permitted except
- “There is no doubt they will repeat the same success they had at LJB.”
- “Our president was in large part behind the run of success that LJB Corporation had.”
- “Our president ran LJB Corporation for quite a few years before he joined this firm.”
- “No one knows if they will recreate the same success they had at LJB.”
Correct answer: “There is no doubt they will repeat the same success they had at LJB.”
Saying there is no doubt the officers will repeat the same success states a future result as a certainty, which is a guarantee of performance and is not permitted however well the officers have done before. The other three stay inside what is known: that the president ran LJB Corporation for years, that he was in large part behind the run of success there, and that no one knows whether the record will be recreated. None of those promises anything about how this security will perform.
- Promising Future Retirement Success (PFRS) is a state-registered investment adviser whose only activity is sponsoring wrap fee accounts. In line with the NASAA Model Rule on investment adviser brochures, PFRS shall deliver a copy of its
- Form ADV Part 1B, which is the filing that state-registered advisers must make
- Form ADV Part 2A Appendix 1 wrap fee brochure, before the advisory agreement is signed
- Form ADV Part 2A, or a written document holding the same details, before the agreement
- NASAA fee disclosure template, which is the form that its wrap clients receive
Correct answer: Form ADV Part 2A Appendix 1 wrap fee brochure, before the advisory agreement is signed
When sponsoring or taking part in wrap fee programs is an adviser's only business, its brochure is the wrap fee brochure, Form ADV Part 2A Appendix 1, and it must reach the client before or at the same time as the advisory agreement is entered into. The ordinary Part 2A brochure, or a written document carrying the same information, would be the answer only if the firm also offered other advisory services alongside the wrap program. Part 1B is a state registration filing rather than a client document, and the NASAA fee disclosure template is a broker-dealer form that can never stand in for an adviser's brochure.
- Which of the following statements may be made by an agent of a broker-dealer? I. "I am a registered agent for XYZ Securities, Inc., a registered broker-dealer." II. "I am a registered agent for XYZ Securities, Inc., a registered broker-dealer, meaning my qualifications have been approved by the appropriate regulatory agencies." III. "This security I am recommending to you is registered on both the state and federal levels." IV. "This security I am recommending to you is registered on both the state and federal levels, meaning that both the SEC and the appropriate states have given their approval of this issue."
- I, II, and III
- II and III
- I and III only
- III and IV
Correct answer: I and III only
Stating that one is a registered agent of a named broker-dealer, and stating that a security is registered at both the state and the federal level, are simple statements of fact and may be made. Adding that the registration means the regulatory agencies approved the agent's qualifications, or that the SEC and the states approved the issue, turns registration into an endorsement. Registration is never approval, so any combination resting on those two additions misstates both the agent's standing and the security.
- Which of the following prospective clients of a registered investment adviser is exempt from the requirement to receive delivery of the adviser's brochure?
- Fortune Global Advantage Fund, a private hedge fund holding over $500 million
- Fortune Investment Advisers, an advisory firm that is registered with the SEC
- Fortune Investment Securities, a broker-dealer that is registered in the state and two more
- Fortune Income Fund, a closed-end investment company whose shares trade on a stock exchange
Correct answer: Fortune Income Fund, a closed-end investment company whose shares trade on a stock exchange
The brochure rule excuses delivery in only two situations: where the advice is impersonal and the annual fee is less than $500, and where the client is an investment company registered under the Investment Company Act of 1940. A closed-end fund is such a registered investment company, so no brochure need be delivered to it. Size does not matter and neither does the client's own place in the regulatory scheme, so a private hedge fund, an SEC-registered adviser and a registered broker-dealer must each receive the brochure.
- What does the term guaranteed mean when used to describe a security?
- A party other than the issuer stands behind interest and principal
- The broker-dealer will buy the shares back at their purchase price
- The state Administrator has reviewed this entire offering and now stands behind it
- An annuity contract promises a fixed income through all of the holder's retirement
Correct answer: A party other than the issuer stands behind interest and principal
A security is guaranteed when a party other than the issuer stands behind the payments due on it, most often a parent company or an insurer, and the guarantee runs to principal, interest or dividends. Capital gains are never guaranteed. A promise by the firm to repurchase at the price the customer paid is a prohibited practice rather than a guarantee, the income a fixed annuity pays is a term of that contract and not a third party's guarantee, and the Administrator neither passes on the merits of an offering nor stands behind it.
- Gray is registered as an agent with Execrable Investment Returns (EIR), a broker-dealer registered with the SEC and the Administrator. Gray has a 55-year-old customer who has just inherited $100,000 and plans to retire once attaining age 70. Gray has recommended investing the money into several mutual funds offered by the KAPCO Fund Group, pointing out that over a 15-year period, mutual funds will outperform the market. Gray has
- Made a claim that holds true across any fifteen-year stretch
- Violated the ban on guaranteeing the way an investment will later perform
- Made a forecast the fund's prospectus lets an adviser repeat
- Violated the ban on comparing a fund against any broader market benchmark
Correct answer: Violated the ban on guaranteeing the way an investment will later perform
Telling a customer that mutual funds will outperform the market over a fifteen year period states a future result as a fact, and stating a future result as a fact is guaranteeing the way an investment will later perform, which the act never permits. The claim is not even accurate, since most funds trail the market once their expenses are counted, so it does not hold true across any fifteen year stretch, and no prospectus authorizes an agent to promise a result. Comparing a fund with a broad market benchmark is allowed when the comparison is fair; the violation is the promise, not the comparison.
- Disclosure to customers of a control relationship between a broker-dealer and the issuer of the security recommended is required in I. agency transactions. II. principal transactions. III. exempt transactions.
- I and II, but not III
- III, but not I or II
- All of I, II and III
- II and III, but not I
Correct answer: All of I, II and III
A control relationship between the firm and the issuer of a recommended security is a conflict the customer has to know about, and the duty does not turn on how the trade is done. It applies when the firm acts as the customer's agent, when it acts as a principal for its own account, and in exempt transactions as well, so disclosure is required in all three and no narrower combination is right.
- You receive a note from your firm congratulating you on passing the exam as an agent. Furthermore, your broker-dealer indicates that it has received notice from the Administrator that your registration as an agent is effective. At this point, you could not
- Accept orders from clients resident in the states your firm serves
- State that the exam is passed and the registration effective
- Start telephoning residents of the state to look for clients
- Tell prospects that the Administrator has approved you as an agent
Correct answer: Tell prospects that the Administrator has approved you as an agent
An effective registration lets an agent do everything a licensed agent may do: telephone residents of the state to look for clients, accept orders from the clients who live there, and state truthfully that the examination is passed and the registration effective. What registration never confers is an endorsement, so telling prospects that the Administrator has approved you as an agent misstates what an effective registration means and is prohibited.
- Under securities industry regulations, all of the following are prohibited when attempting to make a sale except
- Reporting that the issuer has announced plans to seek a listing
- Promising to repurchase the shares from the client at the very same price
- Calling the stock a certain candidate for a coming takeover bid
- Saying that trades cost nothing while the firm adds a markup as principal
Correct answer: Reporting that the issuer has announced plans to seek a listing
An agent may pass along a fact, so where the issuer has itself announced that it plans to seek an exchange listing, reporting that announcement states something true rather than predicting an outcome. The other three are prohibited: agreeing to repurchase the shares at the price the client paid guarantees the customer against loss, calling a takeover a certainty states a future event as a fact, and telling a client that trades cost nothing conceals the markup the firm takes when it acts as principal.
- Which of the following practices could be considered fraudulent under the Uniform Securities Act?
- Changing an order at the client's own request, even though it then loses money
- Promising a client services that the agent's own firm has no way of delivering
- Leaving repeated spoken complaints out of the report made to a principal
- Trading actively in a stock that has recently seen unusually high volume
Correct answer: Promising a client services that the agent's own firm has no way of delivering
Promising a client services that the agent's own firm cannot deliver misrepresents what the customer is being sold, and a misrepresentation made to induce a securities transaction is the core of fraud under the act. Changing an order at the client's own request is proper even when the market then moves against the client, only written complaints have to be passed up to a principal, and unusually heavy volume in a stock does not taint an agent who trades it, so long as the trading is not designed to fake activity.
- Which of the following is defined as fraud under the Uniform Securities Act?
- Selling an unregistered nonexempt security in the honest belief that it was exempt
- Handling a transaction the state prohibits, not knowing of that prohibition at all
- Entering trades that the legislature calls fraudulent though no court has
- Selling securities that turned out to be fraudulent four years afterwards
Correct answer: Entering trades that the legislature calls fraudulent though no court has
The act states that fraud is not limited to common law deceit, which means a legislature may define conduct as fraudulent even where no court or line of cases has yet done so, and entering those trades is fraud under the act. The others are not. Fraud requires a deliberate act, so a sale made in the honest belief the security was exempt violates the registration provisions without being fraud, and handling a prohibited transaction in complete ignorance of the prohibition is not fraud either, whatever the transaction did for the client. Learning years afterwards that a security was fraudulent says nothing about the agent's state of mind at the time of the sale.
- While having lunch at his club, an agent overhears a conversation that Technotalk (a publicly traded company) has just lost its biggest account to a competitor. Upon returning to the office, the only person the agent informs of the conversation is his supervisor. In this situation, the agent has acted
- Unlawfully, because his customers had a claim on this news too
- Ethically, because he can now sell the stock short
- Ethically, because he neither traded on it nor tipped a client
- Unlawfully, because that tip was for the SEC alone
Correct answer: Ethically, because he neither traded on it nor tipped a client
Holding material nonpublic information is not itself a violation; what the agent does next decides the question. Passing the news up to a supervisor and taking no other step is the only safe route, so he acted ethically because he neither traded on it nor tipped a client. His customers had no claim on the news — telling them would have been the tip, and NASAA treats passing such information along as unethical conduct even when nobody trades on it. Selling the stock short on the strength of what he overheard would be a use of the information and would expose him to a fraud charge rather than excuse him. And the Uniform Securities Act asks no agent to route a lunch-table rumor to the SEC; the duty runs to his own firm.
- The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?
- Customer name, home address, entry time, and order terms
- Account number, execution price, entry time, and terms
- Account number, customer name, order time, and the price
- Customer name, home address, execution price, and time
Correct answer: Account number, execution price, entry time, and terms
An order ticket identifies the customer by account number and never by name or address, so what appears on it is the account number, execution price, entry time, and terms of the order — limit, market or stop — together with the time of execution or of cancellation if the order goes unfilled. Every other list here writes the customer's name or home address onto the ticket, and neither belongs there: the account number exists precisely so that identifying detail stays off the order record. Pairing the name with the account number does not cure the defect, and adding the home address makes it worse.
