- 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 a broker-dealer.
- The person is exempt from registration as a broker-dealer.
- The person limits its securities business to securities listed on a stock exchange.
- The person limits its securities business to a single state.
Correct answer: The person is excluded from the definition of a broker-dealer.
When one is excluded from the definition, none of the rules and regulations applying to that term affect the person. One can be a broker-dealer yet be exempt from registration. The person is still a BD but does not have to register (is exempt). Limiting the business to a single state or a single securities marketplace has no impact on the definition.
- Blue-sky laws pertain to all of the following except
- The regulation of securities transactions in a state
- The regulation of securities trading in foreign countries
- The registration of securities within a state
- The registration of securities salespeople in a state
Correct answer: The regulation of securities trading in foreign countries
Blue-sky (Uniform Securities Act) laws refer to state securities regulation in the state. Blue-sky laws require new securities to be registered with the state and regulate trading of securities in a state.
- 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 Administrator in one of the states where the investment adviser does business determines that the firm is not properly registered in that state
- A customer following recommendations made by the investment adviser loses more than the fees charged for the advice
- The investment adviser or one of its representatives converts customer funds for personal use
- The investment adviser is operating at a loss
Correct answer: The investment adviser or one of its representatives converts customer funds for personal use
A surety bond is a form of insurance policy protecting customers of an investment adviser from losses due to the IA or one of its IARs committing a criminal act, such as theft of a customer's money. It has nothing to do with losses in the market or the advisory firm losing money.
- Which of the following is the best definition of a person who manages accounts or portfolios of clients of an investment adviser?
- A financial advisor
- A portfolio manager
- An account executive
- An investment adviser representative
Correct answer: An investment adviser representative
Always keep in mind that this is a law exam. That means the correct answers to questions must match the language of the Uniform Securities Act (or federal law in those few cases where that is part of the question). Handling the accounts of an investment adviser's clients is one of the functions that makes a person an IAR. Account executive is an old term used to refer to an agent, and there is no such legal term as a financial advisor. Portfolio manager is another descriptive term in the industry but is not a legal definition. Those who manage portfolios may be IARs or IAs.
- As found in the Uniform Securities Act, which of the following would not be an issuer?
- A metal refinery whose stock is traded in the OTC market
- A smelter producing gold bullion for sale to investors
- A person who has proposed to issue a security but has not yet issued it
- A finance company offering promissory notes
Correct answer: A smelter producing gold bullion for sale to investors
Gold bullion is a commodity; it is not a security. One of the oddities in the USA's definition is that those who have proposed to issue a security are issuers. Regardless of the nature of the company's business, the fact that there are shares of stock trading publicly means the metal refinery had to issue them. Promissory notes are included in the definition of security (more detail in Unit 4).
- When a security is sold in a manner that creates an exemption from registration in a state, it is
- An exempt transaction
- An illegal transaction
- A federal transaction
- An exempt security
Correct answer: An exempt transaction
An exempt transaction is one where the security involved in the transaction does not require registration. The determining factor is either how it is sold or to whom it is sold. This question does not describe an exempt security because we are told it is the way in which it is sold that creates the exemption. At this point, we are only concerned with definitions. In Unit 4, we'll go much deeper.
- 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
- 60 days.
- 15 days.
- 45 days.
- 30 days.
Correct answer: 15 days.
When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day, and an appeal for review of an Administrator's order must be filed within 60 days.
- One of the distinguishing characteristics of a stock exchange is that
- Stock prices are determined by auction
- It is where unlisted securities trade
- Trading takes place 24 hours per day
- Stock prices are determined by negotiation
Correct answer: Stock prices are determined by auction
Prices on an exchange are determined by auction, while those in the over-the-counter (OTC) market are determined through negotiation. It is where securities listed on that exchange trade. Unlisted securities trade in the OTC market. Stock exchanges are open a stated number of hours each day. Typically, the hours are from 9:30 am to 4:00 pm.
- The term used by the Uniform Securities Act to describe a person applying for registration as a securities professional is
- Registrant
- Agent
- Candidate
- Applicant
Correct answer: Registrant
Any person wishing to register in any capacity, whether a broker-dealer, investment adviser, agent, or investment adviser representative, is legally referred to as the registrant. The term is also used when an issuer files a registration statement with the Administrator when it wants to issue stock or bonds
- The federal act that essentially eliminated the dual system of state and federal registration of certain securities is
- The Dual Registration Elimination Act of 2001
- The National Securities Markets Improvement Act of 1996
- The Securities and Exchange Act of 1934
- The Uniform Securities Act of 1956
Correct answer: The National Securities Markets Improvement Act of 1996
It is the NSMIA, passed in 1996, that created the category of federal covered security—a security that is not required to register at the state level. The USA is not federal law and the Securities and Exchange Act established regulation of exchanges. There is no Dual Registration Elimination Act.
- The term used in legal literature to refer to a number too small to be of significance is
- Mikró
- Tabula rasa
- De minimis
- Insignificant
Correct answer: De minimis
De minimis is from the Latin meaning insignificant. In this exam, de minimis is used to define the number of clients of an investment adviser or IAR at which registration with the state is not required.
- One of the important definitions in the Uniform Securities Act is that of a security. That term would include which of the following?
- U.S. dollars
- Rare coins
- Shares of preferred stock
- Term life insurance
Correct answer: Shares of preferred stock
Stock, whether preferred or common, is a security. In Unit 4, the key nonsecurity items will be covered; term life insurance, collectibles such as rare coins, and currency are not securities.
- Under the Uniform Securities Act, an exempt security is one that
- Is excluded from registration with the state
- Must be registered before it can be offered for sale in the state
- Is exempt from registration with the state
- Cannot be sold in the state to retail investors
Correct answer: Is exempt from registration with the state
When something is exempt, it means it doesn't have to comply. In the case of an exempt security, registration with the state is unnecessary. As an exempt security, it may be sold without registration to retail and institutional investors.
- Which of the following characteristics is not included in the definition of an investment adviser?
- A person who buys and sells securities for his own account or the accounts of others
- A person who receives compensation for preparing reports on securities as a regular business
- A person who is in the business of giving advice on securities
- A person who receives compensation for rendering advice on securities
Correct answer: A person who buys and sells securities for his own account or the accounts of others
Buying and selling securities is the role of a broker-dealer. Being in the business of giving advice on securities for compensation is what makes a person an investment adviser.