- Deliberately failing to disclose sufficient information pertinent and relevant to a client making an informed investment decision is
- Committing fraud, since a client cannot see the whole risk
- Churning, since the account turns over far too heavily
- Trading with no authority, since consent was not given
- Guaranteeing a gain, since a sure return is being promised
Correct answer: Committing fraud, since a client cannot see the whole risk
Withholding information a client needs in order to reach an informed decision is a fraudulent practice, not merely an unethical one, because the client is left to act on a picture the agent knows is incomplete. Deliberate non-disclosure is therefore committing fraud, since a client cannot see the whole risk he is being asked to take. Churning is a different wrong — excessive trading measured against the account's objectives and resources — and it says nothing about what was disclosed. Trading with no authority describes an order the client never approved, which is not what happened here. Guaranteeing a gain is a promise about outcome, and the agent who stays silent has promised nothing at all.
- An agent was soliciting sales in XYZ stock six months ago when the market value was $16 per share. One of the agent's more aggressive clients did not purchase the stock at the time. The agent has read that there is a class action lawsuit pending against XYZ, and the market value has dropped to $5 per share. If the client were to contact the agent now and ask to purchase XYZ stock, what should he say or do in accordance with the Uniform Securities Act?
- Refuse the order because the price has fallen so far
- Enter the order at once without raising the lawsuit
- Stress that the client can buy far more shares today
- Disclose the pending suit before he takes the order
Correct answer: Disclose the pending suit before he takes the order
A pending class action against the issuer is material — a reasonable investor would want to know about it before buying. The agent may still accept the order, but he must disclose the pending suit before he takes the order. Entering it without raising the lawsuit is exactly the omission the antifraud provisions forbid. Refusing the order is not required by the Uniform Securities Act and would substitute the agent's judgement for the client's, which is not his to make. And stressing that the lower price buys far more shares turns the very development that triggers the duty to speak into a sales argument, compounding the omission instead of curing it.
- Under the Uniform Securities Act, an agent may not make which of the following statements to a customer?
- This issue is registered for sale within this state
- This issue is exempt from registration in the state
- The state Administrator has approved this issue for sale now
- The registration statement for this issue is fully in effect
Correct answer: The state Administrator has approved this issue for sale now
No state Administrator approves, endorses or passes on the merits of a security, and an agent may not suggest otherwise to a customer; the statement that the state Administrator has approved this issue for sale is the one the Act prohibits. State registration is a disclosure process, not a seal of quality, which is why the other three statements are all permissible descriptions of status: that a registration statement is fully in effect, that an issue is registered for sale within this state, and that an issue is exempt from registration in the state are statements of fact. The unlawful step is the leap from status to approval.
- If an agent recommends the purchase of a technology company with an impressive growth record but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has
- Broken no rule since the growth record was truthful
- Omitted a material fact needed by the client
- Breached a suitability duty and not the fraud rules
- Made an untrue claim about the growth record
Correct answer: Omitted a material fact needed by the client
The looming obsolescence of the company's technology is the kind of fact a reasonable investor would want, and leaving it out of a recommendation is a fraudulent omission under the Uniform Securities Act: the agent omitted a material fact needed by the client. He made no untrue claim about the growth record — that record was real, which is why the defect is the omission rather than a misstatement. An accurate growth record is no defence either, since the antifraud provisions reach half-truths as squarely as falsehoods. And recasting the problem as suitability misses it: the violation is the withheld fact, not the fit of the investment to the client.
- If a person who is not an agent or broker-dealer makes a false statement of material fact in connection with the sale of a security, that person
- Has committed fraud under the Act, as anyone else can
- Must be an adviser or a representative of one
- Falls outside the Act, since it binds firms alone now
- Is clear if the buyer was an institution here
Correct answer: Has committed fraud under the Act, as anyone else can
The antifraud provisions of the Uniform Securities Act reach any person in connection with the offer, sale or purchase of a security, not only registered agents and broker-dealers. A person who misstates a material fact has committed fraud under the Act, as anyone else can. Standing outside the registration categories is no shelter, because the fraud provisions bind firms and individuals alike. Nor does making the misstatement turn the speaker into an adviser or a representative of one; those are defined terms about giving advice for compensation. And the buyer's sophistication is irrelevant — the registration provisions carry institutional exemptions, the fraud provisions do not.
- With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is not true?
- An omission still violates where no trade was placed
- An omission in error remains a serious violation
- An omission of this kind is unethical and fraudulent
- An exempt issue sits outside the antifraud rules
Correct answer: An exempt issue sits outside the antifraud rules
This question asks which statement is false. The antifraud provisions of the Uniform Securities Act apply to every security and every transaction, exempt or not, so the claim that an exempt issue sits outside the antifraud rules is untrue and is the answer. The rest state the law correctly. An omission in error remains a serious violation: a deliberate omission is fraud and a careless one is an unethical business practice, but either way the Act has been broken. An omission still violates where no trade was placed, because the provisions reach an offer as well as a completed sale. And once the fact left out is material, the omission is unethical and fraudulent by definition.
- The antifraud provisions of the Uniform Securities Act apply to I. registered securities. II. exempt securities. III. federal covered securities. IV. exempt transactions.
- II and III only
- II, III, and IV
- I, II, III and IV
- I, II and IV only
Correct answer: I, II, III and IV
Registration requirements have exemptions; the antifraud provisions do not. Fraud and prohibited practices reach registered securities, exempt securities, federal covered securities and exempt transactions alike, so all four numbered categories belong in the answer. Any combination that drops one of them is wrong for the same reason: an exemption from registration relieves the issuer of a filing burden, never the seller of the duty to deal honestly. Federal covered securities make the point plainly — a state may not require them to be registered with it, yet the state Administrator keeps antifraud authority over how they are sold.
- Which of the following statements regarding an agent is true?
- The fraud rules do not reach a soliciting agent here
- Deceiving a client in a securities sale is unlawful
- Deceiving a client in other work breaks the same Act
- A dealer with three in-state clients is exempt here
Correct answer: Deceiving a client in a securities sale is unlawful
The Uniform Securities Act makes it unlawful for any person, an agent included, to employ a device or scheme to defraud in connection with the offer, sale or purchase of a security, so deceiving a client in a securities sale is unlawful under it. An agent is never outside those provisions while engaged in securities sales activity, and the fraud rules do reach a soliciting agent. There is also no client-count threshold that switches them off — a dealer with three in-state clients is exempt from nothing here. Deception in an agent's other lines of work may well be actionable, but under other law: the Act reaches only conduct connected to a security.
- A customer buys 200 shares of a common stock at $30 per share. On a day when the stock's price is down $5, the customer calls her agent and inquires as to its current price; the agent tells her the price is around where she bought it. In the next few weeks, the stock's price turns around and the customer liquidates the shares at $35 per share, realizing a $5 per share profit excluding commission. In this situation, the agent has acted
- Unlawfully, because a quote must be accurate each time
- Ethically, because the loss on paper was temporary
- Ethically, because the account still ended with a gain
- Unlawfully, because quotes must be sent in writing
Correct answer: Unlawfully, because a quote must be accurate each time
Giving a customer a price the agent knows is not the market price is a misrepresentation, and it does not become acceptable because the position later recovered. He acted unlawfully, because a quote must be accurate each time one is given. That the account still ended with a gain is beside the point — a fraudulent statement is judged when it is made, not by how the trade turns out. The Uniform Securities Act imposes no requirement that quotes be sent in writing, so that is not the reason the conduct fails. And calling the interim decline a temporary paper loss describes the market rather than the answer he gave, which was false when he gave it.
- An agent's customer says that ABC Corporation is about to be bought out. The customer wishes to place an order to buy ABC common stock based upon this yet-unreleased information, which he claims he learned from an officer in the company. How should the agent respond in this situation?
- Tell the supervisor once the whole order has been filled
- Fill the order and mark the ticket as unsolicited
- Send word of this tip to the state Administrator instead
- Take it to the supervisor named in the procedures
Correct answer: Take it to the supervisor named in the procedures
A customer who wants to trade on an unreleased corporate development is asking the firm to take part in a violation, and the agent's route is the one his firm has written down: take it to the supervisor named in the procedures manual before anything is done with the order. Telling the supervisor once the whole order has been filled comes too late, because the trade itself is the violation. Sending word of the tip to the state Administrator is not required of the agent and is not his call to make. And filling the order and marking the ticket as unsolicited makes matters worse, since it executes the trade and then misrecords how it arose.
- You are an agent for a fully licensed broker-dealer and one of your clients is the chairman of a drug company who tells you that the government will shortly disapprove a patent for a new drug. According to the Uniform Securities Act, you should
- Sell the shares short in your managed account
- Alert the SEC, since this is inside knowledge
- Report the tip to your own supervisor without delay
- Notify the branch manager when the trades settle up
Correct answer: Report the tip to your own supervisor without delay
Word from a company insider about a government decision that has not been announced is material nonpublic information, and the agent's obligation is to report the tip to his own supervisor without delay, so the firm can take steps to keep any transaction from being made on it. Notifying the branch manager when the trades settle up is no answer, because the purpose of the report is to prevent the trading rather than to record it afterwards. Selling the shares short in a managed account is the classic misuse of the information and would be a fraudulent act. And an agent has no duty to alert the SEC; the Act routes the problem through his own firm.
- If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes
- A manipulation the state Act forbids as market abuse
- A lawful arbitrage on a small price difference
- Fraud under state law and the federal statutes
- A lawful trade if both markets settle together today
Correct answer: A lawful arbitrage on a small price difference
Buying a security in one market and selling it in another at a higher price is arbitrage, an ordinary and permitted activity: what the investor did is a lawful arbitrage on a small price difference. Nothing conditions that on the two markets settling together on the same day, so a rule of that kind is invented. Arbitrage is not manipulation either — the arbitrageur takes advantage of a disparity that already exists instead of creating one, so no state Act forbids it as market abuse. And it is not fraud under state law or the federal statutes, which reach deception rather than the ordinary business of closing a price gap between two markets.
- The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an agent, you would
- Hold off until the firm confirms the report is public
- Point clients to the website before you comment
- Call your clients now, since the report goes up today
- Withhold this report from your clients for good
Correct answer: Hold off until the firm confirms the report is public
An unreleased research report from a well-regarded firm is itself material nonpublic information, because it will move the security's price once it is out. The agent should hold off until the firm confirms the report is public, which normally arrives as an internal notice that it has been released. Calling clients now, while the report is still unposted and the analyst has not yet appeared, is using it before release. Pointing clients to the website does not help, since the report is not there yet. And the bar is temporary, not permanent: once the report is public the agent may discuss it freely, so withholding it from clients for good is wrong in the other direction.
- Baird, a registered agent, receives an order from Miller, her customer, for an unusually large order of common stock in XYZ, Inc. He states that he overheard the CFO of XYZ, Inc., telling his golfing partner that XYZ was close to being acquired by Monolith Communications, Inc. In light of ethical standards under the Uniform Securities Act, which of the following actions is most acceptable?