- The term qualified client would include a natural person who has
- Had net income of at least $200,000 for each of the two previous years with an expectation of meeting that in the current year
- A net worth, together with their spouse but excluding the equity in a primary residence, exceeding $2.2 million
- A net worth, together with their spouse but excluding the equity in a primary residence, exceeding $1 million
- No less than $2.2 million under the management of the specified investment adviser
Correct answer: A net worth, together with their spouse but excluding the equity in a primary residence, exceeding $2.2 million
A qualified client can meet one of two standards. Either the natural person has at least $1.1 million under the investment adviser's management or has a net worth (spouse can be included) of more than $2.2 million exclusive of the equity in a primary residence. It is the accredited investor who has the $200,000 annual income or $1 million net worth requirement.
- A natural person would find it most challenging to meet the standards to be considered
- An accredited investor
- A qualified purchaser
- A qualified client
- A sophisticated investor
Correct answer: A qualified purchaser
Natural persons who wish to meet the qualified purchaser definition must have not less than $5 million in investments. There are no specifications for a sophisticated investor, and the other choices can be met with much less than $5 million.
- 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
- A managed account
- A wrap fee program
- A mutual fund
- An advisory account program
Correct answer: A wrap fee program
Wrap fee programs are offered by broker-dealers who are also registered as investment advisers. The programs wrap together the primary services offered by each type of professional. IAs get paid for giving advice and BDs get paid for executing transactions. When the charges for these two activities (plus several others) are wrapped into a package with a fee, generally based on the size of the account, it is a wrap fee account or wrap fee program. There is such a thing as a managed account, but it is somewhat different and is unlikely to be a correct answer on the exam.
- On the Series 63 exam, in most cases, solicitors
- Must be registered as investment advisers
- Are exempt from registration
- Must be registered as agents
- Must be registered as investment adviser representatives
Correct answer: Must be registered as investment adviser representatives
Solicitors are persons who refer business to investment advisers. As such, because they are paid by those IAs, in general, they are registered as IARs. Because they refer to IAs, they themselves are not IAs or agents.
- A membership organization offering a facility to trade stocks for its members is
- The SEC
- A stock exchange
- FINRA.
- A stock market
Correct answer: A stock exchange
A stock exchange is one part of the stock market. It is where members trade securities listed on that exchange. The best-known example is the New York Stock Exchange. FINRA is a membership organization, but it has nothing to do with buying and selling securities. The SEC is the federal regulator of the industry.
- 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 Dual Registration Elimination Act of 2001
- The Uniform Securities Act of 1956
- The Securities and Exchange Act of 1934
Correct answer: The National Securities Markets Improvement Act of 1996
It is the NSMIA, passed in 1996, that created the category of federal covered investment adviser—an adviser that is not required to register at the state level. The USA is not federal law and the Securities and Exchange Act established regulation of exchanges. There is no Dual Registration Elimination Act.
- 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
- Exempt investors
- Institutions
- Sophisticated investors
- Accredited investors
Correct answer: Institutions
It is always important to remember the name of this exam: the Uniform Securities State Law Examination. Because this is an exam about the laws, the wording has to be very precise. Do all three of these meet the definition of accredited investor? Yes, but that is a term used in the federal law, not state law. Are they all sophisticated investors? Yes, but that term has no legal meaning in the law. There is no such thing as an exempt investor, although transactions with these institutions are exempt transactions (covered in depth in Unit 4). What is critical is that these are all included in the specific definition of an institution.
- Which of the following could become registered as an investment adviser representative?
- An LLC
- A limited partnership
- An individual
- A corporation
Correct answer: An individual
The only person who can become an investment adviser representative is a natural person (an individual). Any of these choices could become registered as an investment adviser, but the IAR must be an individual.
- 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
- Limits its business in State B to accredited investors
- Is registered with FINRA
- Is exempt from registration in State B
- Is excluded from the definition of an investment adviser
Correct answer: Is exempt from registration in State B
When an investment adviser does not have a place of business in a state and deals with five or fewer retail residents of that state, the de minimis exemption applies. ABC would be defined as an IA, but is exempt from registration in this specific state. IAs do not register with FINRA. In general, accredited investors will not be a correct answer on the exam. Because the question tells us ABC deals solely with retail investors, individuals who are accredited investors are still retail clients. If ABC had six or more of them in State B, the exemption would no longer apply. There is more coverage of this in Lesson 3.1.
- 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
- Qualified purchasers
- Accredited investors
- Sophisticated investors
- Institutional investors
Correct answer: Accredited investors
The question is referring specifically to Rule 501. That is where the definition of accredited investor is found. Accredited investors are those persons who, by dint of wealth, income, or investment sophistication, are able to invest in ventures that are generally unsuitable for the average person. Most commonly, those ventures are private placements. Although qualified purchasers meet the requirements, that is under a different federal law. Institutional investors are accredited, but, once again, that is not the term defined in Rule 501. This exam can get that fussy. It is, after all, a test on the laws.
- 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?
- A bank holding company
- A bank investment company
- A specialized mutual fund
- A hedge fund
Correct answer: A bank holding company
A holding company is a corporation that seeks control through a sizeable stake in the ownership of the voting stock of another company or companies. This gives it control over management, generally by having seats on the board of directors. The most common holding company on the exam is the bank holding company, where the companies owned are banks or bank-related businesses such as mortgage companies.
- Under both state and federal laws, when a broker-dealer wants to offer wrap fee programs,
- Consent must be granted by the Administrator of the state where the firm's principal office is located
- The commissions charged cannot exceed the advisory fee
- It must also register as an investment adviser
- It should limit the offering to accredited investors
Correct answer: It must also register as an investment adviser
Because a wrap fee program involves compensation for advice, broker-dealers offering it must be dually registered (BD and IA). The Administrator's consent is not required and there are no commissions charged. That is the attraction of a wrap fee program; for the one fee, all expenses are covered. In general, these programs are more suitable for customers with larger accounts, but nothing near the accredited investor minimum. Furthermore, the term accredited investor is a term applicable solely to private placements.
- 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
- Securities regulatory organization
- State regulatory organization
- Sanctioning regulatory organization
Correct answer: Self-regulatory organization
SRO stands for self-regulatory organization. The best-known SRO is FINRA. Others include the MSRB and the CBOE. NASAA is not an SRO.
- According to the Uniform Securities Act, which of the following is not considered a person?
- Minor
- Guardian for someone declared legally incompetent
- Limited partnership
- Municipality
Correct answer: Minor
A person is generally anybody who can open an account. A minor cannot open an account or enter into contracts and is not considered a legal person.
- 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 trade on a listed exchange
- A nonissuer transaction
- An illegal transaction
- An issuer transaction
Correct answer: A nonissuer transaction
A nonissuer transaction is one where the proceeds from the sale do not go to the issuer. Because Garrding is selling to Westerfield, Garrding is the one receiving the money, not Utopia Medical Supplies (the issuer). There is nothing illegal about an individual who owns a security selling it to a friend, neighbor, relative, or stranger. In the same manner you do not need a real estate license to sell your home, you do not need a securities license to sell stock you own.
- Which of the following could be an agent of a broker-dealer?
- A corporation
- A partnership
- Anyone meeting the definition of a person
- An individual over the age of majority
Correct answer: An individual over the age of majority
By definition, an agent must be a natural person (an individual). As a person, the individual cannot be a minor. However, not all persons can be agents, only natural persons. That eliminates business structures such as partnerships and corporations.
- The Uniform Securities Act is
- Model legislation passed in 1956 in an effort to unify state securities laws
- The prototype used by the SEC for developing federal securities laws
- A series of regulations applying to securities transactions in interstate commerce
- Model legislation passed in 1956 that enabled states to dispense with the need to create their own securities laws
Correct answer: Model legislation passed in 1956 in an effort to unify state securities laws
In 1956, the National Conference of Commissioners on Uniform State Laws (NCCUSL), a national organization of lawyers devoted to unifying state laws, drafted the original Uniform Securities Act (USA) as model legislation for the separate states to adopt. It is used as a template, but each state legislature must approve of the specific laws in effect in that state. Interstate commerce involves the SEC and the USA has no impact on federal securities regulations.
- Which of the following is not included in the Uniform Securities Act's definition of a state?
- New Jersey
- New Hampshire
- New York
- New Brunswick
Correct answer: New Brunswick
New Brunswick is a Canadian province. Even if you do not know the Canadian provinces, you are expected to know the U.S. states.
- Under the Uniform Securities Act, the definition of a broker-dealer includes
- A person in the business of making trades in his own account or for the accounts of others
- An agent handling principal transactions with major institutional clients
- A trust company when executing transactions in accounts in which it does not act in a fiduciary capacity
- An authorized representative of the issuer who receives a commission
Correct answer: A person in the business of making trades in his own account or for the accounts of others
A broker-dealer is defined as any person in the business of making trades in his own account or for the accounts of others. Agents represent BDs and are usually compensated by commissions.
- Purchases and sales of publicly traded unlisted securities are made
- Illegally
- Privately
- In the over-the-counter market
- On the unlisted exchanges
Correct answer: In the over-the-counter market
Listed securities trade on the exchanges while unlisted securities trade OTC. If the question says these are publicly traded, privately is not going to be a correct answer.
- 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,
- ""I will get one for you as soon as possible.""
- ""U.S. Treasury securities are exempt from registration on the federal and state level, so there is no prospectus.""
- ""U.S. Treasury securities are excluded from the registration requirements of the federal and state regulators, so there is no prospectus.""
- ""U.S. Treasury securities are excluded from the definition of a security.""
Correct answer: ""U.S. Treasury securities are exempt from registration on the federal and state level, so there is no prospectus.""
As you will learn in Unit 4, U.S. Treasury securities are part of a group of issues that are exempt from registration on both the federal and state levels. They are securities but qualify for an exemption from the registration requirements. That is why there is no prospectus.
- If, in the opinion of the Administrator, an agent is about to engage in a prohibited activity, the Administrator may
- Issue an injunction
- Suspend the agent's registration pending the outcome of a hearing
- Arrest the agent
- Issue a cease and desist order
Correct answer: Issue a cease and desist order
If the Administrator suspects a prohibited action is about to take place, a cease and desist order will be issued in an attempt to prevent that activity. Should the agent refuse to halt, then the Administrator will apply to the courts for an injunction. Suspension of registration takes place after a hearing, and the Administrator does not have the power to arrest anyone.
- The term used to describe a security that may be sold legally in a state without the requirement to register is
- Exempt transaction
- Guaranteed security
- Excluded security
- Exempt security
Correct answer: Exempt security
Securities that may be sold in a state without registration are exempt securities, meaning they are exempt from registration (i.e., don't have to register). An exempt transaction refers to the way the security is sold, not to the security itself. If something is excluded from the definition of a security, for example an automobile, it doesn't register, but the question states that this is a security. The fact that a security is guaranteed or not has nothing to do with it being exempt.
- In an effort to create uniformity among state securities laws, there is a template followed by most states known as
- The Uniform Security Act
- The Uniform Securities Act
- The State Securities Act
- The Standardized Securities Act
Correct answer: The Uniform Securities Act
In 1956, the National Conference of Commissioners on Uniform State Laws (NCCUSL), a national organization of lawyers devoted to unifying state laws, drafted the original Uniform Securities Act (USA) as model legislation for the separate states to adopt. That is the version used for this exam.
- Under the Uniform Securities Act, the term nonissuer refers to
- A person other than the issuer
- An agent
- A corporation
- An investment adviser
Correct answer: A person other than the issuer
Under the Uniform Securities Act, a nonissuer is any person (as defined under the act) that is not the issuer of the security. This would include an individual investor or a securities dealer selling from inventory.
- On the Series 63 exam, the term solicitor is used to describe persons who refer business to
- Agents
- Broker-dealers
- Institutions
- Investment advisers
Correct answer: Investment advisers
As found in the Uniform Securities Act, and therefore relevant to this exam, solicitors are persons who refer business to investment advisers. There is no comparable term for those referring business to broker-dealers and their agents.
- As found in the Uniform Securities Act, the term issuer means
- Any person who issues or proposes to issue any security
- Only those persons who actually issue a security
- Any person representing a person who issues or proposes to issue any security
- Broker-dealers who trade only for their own accounts
Correct answer: Any person who issues or proposes to issue any security
Those who issue securities are issuers. Under the USA, these persons are issuers even when the issue is only proposed and may not, in fact, ever be issued.
- Securities transactions that take place otherwise than on a listed stock exchange are made
- Solely by broker-dealers
- Only after the stock exchanges close
- On the unlisted exchanges
- In the over-the-counter market
Correct answer: In the over-the-counter market
The OTC market is where transactions in securities that are not traded on any of the listed stock exchanges take place. There is no such term as unlisted exchange. It is a broker-dealer-controlled market, but trades are made by institutions and retail investors as well.