- Baird buys XYZ shares within her personal account
- Baird passes the tip to her aggressive growth clients
- Baird tells her supervisor once the order has settled
- Baird tells her supervisor of Miller's inside tip
Correct answer: Baird tells her supervisor of Miller's inside tip
Miller wants to trade on what he overheard from an officer of the issuer, which would draw Baird's employer into a violation, so the acceptable step is that Baird tells her supervisor of Miller's inside tip before the order goes anywhere. Telling the supervisor once the order has settled reverses the sequence and lets the violation happen first. Buying XYZ shares within her personal account is trading on the information herself, which she may never do. And passing the tip to her aggressive growth clients spreads it further — the information is no less inside for being given to customers who welcome risk.
- Agent B is working late in the office one night and happens to notice something on Agent C's desk. It is a report stamped Confidential. Agent B opens the report and sees that it indicates that XYZ Company is in terrible financial condition. The next morning, Agent B begins contacting his clients urging them to get out of their positions in XYZ. Under the Uniform Securities Act, this would be
- Sound advice that saved his clients real money
- A lawful act because the report was openly available
- The fraudulent use of inside information he had read
- An office lapse rather than a securities crime
Correct answer: The fraudulent use of inside information he had read
A document stamped confidential must be assumed to contain material nonpublic information, and using it as the basis for advice to customers is the fraudulent use of inside information he had read. How he came by it does not matter: the antifraud provisions turn on the use of the information, not on the effort spent acquiring it, so calling it a lawful act because the report was openly available fails. Calling it an office lapse rather than a securities crime misses what happened: the antifraud provisions are precisely what he broke. And the advice was not sound advice that saved his clients real money in any sense the Act recognises — a profitable trade on inside information is still a fraudulent one.
- Under the Uniform Securities Act, an agent may use material nonpublic inside information as a basis for recommendations only
- When the tip is presented as unconfirmed market gossip
- Once the facts have reached the wider public
- Until the report becomes known to the public
- If the shares in question are exempt from registration
Correct answer: Once the facts have reached the wider public
Material nonpublic information may never be the basis for a recommendation while it is still nonpublic. The restriction lifts for one reason only: once the facts have reached the wider public the information has stopped being inside information, and the ordinary rules about recommendations apply again. Whether the shares in question are exempt from registration changes nothing, because the antifraud provisions reach exempt securities. Dressing the information up as unconfirmed market gossip does not launder it either — inducing a trade with a rumor is itself a prohibited practice. And the timing runs the other way from a permission that lasts until the report becomes known: the agent may use it only after that point, never before.
- Which of the following practices is fraudulent?
- Charging a five percent markup after quoting two percent
- Leaving out unimportant details from the sales talk
- Charging a commission the industry would call steep
- Charging a ten percent markup with the buyer's knowledge
Correct answer: Charging a five percent markup after quoting two percent
Fraud is the willful deception of a customer. Quoting a two percent markup and then charging a five percent markup is a lie about what the client is paying, and that is fraudulent. Charging a ten percent markup with the buyer's knowledge is a different matter: an excessive markup is a prohibited and unethical practice, but a markup the client knows about and accepts involves no deception at all. The same holds for a commission the industry would call steep. And leaving out unimportant details from the sales talk is not fraud either, because the duty runs to material facts, not to every fact an agent could mention.
- An agent omits certain details about an issue during a sales presentation. These omissions would be fraudulent if
- The sale was solicited and not ordered by the client
- The buyer was a person, not a large institution
- The fact was absent from the prospectus for the deal
- The fact was needed to keep other claims honest
Correct answer: The fact was needed to keep other claims honest
An omission becomes fraudulent when what was left out is material — that is, when the fact was needed to keep other claims honest, so that the statements the agent did make are not misleading without it. Whether the sale was solicited or came in unprompted has no bearing, since the antifraud provisions apply either way. The buyer's identity does not decide it either: a person and a large institution are owed the same freedom from misleading statements, even though the registration exemptions treat them differently. And the prospectus is not the test — a fact may be absent from the prospectus and still be immaterial, while a material fact must be disclosed whether or not any document happens to carry it.
- An agent at a broker-dealer firm is excited about new earnings projections he received from TechEd, which sells at a market value of $10; it paid a $1 dividend this past year, and its earnings projections for the next year amount to an increase of 30%. The agent calls his clients to solicit purchases of TechEd stock and says if they buy now at $10 per share, they will realize a profit of 30%. The agent should
- Say nothing, since the estimate is still inside news
- Call the issuer first to check the earnings estimate now
- Stop the claim at once, since it misrepresents the stock
- Mail the clients his charts once the principal signs
Correct answer: Stop the claim at once, since it misrepresents the stock
Telling clients that buying at the current price will produce a thirty percent profit converts an earnings projection into a promise of investment return, which no agent may make. He should stop the claim at once, since it misrepresents the stock. Calling the issuer to check the earnings estimate does not cure it, because even a perfectly current projection of earnings is not a projection of the share price. Mailing the clients his charts once the principal signs off simply spreads the same misrepresentation with a signature attached. And saying nothing on the theory that the estimate is inside news mistakes the defect, which is the promised gain rather than the source of the number.
- An agent has inside information on a public corporation that will probably cause the price of the stock to fall when it becomes generally known. A good customer calls with an order to buy a large amount of that stock. The agent should
- Repeat what he knows and let the customer decide it
- Take the matter to the firm's compliance officer
- Set that order aside and let the customer call back
- Enter an offsetting sell order alongside the buy
Correct answer: Take the matter to the firm's compliance officer
The agent holds information that would make the customer's purchase a trade on inside information, and none of the improvised responses is safe, so he should take the matter to the firm's compliance officer and let the firm decide what happens next. Setting that order aside and letting the customer call back is simply ignoring an order he has already received. Repeating what he knows and letting the customer decide passes the inside information along, which is a violation whether or not the customer then trades. And entering an offsetting sell order alongside the buy adds an unauthorized transaction in the account to everything else.
- Which of the following would not be considered a fraudulent practice under the Uniform Securities Act?
- An adviser gives sound advice and the client loses money
- An adviser conceals a risk and the client gains
- An adviser claims the SEC has cleared a registered issue
- An adviser quotes a stale price to close orders
Correct answer: An adviser gives sound advice and the client loses money
Fraud under the Uniform Securities Act requires deception, not a loss. Where an adviser gives sound advice and the client loses money, nothing has been misstated and nothing material withheld, so there is no violation — a poor outcome on honest advice is not fraudulent. The others are fraudulent whatever the outcome. An adviser who conceals a risk has omitted a material fact, and the client's gain does not repair it. An adviser who claims the SEC has cleared a registered issue implies an approval that no regulator, state or federal, ever gives. And an adviser who quotes a stale price to close orders has given an inaccurate market quotation, one of the classic fraudulent acts.
- If an agent misrepresents the price of a customer's stock by $10 per share to encourage the client to sell, this activity is
- An innocent mistake unless the customer relied on it
- A service charge revealed after the trade settles
- Lawful, since the client finally came out ahead here
- Fraud, since the stated value was knowingly false
Correct answer: Fraud, since the stated value was knowingly false
Deliberately misstating the price of a customer's stock by ten dollars a share in order to induce her to sell is a willful deception, and willful deception of a customer is what the Act treats as fraud, since the stated value was knowingly false and was given to move her. A profit on the resulting trade does not make it lawful, because the offence is complete when the false statement is made to induce the transaction. Recasting the difference as a service charge revealed after the trade settles does not help either, since the client was quoted a false price rather than charged a disclosed fee. And it is no innocent mistake — reliance is not the test, and the agent knew the figure was wrong.
- Alan Richards is the next-door neighbor of Marc Terry, the CEO of a Nasdaq Stock Market security. Terry tells Richards that a major NYSE-listed corporation is in the process of submitting an offer to buy out his company at a very handsome premium over the current market price. Richards would be permitted to I. immediately purchase shares of Terry's company. II. immediately purchase shares of the NYSE-listed company. III. purchase shares of Terry's company once the news becomes known to the investing public. IV. purchase shares in the NYSE-listed company once the news becomes known to the investing public.
- II and III
- III and IV
- I, II, and III
- I, III, and IV
Correct answer: III and IV
Terry's tip is material nonpublic information about a pending buyout at a premium, and it is inside information about both sides of the deal. Until the offer has been disclosed and the investing public has had a chance to absorb it, Richards may not buy the target's shares and may not buy the acquirer's shares either, so any answer that has him trading immediately in either company describes a violation. Once the news is out, the information is no longer nonpublic and he is free to buy shares of either company.
- According to the Uniform Securities Act, which of the following is an example of market manipulation?
- Omitting a material fact from the sales presentation
- Guaranteeing a customer against loss on the purchase
- Entering matched buy and sell orders to simulate active trading
- Recommending more trades than a client's income and means allow
Correct answer: Entering matched buy and sell orders to simulate active trading
Matched orders — a purchase arranged to offset a sale so that the tape shows volume no real supply or demand supports — create a false appearance of active trading, and manufacturing that appearance is what market manipulation means under the Uniform Securities Act. Omitting a material fact from a presentation is fraud, recommending more trades than a client can pay for is unsuitable, and guaranteeing a customer against loss is a prohibited practice. All three are barred, but none of them distorts the appearance of the market itself.
- One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? I. A registration statement with the SEC is available on the website of the proposed investment. II. The purchase money must be wired to an offshore account. III. One of the members of the group is a principal in the company being offered. IV. Bonus shares are offered for recruiting friends into the deal.
- I, II, and IV only
- I, II, III, and IV
- II and III only
- II, III, and IV
Correct answer: II, III, and IV
Money that must be wired to an offshore account is money that cannot be traced or recovered, a group member who is also a principal in the company being offered is promoting his own deal, and shares awarded for recruiting friends is the structure of a pyramid. Each of those raises the odds that this is a scam. A registration statement on file with the SEC guarantees nothing, but its presence cuts those odds rather than raising them, so any answer that counts it as a warning sign is wrong, and so is any answer that leaves the recruiting bonus out.
- An agent has a client who works in the legal department of ABC Manufacturing Corp. The client informs the agent that the company is going to be taken over by a competitor at a sizeable premium to the current market price. If the agent uses this information to solicit buy orders from clients and prospects, this is an example of
- misuse of the material nonpublic information on the takeover
- churning of the customer's account for the added commissions
- front running of a customer's institutional block order
- a private securities transaction away from the employer
Correct answer: misuse of the material nonpublic information on the takeover
The client works in ABC's legal department, so the takeover news is material and nonpublic, and soliciting orders on the strength of it is using inside information — the prohibition binds the person who receives the tip as tightly as the insider who gave it. It is not churning, because nothing here describes trading run up to generate commissions. It is not a private securities transaction away from the employer, because the agent is placing the orders through his own firm. And it is not front running, because there is no pending customer block order for him to trade ahead of.
- Which of the following sales would be exempt from the antifraud provisions of the Uniform Securities Act?