- 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 on this stock are guaranteed to increase to keep pace with inflation
- The dividends on this stock are guaranteed by the Shortline Railroad
- The dividend payments on this stock are guaranteed by someone other than the issuer
- Shareholders are guaranteed against loss of principal
Correct answer: The dividend payments on this stock are guaranteed by someone other than the issuer
The Uniform Securities Act defines a guaranteed security as one whose interest and principal (if a debt security) and dividends (if an equity security) are guaranteed by someone other than the issuer. However, in the case of a stock, there are no guarantees to the capital value.
- As defined in the Uniform Securities Act, an offer or an offer to sell
- Includes every disposition or purchase of a security for value
- Includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value
- Only applies to attempts involving properly registered securities
- Is effective only when made by a properly registered agent
Correct answer: Includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value
An offer or an offer to sell is the attempt while the sale is when the attempt is successful. Offers can be made by those who are not agents and can be made in an attempt to sell exempt securities as well as registered ones.
- An individual eligible under federal law to purchase securities sold in a private placement is called
- A wealthy investor
- A sophisticated investor
- An institutional investor
- An accredited investor
Correct answer: An accredited investor
Rule 501 of the federal Securities Act of 1933 defines certain individual as accredited investors if they meet the income or net worth standards set out in that rule. In that case, they are eligible to purchase securities offered in private placements. Yes, they may be wealthy and sophisticated, but the question is looking for the specific legal term. Institutional investors are accredited investors, but individuals (the subject of this question), are never institutions.
- Which of the following is included in the Uniform Securities Act's definition of a person?
- A natural person since deceased
- An unincorporated association
- A natural person deemed mentally incompetent
- A minor
Correct answer: An unincorporated association
For testing purposes, please remember the three nonpersons: the three incorrect choices here.
- As found in the Series 63 examination, which of the following terms is synonymous with retail client?
- Accredited investor
- Noninstitutional investor
- Qualified purchaser
- Existing customer
Correct answer: Noninstitutional investor
A retail client is an individual investor rather than an institution such as a bank, insurance company, or investment company. Although some retail investors are accredited or qualified, those terms will usually apply to institutional investors. Depending on the nature of your business, all of your existing clients may be retail; however, institutions can be existing clients as well.
- One of the important definitions in the Uniform Securities Act is that of a security. That term would include all of the following except
- A mutual fund
- A debenture
- Shares of common stock
- An office building
Correct answer: An office building
An office building is real property (real estate). Stock, debentures, and mutual funds are included in the definition of a security. In Unit 4, the list of securities, and, more importantly, those that are not securities will be covered.
- Which of the following would be included in the Uniform Securities Act's definition of institution?
- An individual meeting the accredited investor requirements
- A corporation whose stock is listed on the New York Stock Exchange
- An individual meeting the qualified client requirements
- An employee benefit plan with assets of $1 million
Correct answer: An employee benefit plan with assets of $1 million
Included in the definition of institution is an employee benefit plan, such as a pension or profit-sharing plan, with assets of at least $1 million. No individual, regardless of wealth or sophistication, is defined as an institution by the USA. We would need to know more about the NYSE-listed company before we could label it an institution.
- 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
- III and IV
- I and II
- II and III
- I, II, III, and IV
Correct answer: I, II, III, and IV
An unincorporated investment club, an individual who buys and sells securities for his own account, associations, and partnerships (whether or not they issue certificates), and the U.S. government are specifically listed as persons in the act. On the exam, minor children, deceased individuals, and mentally incompetent individuals are the only choices that are not persons under the act.
- 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 registrant
- The petitioner
- The filer
- The applicant
Correct answer: The registrant
When an issuer files the registration papers with the Administrator, the USA refers to that person as the registrant. Any person wishing to register in any capacity, whether a broker-dealer, investment adviser, agent, or investment adviser representative, is legally referred to as the registrant.
- A registered broker-dealer committing which of the following would be most likely to face criminal charges?
- Unethical behavior
- Hiring unlicensed agents
- Prohibited activity
- Fraud
Correct answer: Fraud
This is another case where students must recognize that the Series 63 exam is a test on the laws. That is why the specific legal terminology must be used when answering a question. The commission of a fraudulent act by a broker-dealer is likely to be adjudicated as a criminal act. Unethical or prohibited actions generally result in disciplinary action by the regulators but are not considered criminal. Hiring an unlicensed individual to be an agent is not a problem; failing to register that person once hired is.
- Which of the following can only be a natural person?
- A limited liability company (LLC) with only one member
- A city
- An agent
- A business trust
Correct answer: An agent
Only a natural person can be an agent; political subdivisions, business trusts, and limited liability companies are legal persons. Both legal and natural persons are subject to the Uniform Securities Act. Corporations, trusts, partnerships, associations, joint ventures, governments and their subdivisions, agencies or instrumentalities, and any other legal or commercial entities are legal persons subject to the act.
- Mammoth Corporation owns a controlling interest in five different corporations in diversified industries. Mammoth is most likely
- A holding company
- A mutual fund
- A hedge fund
- A bank
Correct answer: A holding company
The distinguishing characteristic of a holding company is that it maintains an ownership interest in other companies for the purpose of controlling them. Hedge funds and mutual funds do not look for control. Most large banks are owned by bank holding companies.
- The Financial Industry Regulatory Authority functions as
- A stock exchange
- A federal government regulatory agency
- An educational organization
- An SRO
Correct answer: An SRO
FINRA is the main self-regulatory organization (SRO) for the securities industry. It is a member organization and, although authorized through an act of Congress, it is not a governmental agency. The various stock exchanges are SROs for the activities on those exchanges by their members. Although FINRA does provide educational information to investors, its primary function is as a regulator.
- Which types of accounts are billed a single fee that includes a group of services such as, execution of transactions and advice?
- Margin account
- Discretionary account
- Option account
- Wrap fee account
Correct answer: Wrap fee account
Wrap fee accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap fee accounts are generally considered investment advisory accounts.
- Under the Uniform Securities Act (USA), a person is best defined as
- An adult human being
- A party that is subject to federal income tax
- An individual or entity considered able to enter into an enforceable contract
- A human being
Correct answer: An individual or entity considered able to enter into an enforceable contract
According to the Uniform Securities Act (USA), a person is a competent, adult individual or an entity that is able to enter into an enforceable contract. For example, the American Red Cross is a person (legal entity), although as a charitable organization, it is not subject to federal income tax.