- The sale of a variable annuity contract to a customer
- The sale of a convertible term life insurance policy
- The sale of a scheduled premium variable life policy
- The sale of a municipal bond in an exempt transaction
Correct answer: The sale of a convertible term life insurance policy
The antifraud provisions of the Uniform Securities Act apply to every security, so no combination of exempt security and exempt transaction escapes them; a municipal bond sold in an exempt transaction is still covered. What falls outside the Act is a contract that is not a security at all. A convertible term life policy has no separate account and places no investment risk on the buyer, so it is insurance rather than a security. Scheduled premium variable life and variable annuity contracts do place investment risk on the buyer, which makes them securities and keeps their sale inside the antifraud rules.
- If an agent fails to inform a client that a company whose security he is selling is changing the investment managers of its employees' pension plan, under the Uniform Securities Act, this omission constitutes
- a fraudulent act, as a material fact was left unstated
- a civil offense, as the client could have sold earlier
- no violation, as this change of pension managers is not material
- no fraud, but an unethical act that the Administrator may punish
Correct answer: no violation, as this change of pension managers is not material
The Uniform Securities Act requires the disclosure of material facts — the facts a reasonable investor would weigh, which in practice are the ones that can move the price. Who manages the money inside the issuer's employee pension plan has no bearing on the value of the issuer's stock, so leaving it unmentioned withholds nothing material and breaks no rule. Because the fact is immaterial, the omission is not fraud, it is not an unethical practice the Administrator can act on, and no civil penalty attaches to it.
- According to the Uniform Securities Act, market manipulation includes all of the following except
- Matching buy and sell orders so that the tape looks active
- Publishing a price quote the dealer does not plan to honor
- Bidding constantly to keep a stock's price at one level
- Buying a stock on one exchange and selling it elsewhere
Correct answer: Buying a stock on one exchange and selling it elsewhere
Buying in one market and selling in another to capture the difference is arbitrage. It pushes the two prices toward each other instead of distorting either one, and it is an accepted business practice, so it is the single activity here that is not manipulation. Matching buy and sell orders manufactures volume that no real interest supports, a price quote the dealer will not stand behind is a fictitious quotation, and bidding constantly to keep a price at one level is pegging. Each of those is market manipulation under the Uniform Securities Act.
- An agent implies to his customers that he has inside information that will have a dramatic effect upon the price of the company's stock. In truth, he does not have this kind of information and no trades result. Under the antifraud provisions of the Uniform Securities Act, this is
- fraudulent, since the agent knowingly told his clients a lie
- fraudulent, since the agent traded on the leaked merger news
- permitted, since the boast produced no orders for stock
- permitted, since the agent had no such inside knowledge
Correct answer: fraudulent, since the agent knowingly told his clients a lie
Claiming to hold inside information he does not have is a deliberate untrue statement made in connection with the offer or sale of a security, and that by itself is fraud under the Uniform Securities Act. No trade has to follow and no customer has to lose money. This is not an insider trading case at all: there was no material nonpublic information, so nothing was traded on. Neither the absence of resulting orders nor the emptiness of the boast cures it, because the lie itself is the violation.
- This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients
- only after every one of the clients has read the article in full
- at any time, because the article has made the facts public
- at any time, provided the issuer has agreed to the release
- only if the facts happen to show the issuer in a favorable light
Correct answer: at any time, because the article has made the facts public
Facts printed in this morning's financial pages are public information, and public information may be passed to clients freely. The issuer has no veto over the discussion of news about itself, so its agreement is neither required nor relevant. Clients do not have to read the article first, since telling them is the point of the call. And the rule does not turn on whether the news flatters the issuer: unfavorable public facts may be shared exactly like favorable ones.
- Under the Uniform Securities Act, an agent who has inside information that ABC Company stock is about to fall
- may sell the position and may not tell clients about it
- may pass the news to a customer who already owns shares
- may not trade this stock and may not tell clients to sell it
- may tell clients to sell the stock but may not give a reason
Correct answer: may not trade this stock and may not tell clients to sell it
Material nonpublic information may not be used in any securities transaction or in any recommendation. The agent may not sell ABC in his own account, and he may not steer customers out of the stock on the strength of what he knows, because a recommendation built on inside information uses that information as surely as a trade does. Withholding the reason changes nothing, since the recommendation itself is the use. Handing the news to a customer who already owns the shares is tipping, which is prohibited as well.
- An agent has been recommending that customers buy common stock in XYZ Company. If on a visit to XYZ he overhears unreleased news that XYZ has just lost its biggest account, the agent should I. discuss the situation with his supervisory principal. II. continue to recommend the security to customers and prospects. III. stop recommending the security to customers and prospects. IV. sell the stock short in his brother's account.
- II and IV
- I, II, and III
- I, III, and IV
- I and III
Correct answer: I and III
Overhearing unreleased news that XYZ has lost its biggest account leaves the agent holding material nonpublic information. He should take it to his supervising principal, who decides what the firm does with it, and he should stop recommending the stock, because he can no longer recommend it in good faith. Continuing to recommend XYZ would mean urging customers into a stock while holding information they do not have, and selling short in his brother's account is trading on that information through a family member. Both are prohibited.
- Which of the following persons are subject to the antifraud provisions of the Uniform Securities Act? I. An investment adviser who receives a fee directly from clients II. An agent who receives no compensation directly from customers but is paid by a broker-dealer III. A broker-dealer who advises customers on the value of securities but is compensated only in the form of commissions on sales
- I, II, III
- I, II only
- I, III
- II, III
Correct answer: I, II, III
The antifraud provisions reach everyone involved in a securities transaction and everyone compensated for giving investment advice. It makes no difference whether the money arrives straight from the client, as with the adviser's fee, indirectly through an employer, as with the agent's pay, or as commissions on the trades themselves, as with the broker-dealer. Registration status makes no difference either, because an exemption from registration or an exclusion from a definition never carries an exemption from fraud liability. All three persons are covered.
- An agent receives inside information concerning an impending merger. Under the Uniform Securities Act, the agent may divulge the information to
- the state Administrator at any time before the news is public
- anyone at all once the merger has become public news
- her three largest customers a few days before the news breaks
- any customer who has agreed in writing to stay quiet
Correct answer: anyone at all once the merger has become public news
Inside information stops being inside information once it is public, so after the merger is announced the agent may discuss it with anyone. Before that it may not be passed along at all: a customer's written promise of secrecy does not cure the tip, and giving the news to her largest customers ahead of the announcement is tipping in its plainest form. The state Administrator is not the right recipient either, because an agent who comes into material nonpublic information takes it to a supervisor rather than to the regulator.
- A customer asks an agent for a valuation of his securities portfolio. Because the agent does not want to cause the customer to panic and sell his shares at a loss, the agent inflates the value of the stock. Under the Uniform Securities Act, this action is
- permitted, because the agent recommended no purchase and no sale
- permitted, because the agent believed a sale would be unsuitable
- prohibited, because the agent misstated the material fact to the customer
- prohibited, because the agent tried to influence the stock's market price
Correct answer: prohibited, because the agent misstated the material fact to the customer
An account's value is a material fact, and quoting a figure the agent knows is too high misstates it. The customer's peace of mind is no defense, because the antifraud provisions carve out no exception for kind lies. The agent did nothing to the price of the security in the market, so this is a misstatement rather than manipulation. Ethical duties are not confined to the moments when a trade is recommended, and a private judgment that selling would be a mistake does not license misinforming a customer about what she owns.
- Under the Uniform Securities Act, all of the following are improper actions except
- Agreeing to buy the security back from the customer at the original price
- Charging a buyer transaction fees that are far over the firm's usual rate
- Taking a whole two months to deliver the securities a client bought
- Telling a client the issuer has announced its plans to seek listing
Correct answer: Telling a client the issuer has announced its plans to seek listing
An agent may repeat a fact, and the issuer's own announcement that it plans to seek a listing is a fact. What an agent may not do is promise that the listing will happen. The others are all prohibited: agreeing to buy the security back at the price the customer paid is a guarantee against loss, fees far over the firm's usual rate are unreasonable charges, and holding a client's securities for two months is an unreasonable delay in delivery.
- An agent puts together a recommendation for a customer but is unable to attend the meeting. Another agent from the firm meets with the customer and presents the recommendation but omits some material facts. According to the Uniform Securities Act, this is
- a fraudulent act, since material facts were withheld from the client
- an acceptable practice, since the material facts were unknown to him
- an acceptable practice, since another agent assembled the analysis
- a suitability lapse, since the client's objectives went unreviewed
Correct answer: a fraudulent act, since material facts were withheld from the client
Whoever presents a recommendation carries the duty to present the material facts that go with it, and leaving them out is fraud under the Uniform Securities Act. That a colleague assembled the analysis does not shift the duty, because the agent in the room is the one making the presentation. Not knowing about the omission is no defense either, since an agent is required to know the material facts about what he recommends. And the defect here is the omission itself, not a mismatch between the recommendation and the client's objectives.
- Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of the following except
- Engaging in any fraudulent practice in the ordinary course of business
- Leaving an immaterial detail out of a sales presentation
- Using any scheme or artifice designed to defraud clients
- Engaging in a practice that the Administrator has defined as unethical
Correct answer: Leaving an immaterial detail out of a sales presentation
Only material information must be disclosed, so leaving out a detail that would not change a reasonable investor's decision breaks no rule, which is what makes it the exception here. The antifraud provisions expressly bar any scheme or artifice to defraud, any act or practice that works as a fraud or deceit in the ordinary course of business, and any practice the Administrator has defined by rule as unethical. Each of those is prohibited whether or not a customer ends up losing money.
- Which of the following is not a fraudulent practice?
- Reporting an inflated account value to keep a nervous client calm
- Inventing a sudden jump after quoting a below-market price to win
- Buying shares on one exchange and selling them on another for the spread
- Entering a buy order and having another agent enter a matched sell order
Correct answer: Buying shares on one exchange and selling them on another for the spread
Buying the same shares in one market and selling them in another to capture a price difference is arbitrage, a legitimate practice that narrows the gap between the two prices. The rest are fraud. A buy order entered against another agent's matched sell order manufactures the appearance of trading. Telling a nervous client her account is worth more than it is misstates a material fact. And quoting a price below the market to win an order, then inventing a jump to explain the difference, is a lie told to make the sale.
- In cases of fraudulent sales practices or advice with respect to securities, state securities Administrators may I. not take enforcement action against federal covered investment advisers. II. take enforcement action against federal covered investment advisers. III. not take enforcement action against state-registered investment advisers. IV. take enforcement action against state-registered investment advisers.
- I and IV only
- II and III only
- I and III
- II and IV
Correct answer: II and IV
Fraud is the one area where the line between state and federal registration does not matter. A state Administrator may bring an enforcement action for fraudulent sales practices or fraudulent advice against a federal covered investment adviser and against a state-registered investment adviser alike, and the Uniform Securities Act grants no exemption from its antifraud provisions to either one. Any answer that shields the federal covered adviser from the Administrator, or that shields the state-registered adviser, understates that authority.