- A broker-dealer would most likely hire an agent to
- Sell securities to clients
- Implement the firm's new recordkeeping program
- Engage in marketing for the broker-dealer
- Solicit for advisory clients
Correct answer: Sell securities to clients
The Uniform Securities Act defines an agent as follows: "Agent means any individual other than a broker-dealer who represents a BD or issuer in effecting or attempting to effect purchases or sales of securities." They are not there to do marketing or handle recordkeeping. Soliciting for advisory clients would be done by an investment adviser representative, not an agent.
- A natural person with at least $5 million in investments meets the definition of
- A qualified purchaser
- An accredited investor
- An institutional investor
- A qualified client
Correct answer: A qualified purchaser
When it happens that more than one choice could be correct, you must always choose the one that most accurately defines the question. Although an individual with $5 million in investments would probably meet the requirements of a qualified client or an accredited investor, the more specific answer is the qualified purchaser. That is the only choice where there is a $5 million minimum. Individuals are never institutions.
- XYZ Partners, Ltd., is in the business of providing advice on securities for compensation. Under the Uniform Securities Act, this firm would be considered
- An agent
- An investment adviser
- A limited partnership
- A broker-dealer
Correct answer: An investment adviser
The USA defines an investment adviser as a person in the business of giving advice on securities. The person is compensated for performing this service. Broker-dealers and their agents are in the business of buying and selling securities, not giving investment advice. XYZ may be a general or limited partnership; we do not have enough information to tell. In any event, that would not be the answer because the USA does not specifically define a partnership, limited or general.
- As defined in the Uniform Securities Act, the term person includes all of the following except
- A city
- A limited partnership
- A corporation
- A minor
Correct answer: A minor
For testing purposes, please remember the three non-persons, of which a minor is one.
- The regulators recognize that certain investors need more protection than others. Those investors are generally called
- Accredited investors
- Retail investors
- Institutional investors
- New investors
Correct answer: Retail investors
Retail investors, or retail clients, are always individuals. When compared to institutional investors, they generally need more protection due to lack of sophistication or knowledge. The term is not restricted to new clients. An individual who has been a client of the broker-dealer for 30 years and has $20 million in the brokerage account is still a retail investor. By the way, a new bank or investment company is still an institutional investor.
- Under the Uniform Securities Act, a broker-dealer is defined as any person who
- Is registered with the SEC
- Is in the business of effecting securities transactions for his own account or for the accounts of others
- Buys securities
- Sells securities
Correct answer: Is in the business of effecting securities transactions for his own account or for the accounts of others
A broker-dealer is any person engaged in the business of effecting securities transactions for the accounts of others (broker) or for his own account (dealer). Although most are registered with the SEC, that is not what defines a BD. Any person who merely buys or sells securities would be an investor. It is being in the business of buying and selling for others or himself that defines the role of a BD.
- The Uniform Securities Act would consider an agent's deliberate attempt to deceive a customer to be
- Deceit
- Fraud
- Prohibited
- Unethical
Correct answer: Fraud
Here is a case where you must pick the specific legal term. Fraud is the deliberate or willful attempt to deceive a person. Yes, it is deceitful, prohibited, and unethical, but the legal term for this activity is fraud.
- If you were reading a legal document and saw the term de minimis, it would be referring to
- The length of the agreement
- The length of the document
- An insignificant amount
- The amount of the sale
Correct answer: An insignificant amount
De minimis is from the Latin meaning insignificant. In this exam, de minimis is used to define the number of clients of an investment adviser or IAR at which registration with the state is not required.
- Certain securities may be sold without registration because of the way the sale takes place. When that is the case, it is
- An excluded security
- An exempt transaction
- An excluded transaction
- An exempt security
Correct answer: An exempt transaction
It is important to recognize the difference between an exempt transaction and an exempt security. An exempt transaction always involves a purchase or sale (a transaction). The security involved in the transaction is exempt from registration based on the method of sale or the nature of the party involved in the transaction. There will be much more detail on this in Unit 4.
- A discussion referring to blue-sky laws would include all of the following except
- Federal laws such as the Securities Act of 1933 and Securities Exchange Act of 1934
- Forms requiring issuers selling securities in the state to comply with state securities laws
- State laws that are designed to protect the public against fraud in securities sales within a state
- A state securities law that grants state securities Administrators the power to deny or revoke a broker-dealer's or an agent's registration within its state
Correct answer: Federal laws such as the Securities Act of 1933 and Securities Exchange Act of 1934
Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.
- A retail customer of an investment adviser has at least $1.1 million under management with that adviser. That would make this individual
- A qualified client
- An institutional investor
- An accredited investor
- A qualified purchaser
Correct answer: A qualified client
As a law exam, there are similar terms that have different meaning. This question relates to three of those, but only one choice is correct. Those natural persons with $1.1 million or more under the management of an investment adviser are deemed to be qualified clients. There is no assets under management requirement for a qualified purchaser, but the net worth requirement is substantially higher than that of a qualified client. There is no assets under management requirement for an accredited investor, but having $1.1 million with the adviser does not necessarily mean the individual meets the $1 million net worth requirement. The question states it is a retail customer (an individual); they are never defined as institutions.
- Who receives the proceeds from a nonissuer transaction of a bond?
- The seller
- The beneficiary
- The Administrator
- The issuer
Correct answer: The seller
A nonissuer transaction is one where the proceeds from the sale go to someone other than the issuer. That would be the person who is selling the bond.
- Which of the following is responsible for the administration of the Uniform Securities Act in a state?
- Executive department
- Securities and Exchange Commission
- The Administrator
- State judiciary system
Correct answer: The Administrator
On this exam, the chief state regulator is the Administrator. The Securities and Exchange Commission is the federal agency, not state agency, that oversees and regulates securities on a national level.
- 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 from registration as an agent
- Is excluded from the definition of an agent
- Is a part-time employee not requiring registration
- Is in the process of studying for the exam
Correct answer: Is excluded from the definition of an agent
Clerical and administrative personnel are specifically excluded from the definition of an agent. As such, there is nothing for them to be exempt from. Registration is not based on how much time the employee works; it is based on the function.
- As defined in the Uniform Securities Act, which of the following is not a state?
- New Mexico
- Utah
- Puerto Rico
- Ontario
Correct answer: Ontario
Ontario is a Canadian province, not a state. The term state includes Puerto Rico, Washington, D.C. and any territory or possession of the United States.
- 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
- Fraud
- A disposal attempt
Correct answer: An offer to sell
The terms offer and offer to sell include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. A sale is when the offer has been accepted.
- Each of the following statements is true except
- The state securities Administrator takes responsibility for the enforcement and administration of a state's securities law
- NASAA is responsible for the content of the Series 63 exam.
- The National Securities Markets Improvement Act of 1996 (NSMIA) requires states and the federal government to have identical registration requirements
- The Uniform Securities Act is a template rather than the actual law of any state or territory of the United States
Correct answer: The National Securities Markets Improvement Act of 1996 (NSMIA) requires states and the federal government to have identical registration requirements
The NSMIA's purpose is to eliminate dual registration, not to require identical laws. The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The Series 63 exam's content is the responsibility of NASAA.
- 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
- A garnishment of the agents pay
- FDIC insurance.
- A court hearing
Correct answer: A surety bond
From time to time, there are stories about securities professionals who commit crimes such as forgery. Broker-dealers protect their customers by purchasing a surety bond. This is a form of insurance policy that pays the claimant (the customer) for cases like this. FDIC insurance is limited to banking institutions.
- 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
- An offer
- A transaction
- A bid
- A sale
Correct answer: A sale
This is the definition of a sale. The offer precedes the sale; it is the attempt to make the sale. Once the deal is made, it is a sale. Isn't it also a transaction? Yes, it is, but on the exam, when you are faced with two possible answers that could be right, only one of them is a more complete response. In this case, a transaction could be a buy or a sell, so answering that a sale took place is more accurate.
- A broker-dealer has offered a security to a customer. If the customer accepts the offer, the broker-dealer has made
- A purchase
- An offer to sell
- A sale
- A transaction
Correct answer: A sale
The first step was the offer to sell. That is the attempt to sell the security. The acceptance of the offer, as indicated in the question, means there is a sale by the dealer to the customer. Isn't it also a transaction? Yes, it is, but on the exam, when you are faced with two possible answers that could be right, only one of them is a more complete response. In this case, a transaction could be a buy or a sell, so answering that a sale took place is more accurate.
- Which of the following is not a person as defined by the Uniform Securities Act?
- XYZ Dry Cleaners, Inc., whose shareholders all work on the premises and also offer financial advice to customers who request it
- A small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds
- A nine-year-old child actor whose earnings exceed $200,000 per year
- A small unincorporated investment club
Correct answer: A nine-year-old child actor whose earnings exceed $200,000 per year
Under the Uniform Securities Act, the term person has a specific meaning. Person refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.
- An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than
- Quarterly
- Annually
- Monthly
- With every transaction
Correct answer: Quarterly
An investment adviser in possession of customer assets must send a statement to the customer at least every three months. The statement must list the securities and funds held by the adviser, list their location, and show all transactions in the account since the last statement date.
- In instances where an investment adviser has custody or possession of clients' funds or securities, it must comply with
- The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers
- The SEC’s Customer Protection Rule
- The National Securities Markets Improvement Act of 1996 (NSMIA)
- The NASAA Model Rule on Custody
Correct answer: The NASAA Model Rule on Custody
There are cases on the exam where the correct answer should be obvious. If an investment adviser (IA) has custody, it must comply with the rule on custody. The SEC's Customer Protection Rule applies only to broker-dealers, not IAs.
- 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
- When the investment adviser fails to supply clients, no less frequently than quarterly, with a statement of account activity and the location and value of their assets held in custody
- If the Administrator in the state prohibits, by rule, investment advisers from having custody
- When customer funds and securities are kept in the possession of an affiliated broker-dealer
- In the absence of a rule, an adviser fails to notify the Administrator on Form ADV that it has custody
Correct answer: When customer funds and securities are kept in the possession of an affiliated broker-dealer
When the assets of an investment adviser's clients are kept in the possession of an affiliated broker-dealer (BD), the NASAA Model Rule treats it as if the adviser has custody. As long as the BD complies with the SEC's Customer Protection Rule and the IA notifies the Administrator that it is maintaining custody, the activity is permitted.
- 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 Insider Trading and Securities Fraud Enforcement Act of 1988
- The Customer Protection Rule
- The Trust Indenture Act of 1939
- The Net Capital Rule
Correct answer: The Customer Protection Rule
Commingling is the illegal practice of failing to segregate customer funds and securities from those of the broker-dealer carrying the customer's account. One of the purposes of the SEC's Customer Protection Rule is to ensure that commingling is not taking place.
- 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
- I and III
- I and IV
- II and III
- II and IV
Correct answer: II and IV
The Administrator may, by rule, prohibit investment advisers (IAs) from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an IA has custody. In almost all jurisdictions, a bond of sufficient net worth is required to maintain custody.
- The Administrator may, by rule,
- Suspend the registration of a federal covered adviser because the firm does not require that its advisory contracts be in writing
- Require an agent to waive provisions of the Uniform Securities Act when it is in the best interest of the customer
- Suspend federal law if the Administrator believes it to be in the public interest
- Require investment advisers registered in that state to provide notice of plans to take custody of client funds
Correct answer: Require investment advisers registered in that state to provide notice of plans to take custody of client funds
The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to require IAs registered in her state to provide notification of intent to maintain custody. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. Although the advisory contracts of state-registered IAs must be in writing, the NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.
- 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 and II
- I and III
- I, II, and III
- I only
Correct answer: I only
Under the Uniform Securities Act, custody indicates that the investment adviser (IA) has physical possession over its clients' certificates and monies. A prohibition against custody in a given state does not prohibit the IA from holding investment discretion over clients' accounts, provided such discretion is granted under a suitable authorization or power of attorney. Merely examining customers' stock certificates is certainly not the same as holding custody or possession of such certificates.
- An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if
- The customer fails to tell the adviser that it has custody
- There is a rule in the state barring such custody
- The adviser is not a registered broker-dealer
- The customer does not have a wrap fee account
Correct answer: There is a rule in the state barring such custody
If there is a rule barring custody, under no circumstances may the investment adviser (IA) have custody of customer funds or securities. It is the IA who must notify the customer that custody is being maintained, not the reverse.
- An agent may determine which securities to purchase or sell for a client when
- Written discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction
- Written or oral discretion authority has been received by the broker-dealer before executing the first discretionary transaction
- Written discretion authority has been received by the broker-dealer before executing the first discretionary transaction
- Written or oral discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction
Correct answer: Written discretion authority has been received by the broker-dealer before executing the first discretionary transaction
No broker-dealer or any of its employees shall exercise any discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer. It is an investment adviser who may act with oral consent for a period of 10 days from the initial discretionary trade.
- 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?
- To protect the client in a declining market, an agent sold all shares in the client’s account when the client had only authorized the sale of 30% of the shares.