- Your advisory customer called to check on her account value at 10:00 am, but you were unavailable at the time. It is now 2:00 pm and you are able to call her back. If between 10:00 am and 2:00 pm her account value dropped from $711,500 to $710,000, what should you tell her?
- “As of right now, your account carries a value of $710,000.”
- “Your account has held on to its morning value of $711,500.”
- “I cannot value the account until the market closes.”
- “Your account dipped to $699,700 but has come back.”
Correct answer: “As of right now, your account carries a value of $710,000.”
The customer asked what her account is worth, and at two o'clock it is worth $710,000, so giving her the current figure is the only accurate answer. Saying the account has held its morning value overstates it by $1,500 to spare her bad news, and that is a misstatement of a material fact however kindly it is meant. A portfolio of listed securities can be valued during the trading day, so there is no waiting for the close, and inventing a dip to $699,700 followed by a recovery misrepresents the day's activity.
- Under the Uniform Securities Act, which of the following statements regarding the use of material facts is true?
- Buying shares from a customer creates no duty to state material facts.
- Omitting a material fact during a securities sale is a fraudulent act.
- An agent may leave out any material fact the client has not asked about.
- A client is the one to decide which facts about a security are material.
Correct answer: Omitting a material fact during a securities sale is a fraudulent act.
Material facts are the facts a reasonable investor needs in order to make an informed decision, and leaving one out in connection with the sale of a security is a fraudulent practice under the Uniform Securities Act. The duty is not confined to sales; it applies just as much when an agent buys securities from a customer. Materiality is judged by an objective standard rather than by whatever the client happens to think matters. And a client's failure to ask about a fact does not relieve the agent of the duty to raise it.
- An agent learns of material nonpublic information (MNPI) regarding a company that is publicly held. Which of the following, with respect to the information, would not violate the Uniform Securities Act?
- Soliciting purchase orders from customers based on the news
- Buying the stock in the agent's personal account beforehand
- Reporting the information to a compliance officer at the firm
- Passing the information to another agent at the branch office
Correct answer: Reporting the information to a compliance officer at the firm
Taking material nonpublic information to a supervisor or to the firm's compliance officer is exactly what an agent is expected to do with it, and it violates nothing. Everything else on the list either uses the information or spreads it: handing it to another agent in the branch is tipping, soliciting orders on the strength of it puts customers into the stock on inside information, and buying the stock in the agent's own account before the news is released is insider trading.
- Which of the following is an example of a fraudulent practice?
- Selling a security to a customer at the dealer's offer price
- Refusing to promise that the account will not lose any value
- Recommending a Treasury bond to a careful older investor
- Furnishing a customer a quotation known to be fictitious
Correct answer: Furnishing a customer a quotation known to be fictitious
A quotation the dealer knows to be fictitious misrepresents the market for the security, and furnishing one is a fraudulent practice. Selling to a customer at the dealer's offer is ordinary dealing, since a dealer buys at its bid and sells at its offer. Refusing to promise that an account will not lose value is not merely permitted but required, because guarantees against loss are themselves prohibited. And a Treasury bond is a sensible recommendation for a careful investor rather than a fraud.
- John, a newly registered agent with a broker-dealer in Illinois, violated the Uniform Securities Act if he
- Knowingly sold revenue bonds to a client as safer general obligation bonds
- Deliberately left the issuer's employee headcount out of a new issue pitch
- Warned a client that past performance is no guarantee of results
- Miscalculated a 5% yield on a $75 stock paying $0.75 quarterly
Correct answer: Knowingly sold revenue bonds to a client as safer general obligation bonds
Revenue bonds are backed only by the revenue of the project they finance, while general obligation bonds are backed by the issuer's taxing power. Describing the first as the second, knowingly, misstates a material fact about the credit behind the bond, and the extra interest for the client does not excuse it. The issuer's headcount is not material to the investment decision, so omitting it breaks no rule. Cautioning a client that past performance guarantees nothing is required rather than prohibited. And an honest arithmetic slip — $0.75 a quarter on a $75 stock is a 4% yield, not 5% — is a mistake, not fraud.
- If a customer reveals material nonpublic information to an agent, that agent should
- report the matter to a supervising officer and await orders
- forward the disclosure right now to the firm's trading desk
- report the disclosure to the state regulator and keep on trading
- alert every customer holding the shares so they can sell quickly
Correct answer: report the matter to a supervising officer and await orders
Material nonpublic information that reaches an agent from any source belongs with the firm's supervisory or compliance personnel, and the agent takes no action until told what to do. Handing the disclosure to the trading desk simply moves it to the people best placed to trade on it, which is the abuse the rule exists to prevent. Carrying it to the state regulator is not the agent's step, and doing so while continuing to trade the security leaves the misuse untouched. Warning customers who hold the shares so they can sell is tipping, and tipping is itself an insider trading violation whether or not the agent trades.
- When does a deliberate omission of a fact in a securities sale constitute fraud?
- When a reasonable investor would rely on the omitted fact in deciding
- When the omission happens in an initial offering rather than a resale
- When the omitted fact was already widely known to clients
- When the agent believed the omitted fact was already true
Correct answer: When a reasonable investor would rely on the omitted fact in deciding
An omission becomes fraud when the omitted information is material, and information is material if a reasonable investor would rely on it in reaching an investment decision. Nothing turns on the setting: the antifraud provisions cover an initial offering and a secondary market resale alike. A fact already widely known to clients is not the trigger either, because nothing of substance is being withheld when the market already has it. And an agent's belief that the omitted fact was already true is no defense, since the violation lies in withholding information the investor needed rather than in the truth of what was withheld.
- The Uniform Securities Act contains a number of broad references to activities that might be construed as being in violation of the act's antifraud provisions. An individual making a sales presentation for which of the following would be exempt from the antifraud provisions of the Uniform Securities Act?
- Fixed annuity contracts sold through an insurance agency
- Variable life policies offered by any insurance provider
- Unit investment trusts that are registered under federal law
- Government bonds that are guaranteed by the federal treasury
Correct answer: Fixed annuity contracts sold through an insurance agency
There is no exemption from the antifraud provisions for any security or for any investment advice. Conduct falls outside them only when the product is not a security at all, and a fixed annuity is not one: the insurer bears the investment risk and guarantees the payout, so it is an insurance contract, and fraud in its sale is a matter for the state insurance commissioner instead. A variable life policy is a security because the contract value follows a separate investment account. Unit investment trusts registered under federal law are securities. Government bonds are exempt securities, meaning exempt from registration only, never from the antifraud rules.
- James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is true?4
- The antifraud provisions reach every person who sells any security in this state
- The antifraud provisions reach Jones only because the shares he sold were listed
- The provisions do not reach Jones because the securities were exempt
- The provisions do not reach untrained sellers who lack any licensing
Correct answer: The antifraud provisions reach every person who sells any security in this state
The antifraud provisions apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, so a private individual selling shares he owns is fully covered. Listing has nothing to do with it, and these shares were not listed in any case. The exemption Jones points to is an exemption from registration, and exemption from registration never carries an exemption from liability for fraud. Nor does his lack of training or a license matter: the registration provisions and the antifraud provisions are separate, and only the first depends on being in the securities business.
- At dinner one night, your father-in-law, a member of the board of directors of ABC Company, tells you the firm failed to gain government approval of a new product under development. This information, when it is made public, will seriously harm the value of the company's stock. You should
- Keep the information confidential and make no use of it
- Consider this tip public because it arrived at a dinner
- Advise clients holding the shares to sell before the news breaks
- Buy protective puts and short the shares before any news arrives
Correct answer: Keep the information confidential and make no use of it
The director's news is material nonpublic information because it has not been released to the public, and the only safe course is to keep it confidential and make no use of it in any account. Buying protective puts and shorting the shares are trades placed for your own benefit on the strength of the tip. Advising clients who hold the shares to sell is tipping, which is prohibited even if you never trade yourself. And the information does not become public merely because it arrived at a family dinner, since a private disclosure to one person is not dissemination to the market.
- All of the following are fraudulent sales practices except
- Buying shares on one exchange while selling them on another for the spread
- Buying and selling shares with a friendly dealer to raise the quoted price
- Quoting a price that the dealer has no intention of honoring
- Leaving out a material fact when the client asks about risks
Correct answer: Buying shares on one exchange while selling them on another for the spread
Buying a security on one exchange while selling it on another to capture the price difference is arbitrage, a legitimate practice that helps bring two markets back into line. The others are fraudulent. Trading with a friendly dealer for the purpose of raising the quoted price manufactures a price the market never set. Quoting a price the dealer has no intention of honoring is a fictitious quote. And leaving out a material fact when the client asks about risk is exactly the kind of omission the antifraud provisions reach.
- A person makes a sale that is in violation of the antifraud provisions of the Uniform Securities Act. Which of the following is not a true statement?
- They do not reach any seller who is outside the securities profession
- They reach both exempt and nonexempt securities in the exact same way
- They reach any agent registered elsewhere who is not registered within this state
- They reach a transaction that is already exempt from the state registration rules
Correct answer: They do not reach any seller who is outside the securities profession
The Act makes it unlawful for any person, in connection with the offer, sale, or purchase of any security, to engage in any act or practice operating as a fraud. It is the product, not the person, that decides whether the provisions apply, so a seller outside the securities profession is still covered, which makes that the statement that is not true. The other three are accurate: the provisions reach exempt and nonexempt securities in the same way, they reach a transaction that is already exempt from registration, and they reach an agent registered elsewhere but not in this state.
- An investment adviser representative recommends that a customer purchase shares of Silicon Switches. The representative indicates that the company has reduced market risk because it has graduated to the level of quality acceptable to the New York Stock Exchange. According to the Uniform Securities Act, the investment adviser's statement is
- Not permitted, since implying reduced market risks from a listing misleads
- Not permitted, since the recommendation was not suitable for this customer
- Permitted, since the exchange sets its own listing standards
- Permitted, since any adviser can recommend a listed security
Correct answer: Not permitted, since implying reduced market risks from a listing misleads
Exchange listing standards are numerical thresholds for matters such as share count and earnings, and meeting them says nothing about the risk of loss a security carries. Telling a client that a listing has reduced market risk implies a quality judgment the exchange never made, which makes the statement misleading and therefore prohibited. It is true that an adviser may recommend a listed security and true that the exchange sets its own standards, but neither fact rescues a misleading claim. Suitability is not the problem either, since nothing in the situation suggests the security was wrong for this customer.
- An agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is
- Fraudulent for both exempt and nonexempt securities alike
- Fraudulent for unregistered securities and not for others
- Fraudulent only where the agent intended to mislead investors
- Fraudulent only where the customer eventually sustains a loss
Correct answer: Fraudulent for both exempt and nonexempt securities alike
An investor relies on material facts to decide, so omitting a fact a prudent investor needs is fraudulent whatever the security involved, and exempt and nonexempt securities are covered alike. Confining the violation to unregistered securities repeats the exemption error, because exemption from registration is not exemption from fraud. Proof that the agent set out to mislead is not required for the omission to be prohibited. And whether the customer eventually sustains a loss is irrelevant, since the violation is complete once the material fact is withheld.
- Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action?
- It is permitted if the commission was disclosed before Watson agreed to trade
- It is prohibited unless the regulator has cleared the charges well in advance
- It is prohibited because no commission can ever exceed ten percent
- It is permitted because a trade this small requires no disclosures
Correct answer: It is permitted if the commission was disclosed before Watson agreed to trade
A commission higher than normal is not a prohibited practice in itself, provided the customer is told the amount before the trade and then chooses to proceed, which is why disclosure before Watson agreed is the deciding fact. Charging an unusually high commission without telling the customer in advance is fraudulent. There is no procedure for clearing a charge with the regulator ahead of time, and the Act sets no flat percentage ceiling on commissions. The small size of the trade does not remove the duty to disclose either; it is the reason the charge is disproportionate and needs disclosing.
- An agent engaging in which of the following would not be considered to be acting fraudulently?
- Giving a client all the material facts about an investment
- Promoting shares on a rumor overheard on the trading floor
- Overstating both the value and the yield of one client's account
- Trading on inside reports that came from a company board officer
Correct answer: Giving a client all the material facts about an investment
Failing to state material facts is one of the specifically prohibited acts, so giving the client all of them is compliance with the law rather than fraud. Overstating the value and the yield of an account misrepresents the client's true position. Trading on inside reports coming from a company's board officer is use of material nonpublic information. And promoting shares on a rumor overheard on the trading floor is a recommendation with no reasonable basis, which the Act treats as a prohibited practice.
- Which of the following would not be an example of market manipulation?
- A market maker buys and sells a stock for its own trading account
- Two firms trade a stock back and forth at a steadily rising price
- A dealer enters matched buy and sell orders in one security
- A principal leaks a merger rumor and later shorts the stock
Correct answer: A market maker buys and sells a stock for its own trading account
A market maker buys and sells for its own account as part of its ordinary dealer function, and that activity is not manipulation. Two firms passing a stock back and forth at a steadily rising price with no real change of ownership create false volume and an artificial price. Matched buy and sell orders accomplish the same deception from inside one firm. And a principal who leaks a merger rumor and then shorts the stock is manipulating the market for personal gain, whatever his firm's registration.
- Which of the following may not be used as the basis for a recommendation to customers?
- Merger plans learned while serving a company as a fiduciary
- Research notes coming from a private firm for special rates
- Earnings estimates prepared by the agent's own firm on solid grounds
- Market commentary that is printed in the widely sold financial press
Correct answer: Merger plans learned while serving a company as a fiduciary
Information obtained while acting in a fiduciary capacity for a corporation is inside information, and state and federal rules prohibit basing a recommendation on it. The other three are acceptable bases. A firm may recommend on its own earnings estimates so long as there is an adequate and factual basis for them. Research bought from a private firm for a fee may be used. So may commentary carried in widely sold financial publications, which is public by definition.
- All of the following statements regarding customer complaints sent by email are correct except
- They may be deleted after a principal has reviewed every one of them
- They must be retained as long as the act requires of written records
- They count as written complaints made under the state act
- They are treated as one form of electronic written record
Correct answer: They may be deleted after a principal has reviewed every one of them
Email is treated as electronic communication and satisfies the requirement that a customer complaint be in writing, so an emailed complaint is a written complaint and is one form of written record. Because of that it must be retained for the periods the Act specifies for written records. A principal's review does not discharge the retention obligation, so the statement that they may be deleted after a principal has reviewed them is the one that is not correct.
- Which of the following activities are unethical or fraudulent for agents? I. Stating that a specific stock always follows the performance of the Dow Jones Average II. Stating that the agent will always follow the client's account and recommend changes prior to a market shift III. Recommending speculative, low-priced stocks with no knowledge of the client's financial condition IV. Stating that the client will always make money investing prior to quarterly reports
- Statements I, II, III and IV are prohibited practices
- Only statements I, II and IV reflect improper conduct
- Only statements I and III are unlawful under the statutes
- Statements II and IV alone are viewed as clearly improper
Correct answer: Statements I, II, III and IV are prohibited practices
All four statements are prohibited. Saying that a specific stock always follows the Dow Jones Average is a guarantee of performance the agent cannot make. Promising to watch the account and recommend changes before a market shift is a promise that cannot be kept, because no one can identify a shift in advance. Recommending speculative low-priced stock with no knowledge of the client's financial condition is an unsuitable recommendation. And telling a client that money will always be made ahead of quarterly reports is another performance guarantee. Every answer that names only some of the four understates the list.
- An agent tells his customer that a corporation has graduated to the level of quality acceptable for trading on the New York Stock Exchange and, therefore, has less market risk. If he recommends the stock to the customer based on the exchange's listing requirements, the agent has acted
- Fraudulently, since exchange listing does not lower this client's risk
- Fraudulently, since exchange listing data is not made public knowledge
- Lawfully, since he guaranteed no return for this customer
- Lawfully, since listed firms must all be well capitalized
Correct answer: Fraudulently, since exchange listing does not lower this client's risk
New York Stock Exchange listing requirements are quantitative rather than qualitative, so listing says nothing about the level of risk in owning a stock. An agent who tells a customer that a listing has lowered the customer's exposure to loss has misled that customer, and doing so is fraudulent. The absence of an express guarantee of return does not cure it, because the misleading implication is itself the violation. Capitalization requirements do not make the claim accurate. And exchange listing data is widely published, so secrecy is not what is wrong with the statement.
- Al Watson, a customer of Billy Baird (an agent of Gibraltar Securities), is considering the purchase of 2,000 shares of Kansas Plains Gas and Electric Company common stock. Watson has stock in 10 other utilities companies in his portfolio, and this stock trades on the New York Stock Exchange (NYSE). Baird tells Watson that the company has been increasing its dividend for the past 19 years and will surely continue to do so. Which of the following statements best reflects this situation?
- Baird acted fraudulently by calling the rising dividend certain
- Baird acted unethically by pushing one unsuitable utility stock
- Baird acted properly because a long dividend record supports the advice
- Baird acted properly because he never promised Watson any certain gains
Correct answer: Baird acted fraudulently by calling the rising dividend certain
Telling a customer that a company will surely keep raising its dividend states a future event as a certainty, and that misleading guarantee is fraudulent. A nineteen-year record of increases makes the advice plausible but not certain, so the long record does not make the statement lawful. Nor does the fact that Baird stopped short of naming a specific gain, since saying the increases are a sure thing is itself the guarantee. Suitability is not the issue: Watson already holds ten other utilities, so a listed utility fits his portfolio.
- Which of the following are prohibited by the antifraud provisions of the Uniform Securities Act? I. A misstatement of a material fact II. An omission of a fact important for understanding other statements that are made III. A deceptive sales presentation that does not result in a sale
- Statements I, II and III are all prohibited by those provisions
- Statements I and III are prohibited, though statement II is not
- Statement III alone is prohibited by the antifraud rules
- Statements I and II are prohibited, unlike statement III
Correct answer: Statements I, II and III are all prohibited by those provisions
All three are prohibited. A misstatement of a material fact is the core of the antifraud provisions. So is an omission of a fact needed to keep other statements from being misleading. And a deceptive sales presentation is prohibited even when it produces no sale, because neither a completed transaction nor a client loss is required for the violation. Answers that drop the second or the third statement understate how far the provisions reach.
- A broker-dealer is not acting fraudulently if the firm is
- Acting as broker for both sides of a single transaction
- Trading with other dealers to lift a quoted stock price
- Entering paired buy and sell orders that shift no real ownership
- Trading shares with house accounts to create a sense of interest
Correct answer: Acting as broker for both sides of a single transaction
A broker-dealer may act as broker for both sides of the same transaction; that arrangement is permitted and is not fraud. The other activities are market manipulation. Trading with other dealers in order to lift a quoted price sets a price the market never made. Paired buy and sell orders that shift no real ownership create volume out of nothing. And routing trades through house accounts to create a sense of interest fabricates the appearance of demand.
- Walt and Bryan are old friends who are agents with different broker-dealers. Bryan attends one of Walt's investment seminars and, at a prearranged point in the presentation, stands up and exclaims that his rich brother-in-law wisely purchased the same investment. This action is
- A deliberate effort to mislead the investors who attend this event
- A questionable tactic that this act does not expressly forbid here
- A lawful sales practice known only as priming the pump
- A problem only where one guest has actually lost money
Correct answer: A deliberate effort to mislead the investors who attend this event
A planted enthusiast who speaks up on cue exists to make real investors believe an independent buyer has endorsed the product, which is a deliberate attempt to mislead and is expressly fraudulent. Priming the pump is not a recognized lawful sales technique, and giving the arrangement a name does not change what it does. The Act does forbid it, so treating it as merely questionable understates the violation. And it does not become a violation only once someone loses money, because the deception is complete the moment it is staged.
- It would be considered fraud for an agent to intentionally do all of the following except
- Split a commission with an agent in your local office
- Overstate the yield on a client's bond by nine points
- Describe both a debenture and a note as secured mortgage bonds
- Promise a client that escrowed funds will cover his whole loss
Correct answer: Split a commission with an agent in your local office
Sharing a commission with another agent in the same office of the same broker-dealer is permitted, and there is no requirement to disclose the split to the client, so that is the one act on the list that is not fraud. Describing a debenture and a note as secured mortgage bonds turns unsecured obligations into secured ones in the client's mind, which is a misstatement of fact. Overstating a bond's yield by nine points is another. And promising that escrowed funds will cover the client's whole loss is a guarantee against loss, which is both fraudulent and unethical.
- Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer
- Has committed a fraudulent act under the state securities act
- Has committed both a felony and a criminal securities offense
- Must deliver one hundred shares at that quoted price
- Must honor that order at that price whatever happens
Correct answer: Has committed a fraudulent act under the state securities act
Disseminating a false or fictitious quote is a fraudulent practice under the state securities act. It is not automatically a felony, because criminal liability turns on a willful violation and a prosecution, so treating the quote as proof of a felony overstates what it establishes on its own. A quote is not a commitment to trade any particular size, so the agent is not bound to deliver one hundred shares. And trades are executed at market prices, which means a fabricated quote never becomes the price at which the order must be honored.
- Under the Uniform Securities Act, it is not considered unlawful if an agent
- Solicited orders in an exempt but unregistered bond issue
- Omitted a material fact to shorten a lengthy presentation
- Deliberately ignored an express instruction that a client had given
- Knowingly stated an untrue material fact about a municipal security
Correct answer: Solicited orders in an exempt but unregistered bond issue
Securities that require no registration under the Act are exempt securities, and an agent may actively solicit orders in them; the exemption belongs to the security, while the agent and the broker-dealer must still be registered. That solicitation is therefore lawful. Omitting a material fact because a presentation was running long is still an omission of a material fact. Deliberately ignoring a customer's express instruction is a prohibited practice. And knowingly stating an untrue material fact about a security is fraud whether or not the security itself is exempt.