- An agent sold shares at a price less than authorized by a client.
- Within the first 10 days of a client’s initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client.
- An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without express written discretionary authority.
Correct answer: An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without express written discretionary authority.
An agent of a broker-dealer (BD) may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives (never BDs or agents) during the first 10 business days after the initial discretionary transaction in the account.
- 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
- Annually
- Every 30 days
- Every 3 months
- Semiannually
Correct answer: Every 3 months
This is just one of those facts that must be memorized. IAs maintaining custody must send a report of the asset in custody at least once every three months. On the exam, it would also be acceptable to state it as at least quarterly.
- Under industry regulations, when may an agent be given discretionary power to buy or sell securities for a client?
- If authority is given within one week after the discretionary act
- Only when the authority is specific, provided in advance, and specifies the amount, type, and timing of the transaction
- When authority is given by a written document
- Never
Correct answer: When authority is given by a written document
Discretionary authority must be in written form. The only exception is when the discretion relates to time or price because, under the law, that is not considered to be discretion.
- Which of the following constitutes a discretionary account?
- The agent’s personal trading account
- An account in which the investor gives the broker-dealer written authority to buy or sell securities
- An account in which the investor gives the broker-dealer authority as to pricing or timing of an investment
- The broker-dealer’s trading account
Correct answer: An account in which the investor gives the broker-dealer written authority to buy or sell securities
In a discretionary account, an agent has received authority to select the amount and type of investment for a client; the authorization must be in writing. Timing and price of a trade are not considered discretionary.
- 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.
- I and II
- II and IV
- I and III
- III and IV
Correct answer: II and IV
Customer assets held in custody by an investment adviser (IA) must be segregated, and the firm must send a statement every three months. If there is no rule prohibiting custody, the Administrator must be notified that the IA has custody; approval is not necessary. Discretion is not the same as physical custody.
- Over which of the following would the investment adviser representative have discretionary authority?
- An account in which a trustee has power of attorney over another individual’s account
- An account in which a customer has power of attorney over another individual’s account
- An order that specifies the size of the trade and name of the security, but leaves the choice of price or time up to the investment adviser representative
- An account in which the investment adviser representative chooses portfolio securities on behalf of the client
Correct answer: An account in which the investment adviser representative chooses portfolio securities on behalf of the client
An order is discretionary when it is placed for a customer's account by the member firm or its representative without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time or price is not considered an exercise of discretion.
- The NASAA Model Rule on Custody applies to certain
- Investment adviser representatives
- Broker-dealers
- Investment advisers
- Agents
Correct answer: Investment advisers
The custody rules are limited to those investment advisers who maintain custody of customer funds and/or securities. Broker-dealers are covered under the SEC's Customer Protection Rule. Agents and IARs never maintain custody of customer assets.
- The SEC's Customer Protection Rule is found in
- The Uniform Securities Act
- The Securities Act of 1933
- The Securities Exchange Act of 1934
- The Investment Advisers Act of 1940
Correct answer: The Securities Exchange Act of 1934
Rule 15c3-3, the Customer Protection Rule, is found in the Securities Exchange Act of 1934. It certainly would not be in the USA—that is state law only.
- 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 margin account
- A wrap account
- A discretionary account
- An advisory account
Correct answer: A discretionary account
This is the basic definition of a discretionary account.
- 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
- The SEC Net Capital Rule
- The SIPC insurance program
- The Customer Protection Rule
- The Customer Safeguard Rule
Correct answer: The Customer Protection Rule
On the exam, the assumption is that every broker-dealer is registered with the SEC as well as the appropriate states. That is why so much of broker-dealer regulation is based upon SEC rules. SEC Rule 15c3-3 (not tested by number) is better known as the Customer Protection Rule. If a broker-dealer is forced into liquidation (liabilities exceed assets), the rule protects customers by ensuring the BD will have sufficient assets to meet obligations to customers for securities and funds. Protection for securities is through the requirement to maintain possession or control of customer's securities. Protection for funds is accomplished by requiring every covered BD to maintain a special reserve account solely for the benefit of customers. There are no specifics asked on the exam, only the general knowledge of what the rule is about.
- All of the following are prohibited actions except
- Sharing in profits of an account as a reward for the agent’s recommendations exceeding the S&P 500
- Executing a transaction in a registered nonexempt security in a discretionary account
- Trading in the account of a conservative client exclusively in speculative public offerings with proper trading authorization from the client
- Failing to record exempt transactions on the broker-dealer’s books and records
Correct answer: Executing a transaction in a registered nonexempt security in a discretionary account
Discretionary (and nondiscretionary) accounts may contain nonexempt securities. Because discretionary trades are categorized as solicited, those nonexempt securities should be registered. All transactions, whether exempt or nonexempt, must be recorded on the books of the broker-dealer (BD). Trading the account of a conservative client only in speculative public offerings is unsuitable and, therefore, a prohibited business practice. The only time sharing in the profits of a client's account would be permitted is with consent of both the client and the employing BD. Such consent must be stated in the choice.
- In the securities industry, the term discretionary refers to
- An account in which the agent has the power to decide which securities to buy or sell without customer authorization for those specific trades
- An account in which someone has been given custodial power over another individual’s account
- An order that specifies size, security, or action but leaves the choice of time or price up to the agent
- An account in which a person has power of attorney over an incompetent individual’s account
Correct answer: An account in which the agent has the power to decide which securities to buy or sell without customer authorization for those specific trades
An order is discretionary when the broker-dealer's agent places it for a customer's account without the customer's express authorization for that order. Additionally, for the order to be considered discretionary, the agent must choose at least one of the following: the security, the number of shares (or dollar amount), or whether to buy or sell. Although a person with a POA over another person's account would involve discretionary authority, that choice implies that discretion is limited only to the case where the customer is mentally incompetent.
- 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, III, and IV
- I and III
- I and II
- I, III, and IV
Correct answer: I and III
Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A BD charging for research advice is charging for advisory services, which would require registration as an IA. A charge for creating a comprehensive financial plan is considered to be a charge for investment advice, even if it is only a one-time expense. It could also be considered that the commissions earned from the recommendations are indirect compensation (which is still looked at as advisory compensation). Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an IA if no fees are charged for the advice. BDs may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.
- Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser except
- Broker-dealers and their agents
- A federal covered adviser
- Banks
- A person in the business of providing advice on municipal bonds for compensation
Correct answer: A person in the business of providing advice on municipal bonds for compensation
Although municipal bonds are exempt securities, that only refers to their exemption from registration with the state or SEC. Any person who is in the business of giving advice on securities would be defined as an IA and, therefore, would require registration. Although most federal covered advisers meet the general definition of an investment adviser, federal covered advisers are specifically excluded from the definition in the Uniform Securities Act. That is why covered advisers do not have to register with the Administrator.