- In which of the following situations is an agent committing a prohibited practice?
- Accepting the brother's orders for that account while written authority is pending
- Accepting an unsolicited order from a spouse who carries written trading authority
- Placing an arbitrage trade in one listed security on two exchanges
- Placing an unsolicited order for a security that is not registered
Correct answer: Accepting the brother's orders for that account while written authority is pending
Trading authority held by anyone other than the account owner must be in writing and in hand before an order from that person is accepted, because oral authorization is not enough. Accepting the brother's orders while the written authority is still pending is therefore the prohibited practice. A spouse who already carries written trading authority may enter orders, since the document is on file. Arbitrage, buying a listed security on one exchange and selling it on another to capture a temporary price difference, is an accepted practice. And an unsolicited order for an unregistered security is an exempt transaction, so accepting it is permitted.
- Under the Uniform Securities Act, which of the following activities is an example of churning?
- Selling a client's bonds and buying comparable bonds to capture a tax loss
- Executing the day trades a self-directed client calls in each morning
- Moving a client from one fund family's Class A shares to another's monthly
- Rebalancing a growth account back to its target weights every quarter
Correct answer: Moving a client from one fund family's Class A shares to another's monthly
Churning is excessive trading in a customer's account carried on to generate commissions rather than to serve the customer. Class A mutual fund shares carry a front-end sales charge and are meant to be held for years, so moving a client from one fund family's Class A shares into another family's month after month imposes a fresh load each time and can be explained only by the commissions it produces. Selling a client's bonds and buying comparable bonds to capture a tax loss is a bond swap done for the customer's tax position, not for sales credits. Day trades that a self-directed client calls in each morning are the client's own decisions, so the agent is not the one generating the activity. Rebalancing a growth account back to its target weights every quarter is ordinary portfolio maintenance driven by the customer's stated allocation.
- Which of the following are allowable activities of an agent of a registered broker-dealer?
- Opening a joint account for a client absent firm consent
- Borrowing money from a colleague at the agent's own firm
- Splitting a commission with an agent employed by an unaffiliated firm
- Borrowing securities from a brokerage client who is a longtime friend
Correct answer: Borrowing money from a colleague at the agent's own firm
An agent may borrow from another person employed by the same broker-dealer, even where that colleague is also a customer, so borrowing money from a colleague at the agent's own firm is allowed. Borrowing securities from a brokerage client who is a longtime friend is not: the only customer an agent may borrow from is one in the business of lending, and friendship creates no exception. Splitting a commission with an agent employed by an unaffiliated firm is prohibited, because commission sharing is limited to agents registered with the same or an affiliated broker-dealer. Opening a joint account for a client absent firm consent is prohibited as well, since the arrangement requires the written consent of both the customer and the employing broker-dealer.
- A customer representing an institution calls the securities agent to complain that a security bought one year ago is showing a loss. The customer's job will be lost unless he is able to get out of the security at breakeven or a small loss. The market is 78–78.80 in the security and the customer's cost is 85. The agent can legally
- Place the sell order at the best price the market then offers
- Report 85 on the confirmation although the fill is at the bid
- Enter the order at 78.80, the best of the two quotes
- Purchase it at 85 and place it in the firm's account
Correct answer: Place the sell order at the best price the market then offers
An agent may never guarantee a customer against loss, and the lawful response to a sell instruction is to obtain the best price the current market provides. With a market of 78-78.80, a customer's sale is executed against the bid of 78; the 78.80 offer is the price at which the security would be bought, so filling a sale at 78.80 is not something the agent can do. Reporting 85 on the confirmation while the order is filled at the bid falsifies a customer record and is fraudulent. Purchasing the security into the firm's account at the customer's 85 cost makes the customer whole out of firm capital, which is a guarantee against loss.
- An agent sells her customer $10,000 of 15-year U.S. Treasury bonds. If the agent tells the customer this is the best investment due to the absolute safety of Treasury securities, the agent has acted
- Unethically, because a single bond position leaves the client undiversified
- Ethically, because Treasury securities carry zero default risks
- Ethically, because Treasury obligations are the safest domestic debt issued
- Unethically, because absolute safety implies loss is impossible
Correct answer: Unethically, because absolute safety implies loss is impossible
Telling a customer that a security carries absolute safety states that the customer cannot lose money, and no marketable security may be described that way. Treasury securities do carry no default risk, but a 15-year maturity leaves the customer exposed to interest rate risk, so the absence of default risk does not make the statement ethical. Ranking Treasury obligations as the safest domestic debt issued does not save it either, because the misleading element is the promise of safety rather than the comparison. Diversification is not the defect: nothing in the facts says the bonds are the customer's only holding, so the size of the position cannot be called unsuitable.
- An agent's customer wishes to purchase a small amount of a thinly traded stock that is only available through a regional exchange, of which the firm is not a member. Because of the extra work involved, the firm must charge higher-than-normal commission rates. After the agent discloses the higher rates to the customer, she instructs the agent to proceed with the order, which is then executed. In this situation, the agent has acted
- Improperly, because commissions may not exceed the normal range
- Improperly, because a nonmember dealer cannot handle a regional order
- Ethically, because the customer learned of the higher cost beforehand
- Ethically, because a broker-dealer sets its own rates privately
Correct answer: Ethically, because the customer learned of the higher cost beforehand
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a commission above the firm's normal rate is permissible when the extra work justifies it and the customer is told before the order is entered, which is what happened here. Commissions are not capped at a customary range; the standard is that they be reasonable and disclosed. A firm that is not a member of the exchange may still handle the order, so treating the trade as improper on membership grounds is wrong. And a firm may not simply set its own rates privately, because the advance disclosure to the customer is what makes the higher charge acceptable.
- Mildred Peabody, a retired schoolteacher, has heard about enormous profits made recently in internet stocks. She calls her agent at her broker-dealer and instructs the agent to liquidate her AAA-rated municipal bond position and use the proceeds to buy two internet stocks that have recently experienced significant price volatility. In this situation, the agent should
- Enter the order at once, since a customer's instruction binds the agent
- Advise her it is unsuitable but mark the order unsolicited
- Let a branch principal decide whether to approve the order
- Refuse the trade outright, because internet shares do not fit a retiree
Correct answer: Advise her it is unsuitable but mark the order unsolicited
The strategy would be unsuitable for this customer, but a customer who insists after being told so may still have the order entered; the agent's duty is to inform, not to veto. Best practice, which is what the question asks for, is to explain the unsuitability and then take the trade only as a customer-directed unsolicited order, so the record shows the agent did not recommend it. Entering the order at once ignores the suitability conversation altogether. Refusing the trade outright substitutes the agent's judgment for the customer's, which the act does not authorize. Letting a branch principal approve the order does not discharge the agent's own obligation to the customer.
- Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is unlawful for an agent to
- Enter trades in a discretionary account beyond what the client's profile allows
- Trade a client's account often, but within her stated objectives
- Solicit an order for an unregistered security because the transaction is exempt
- Act on a written third-party authorization the firm has accepted
Correct answer: Enter trades in a discretionary account beyond what the client's profile allows
Excessive trading is measured against the customer rather than against any fixed number of trades, so entering trades in a discretionary account beyond what that client's profile allows is the prohibited conduct. Trading a client's account often is not itself a violation where the activity stays inside the customer's stated objectives and risk tolerance; frequent is not the same as excessive. Acting on a written third-party authorization the firm has accepted is ordinary and permitted. Soliciting an order for an unregistered security is lawful where the transaction itself is exempt, because an exempt transaction removes the registration requirement.
- Your client gave you discretionary authority to trade her account with a beginning balance of $100,000. Her primary objective is long-term growth with low to moderate risk. Market conditions have been volatile for the past six months. A review of the account at the end of the period shows that, while the Dow Jones Industrial Average dropped by 2.2%, the client's account value is $105,300. During that period, if commissions from trading totaled a bit over $6,000, it is likely that your supervisor will
- Ask why a $100,000 account produced only $6,000 in commissions
- Suggest that you invite the client to transfer additional assets
- Praise you for beating a market that declined throughout
- Raise the possibility that the account was being churned
Correct answer: Raise the possibility that the account was being churned
Commissions of a bit over $6,000 on a $100,000 account in six months run at roughly twelve percent a year, far out of line with a long-term growth objective and low to moderate risk, so a supervisor reviewing the account would ask whether it was being churned. Churning is judged against the customer's objectives and resources, not against performance, so the account's gain while the average fell does not clear it and praise for beating the market misses the point. Suggesting that the client transfer additional assets would enlarge the problem rather than address it. Asking why the account produced only that much in commissions inverts the supervisor's concern.
- If a customer is upset with his agent for not servicing his account properly and sends a complaint letter, the agent should
- Send the letter to the state Administrator for review
- Offer the customer money to settle the matter quietly
- Give the written complaint to her own broker-dealer without delay
- Telephone the customer, apologize, and promise to do better later
Correct answer: Give the written complaint to her own broker-dealer without delay
Written customer complaints belong to the firm's compliance process, and an agent who receives one must bring it to her employing broker-dealer immediately so that it can be recorded and investigated. Sending the letter to the state Administrator is not the agent's step; the complaint is handled internally first, and the firm decides what, if anything, must be reported. Telephoning the customer to apologize and promise to do better leaves no record and can compromise the firm's response. Offering the customer money to settle the matter quietly resolves a complaint outside the firm's supervision and is itself a prohibited practice.
- A friend of an agent wants to sell a security and asks if the agent can guarantee a certain price. The friend offers to share his profits with the agent in return for a guaranteed price. Is this practice permissible under the Uniform Securities Act?
- No, because an agent may not claim a share of trading profits
- No, because an agent may not guarantee an execution price
- Yes, if the split is disclosed and approved by the firm first
- No, because the scheme amounts to a commingling of assets
Correct answer: No, because an agent may not guarantee an execution price
An agent may not guarantee a customer a price or protect a customer against loss, so the arrangement fails on the guarantee alone, whatever the friend offers in return. Sharing in a customer's profits is not flatly barred: it is permitted with the prior written authorization of both the customer and the employing broker-dealer, so an answer resting on a blanket ban on claiming a share of trading profits is wrong. Disclosure and firm approval do not rescue this arrangement either, because no approval can make a guaranteed price acceptable. Commingling describes mixing customer assets with the agent's or the firm's own assets, which is not what is being proposed.
- According to the Uniform Securities Act, to determine whether an investment adviser is trading excessively in a customer's account, regulators primarily examine whether
- The trades matched the client's own stated investment objectives
- The client had approved every transaction in writing
- The adviser acted throughout as principal, not agent
- The adviser collected transaction-based pay on each order placed
Correct answer: The trades matched the client's own stated investment objectives
Excessive trading is judged in terms of size and frequency measured against the customer's investment objectives and financial ability, so that comparison is what regulators examine first. A client whose objective is speculative trading may show heavy volume with nothing wrong, while the same volume in a conservative account would be a problem. Transaction-based compensation matters as a possible motive and can support a finding, but it is secondary to the objectives test and does not decide the question. Whether the adviser acted as principal goes to capacity and disclosure, not to volume, and written approval of individual transactions does not make an unsuitable pattern of trading acceptable.
- A customer wishes to open a new account but refuses to provide suitability information. Under NASAA rules, the agent
- Must refuse the account until the client responds
- May open the account but confine any advice to Treasury bonds
- May open the account once a principal waives the missing data
- May open the account but offer no recommendations
Correct answer: May open the account but offer no recommendations
NASAA rules let a broker-dealer open an account for a customer who declines to provide suitability information, but without that information no recommendation can be supported, so the account is limited to unsolicited trades. Refusing the account outright is too strict for a brokerage account, although the rule differs for an advisory account, which may not be opened without the information. Confining advice to Treasury bonds does not cure the problem, because even a conservative security has to be suitable for the particular customer. And a principal cannot waive the missing data, since the bar on recommending is not something the firm can approve away.
- A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to immediately
- Report the complaint to the Administrator before any internal review
- Suspend the agent involved until the complaint is resolved
- Send the customer a written acknowledgment of the complaint received
- Have the agent telephone the customer to settle informally
Correct answer: Send the customer a written acknowledgment of the complaint received
A broker-dealer that receives a written complaint must document it and investigate its merits, and the immediate step in that process is a written acknowledgment to the customer that the complaint has been received. Notifying the Administrator is not required at this stage, because the complaint is an internal matter until the firm has reviewed it. Suspending the agent involved punishes a person against whom no wrongdoing has been shown, and the suspension would stand until a review that has not begun. Having the agent telephone the customer to settle the matter informally leaves the person complained about in charge of the response and destroys the record the rule is designed to produce.
- An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be I. unsuitable and unethical. II. a securities felony. III. grounds, in extreme cases, for suspension or revocation of the agent's license. IV. outside regulatory jurisdiction.
- II and IV
- I and III
- I and II
- I and IV
Correct answer: I and III
Municipal bonds pay interest exempt from federal income tax, so their yields are priced for investors in high brackets; recommending one to a customer in a relatively low bracket surrenders taxable yield the customer could have kept, which makes statement I correct. A recommendation this unsuitable is a dishonest or unethical practice, and in an extreme case the Administrator may suspend or revoke the agent's registration, so statement III is correct as well. Statement II overstates the consequence, because an unsuitable recommendation is a regulatory violation rather than a securities felony in itself. Statement IV is wrong because suitability in the offer and sale of securities sits squarely within the Administrator's jurisdiction.
- An agent may share in the profits and losses of a customer's account if
- The client and the employing broker-dealer both agree to it in writing
- The customer and the firm's own compliance officer are told in writing
- The firm consents and the agent supplies a proportional share
- The client signs a form and the Administrator receives notice
Correct answer: The client and the employing broker-dealer both agree to it in writing
An agent may share in the profits and losses of a customer's account only where both the customer and the employing broker-dealer have authorized the arrangement in writing, so consent from one side alone is never enough. Telling the customer and the firm's compliance officer beforehand does not satisfy the rule, because notice is not authorization. A signed customer form paired with notice to the Administrator leaves out the firm's consent, which the rule requires. Firm consent combined with a proportional contribution by the agent describes the FINRA condition; the Uniform Securities Act imposes no requirement that the agent's share match a financial contribution.
- Which of these would be the most appropriate action for an agent who hears a sensational rumor about a stock to take?
- File it with the Administrator on the form the Act provides
- Ask two other agents whether that rumor has any basis
- Pass it to the clients whose portfolios would gain the most
- Report it to the supervisory person named by the firm
Correct answer: Report it to the supervisory person named by the firm
Rumors must not be acted on or passed along, and an agent who hears one is obliged to take it to the supervisory person the firm's compliance manual identifies. Passing it to the clients whose portfolios would gain the most is precisely the conduct the rule forbids, since it spreads unverified information into customer accounts. Asking two other agents whether the rumor has any basis is an informal investigation that spreads it further inside the firm and still leaves the agent, rather than compliance, deciding what to do with it. There is no form under the Uniform Securities Act for filing a rumor with the Administrator; the obligation runs to the agent's own firm.
- A customer has a financial commitment of $200,000 that will come due in two years. In the interim, the customer wishes to invest the $200,000 to maximize income and have the money available for the obligation in two years. You should recommend investments in
- Common stock of large dividend-paying corporations
- A speculative private placement note maturing in two years
- United States government notes maturing in about two years
- Municipal bonds with twenty-year stated maturities
Correct answer: United States government notes maturing in about two years
The customer needs the principal intact in two years and wants income in the meantime, so the recommendation has to satisfy both the horizon and the certainty of the obligation. Government notes maturing in about two years return the principal when it is needed and pay interest until then. Municipal bonds with twenty-year maturities pay income but would have to be sold at whatever price the market offers in two years, putting the principal at risk. Common stock of large dividend-paying corporations carries the same principal risk and a dividend that can be cut. A speculative private placement note maturing in two years matches the horizon but is illiquid and carries real credit risk, so the money may not be there when the obligation comes due.
- A broker-dealer offering a security for sale must
- Buy the security back from any customer who accepts the quote
- Stand ready to deliver the security at that quoted offer
- Hold the security in its own inventory before quoting it
- Set the quoted price by marking up the security's actual cost
Correct answer: Stand ready to deliver the security at that quoted offer
A dealer must honor its own quotes. An offer is the price at which the dealer is prepared to sell, so a broker-dealer offering a security for sale must be ready to deliver it at the price quoted. Being ready to buy at the quoted price is the obligation attached to a bid rather than an offer, so a firm making an offer need not purchase the security from anyone who accepts that number. The firm's own cost is irrelevant, because quotes reflect the current market and not a markup over what the firm paid. A dealer may also quote a security it does not yet own, so holding it in inventory beforehand is not a condition of making the offer.
- Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is prohibited for an agent to
- Borrow securities from a client who is his own younger brother
- Sell an unregistered security to a pension plan holding ten billion dollars
- Take an unsolicited order from a client in a neighboring state
- Tell a client beforehand that a trade carries an unusually large commission
Correct answer: Borrow securities from a client who is his own younger brother
The only customer an agent may borrow money or securities from is one who is in the business of lending, and a family member is not, so borrowing from a client who is the agent's own brother is prohibited however close the relationship. Taking an unsolicited order from a client in a neighboring state is an exempt transaction and is permitted where the agent is registered, and having a client in that state indicates that he is. Selling an unregistered security to a pension plan of that size is a sale to an institutional investor, which is an exempt transaction, so registration of the security is not required. Telling a client beforehand that a trade carries an unusually large commission is the disclosure the rules call for when a charge exceeds the firm's normal rate.
- An agent offers to sell a new issue of an unregistered exempt security to a wealthy individual investor through a private placement. The offer is accepted and the transaction is executed. If the agent did not obtain satisfactory suitability information for this transaction, this transaction was
- Allowed, because the suitability rules do not reach exempt issues
- Allowed, because a wealthy buyer need not disclose financial data
- Not allowed, since private placements bar individual buyers
- Not allowed, since each recommendation must remain suitable
Correct answer: Not allowed, since each recommendation must remain suitable
Suitability attaches to the recommendation rather than to the security or the transaction, so an agent must gather enough information to judge whether an investment fits the customer before recommending it. The private placement's status as an exempt transaction removes a registration requirement, not the duty to recommend suitably, and the same is true of an exempt security. A customer's wealth does not excuse the inquiry either, since a wealthy investor is entitled to a suitable recommendation like any other customer. Private placements are regularly sold to individual investors who qualify for them, so nothing about the offering barred individual buyers.
- An agent is preparing a marketing piece using information drawn from the prospectus. The agent decides to omit certain information that might cast a negative light on the company. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this is
- Prohibited, because sales material may not quote a prospectus
- Permitted, because the agent selects which facts to highlight
- Prohibited, because leaving out a material fact misleads the reader
- Permitted, if the marketing piece directs readers to the prospectus
Correct answer: Prohibited, because leaving out a material fact misleads the reader
Omitting a material fact is treated the same as misstating one: sales literature drawn from a prospectus must not leave out information that would matter to a buyer's decision, and dropping the unfavorable items is a deceptive practice. A line directing readers to the prospectus does not cure the omission, because the marketing piece itself must not mislead. The agent's motive is beside the point as well, since there is no exception for facts an agent would rather not feature. And sales material may draw on the prospectus, so the defect lies in the selective use of that content rather than in using it at all.
- Agent A with Firm Y and Agent B with Firm Z conduct a joint seminar. They agree to share the commissions on any resulting business. Under the Uniform Securities Act, which of the following statements regarding sharing commissions is correct?
- Both firms could consent in writing and approve the split
- Agents at unaffiliated firms may not split commissions
- Commissions earned at a joint seminar can never be shared
- Only the agent completing that trade earns commissions
Correct answer: Agents at unaffiliated firms may not split commissions
Commission sharing is limited to agents registered with the same broker-dealer or with an affiliated one, so two agents at unrelated firms may not divide the business their joint seminar produces. Consent from both firms does not create the authority, because the limitation runs to the registration relationship rather than to firm approval, and only the Administrator may grant an exception. The seminar itself is not what makes the split improper, since agents of the same or affiliated firms could share commissions from the same event. And a commission need not go solely to the agent who wrote the ticket, which is why sharing inside a firm is permitted at all.
- All of the following activities could result in being charged with a fraudulent or unethical practice except
- Omitting details that a client would not find material to the decision
- Trading an account heavily to build up commission income
- Accepting a personal loan from a retail brokerage client
- Recommending a stock on the strength of information that is not public
Correct answer: Omitting details that a client would not find material to the decision
The Uniform Securities Act reaches the omission of material facts, meaning facts a reasonable investor would weigh in reaching a decision. An agent is not obliged to recite every detail he knows, so leaving out information the client would not find material to the decision is not a violation of the act, which makes it the exception here. Recommending a stock on the strength of information that is not public trades on material nonpublic information and is prohibited. Trading an account heavily to build up commission income is churning. Accepting a personal loan from a retail brokerage client is barred unless that client is in the lending business. Each of those three can support revocation of a registration.
- James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is true?
- Exempt securities cannot be the subject of any fraud suit
- A seller who holds no securities license is outside the antifraud rules
- A person outside the securities business is free of the antifraud rules
- The antifraud rules reach any person who sells a security
Correct answer: The antifraud rules reach any person who sells a security
The antifraud provisions of the Uniform Securities Act apply to any person in connection with the offer, sale, or purchase of a security, and they do not turn on registration, occupation, or the status of the security. Jones was not required to register as an agent for an isolated sale of securities he owned, but the absence of a license does not put him outside those provisions. Being outside the securities business does not free him from those rules either, because they reach persons generally rather than securities professionals alone. And exemption from registration is not exemption from fraud liability, so deliberately misstating material facts about an exempt security remains actionable.