- An investment adviser need not register in a state if it has
- A place of business in the state and advises fewer than 5 banks
- A place of business in the state and only advises employee benefit plans with $1 million or more in assets
- No place of business in the state and only advises 33 insurance companies located in the state
- No place of business in the state, does not direct business communications in the state, and advises no more than 10 high-net-worth individuals located in the state
Correct answer: No place of business in the state and only advises 33 insurance companies located in the state
An investment adviser need not register in a state if it has no place of business in the state and advises such institutional clients as insurance companies or banks. The number of clients is irrelevant as long as they all are of an institutional nature. Without exception, the USA requires an IA to register in a state if it has a place of business in the state. With no place of business in the state, registration would not have been required regardless of the number of banks who were clients. With five or fewer noninstitutional clients, regardless of their net worth, no registration would be necessary under the de minimis provisions of the USA.
- 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
- Other investment advisers
- Broker-dealers
- Investment companies
- Accredited investors
Correct answer: Accredited investors
Included in the definition of accredited investor are individuals with net worth in excess of $1 million, excluding the value of the principal residence. However, that does not make them an institutional investor. Provided its clients are institutional investors and the adviser has no place of business in a state, it is not required to register as an investment adviser in that state.
- According to the Uniform Securities Act, which of the following statements is true?
- An investment adviser with only a small branch office in the state, who conducts business exclusively with insurance companies located in the state, need not register in the state.
- An investment adviser with no place of business in the state, who conducts business exclusively with insurance companies located in the state, need not register in the state.
- If an agent is hired away from his broker-dealer by another broker-dealer, only the new broker-dealer must notify the Administrator.
- Only the employing adviser, not the investment adviser representative, must register in the state.
Correct answer: An investment adviser with no place of business in the state, who conducts business exclusively with insurance companies located in the state, need not register in the state.
An adviser with no place of business in the state who conducts business with insurance companies is exempt from registration in the state. The other answer choices are all false. If an agent is hired away from a broker-dealer by another BD, both BDs and the agent must inform the Administrator. The size of the branch office is irrelevant; simply having a place of business in a state requires registration, regardless of the clientele.
- In response to an evolving marketplace, the SEC, through Release IA-1092, expanded the coverage of the definition of investment adviser to include
- Financial planners and pension consultants
- Broker-dealers offering wrap fee programs and financial planners
- Broker-dealers offering wrap fee programs and life insurance agents
- Life insurance agents and pension consultants
Correct answer: Financial planners and pension consultants
SEC Release IA-1092 added financial planners, pension consultants, and sports and entertainment representatives to the list of potential IAs. Unless the life insurance agent is offering investment advice, the agent does not meet the definition of investment adviser. The release did not address wrap fee programs because the exclusion for broker-dealers is part of the Investment Advisers Act of 1940; once special compensation in the form of wrap fees is received, the exclusion is lost.
- 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
- 12-month period.
- 2-year period.
- 6-month period.
- 30-day period.
Correct answer: 12-month period.
If investment advisers have no office in a state, they are not defined as IAs and are exempt from registration if either of the following conditions applies: their only clients within the state are other IAs or broker-dealers, financial institutions (banks, savings and loans, trust companies), institutional investors (certain pension funds, insurance companies, investment companies), or government agencies or other political entities; and they have no more than five retail clients within the state in a 12-month period (de minimis exemption).
- Under the Uniform Securities Act, the Administrator can require a federal covered investment adviser to
- Maintain net worth in excess of that required by the SEC
- Maintain books and records for a period of time in excess of SEC requirements
- File a copy of all of the documents submitted to the SEC
- File copies of the firm's advertisements
Correct answer: File a copy of all of the documents submitted to the SEC
Federal covered investment advisers do not come under the jurisdiction of the state Administrator. The only requirement he may place on them is a Notice Filing, which may include submitting copies of all documentation filed with the SEC, paying a filing fee, and providing a consent to service of process.
- Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of
- An officer of a trust company handling investments for trust accounts
- An agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him
- A tax attorney who, as an incidental part of his tax practice, recommends that his high tax bracket clients investigate the use of municipal bonds in their portfolios
- An economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee
Correct answer: An economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee
If you are holding yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of investment adviser. A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.
- 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?
- Under no circumstances if there is no place of business in the state.
- He had more than five institutional clients domiciled in the state.
- His website was seen by residents of the state.
- He had more than five noninstitutional clients who were residents of the state.
Correct answer: He had more than five noninstitutional clients who were residents of the state.
An investment adviser with no place of business in the state dealing exclusively with institutional clients is not considered an IA for registration purposes. If the IA has retail (noninstitutional) clients, there is a de minimis limit of no more than five in any 12-month period. Because websites are global, registration is only required if there is a place of business in the state or you go over the de minimis limits.
- Under the Uniform Securities Act, the term investment adviser does not exclude
- A lawyer
- A person who is paid a commission for selling securities
- A publisher of a magazine
- A person who is paid a fee for advising customers on securities
Correct answer: A person who is paid a fee for advising customers on securities
An investment adviser is any person who is in the business of selling investment advice and is paid a fee for doing so.
- A pension fund manager who manages a $35 million dollar account must register with which of the following?
- Either the state or the SEC
- The state
- SEC
- Both the state and the SEC
Correct answer: The state
Under the Dodd-Frank Act, pension fund managers who manage $200 million or more are eligible to register with the SEC, so in this case, they would register with the state.
- 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 and III
- II and IV
- I, II, III, and IV
- I, II, and IV
Correct answer: I, II, III, and IV
Certain professionals are excluded from the definition of an investment adviser if the advice provided is incidental to the practice of their profession and no additional compensation is charged for the advice. Lawyers, accountants, engineers, and teachers are excluded. This is best remembered through the acronym LATE. An Administrator has the power to exclude any person from the definition.
- 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
- II and IV
- II and III
- I, II, and III
- I, II, III, and IV
Correct answer: I, II, III, and IV
Banks, IARs, federal covered advisers, and lawyers are all specifically excluded from the definition of investment adviser. Any investment adviser under contract to manage a regulated investment company must register with the SEC and is, therefore, a federal covered adviser (regardless of where they have an office). Remember that the law makes a distinction between investment advisers and their representatives and that certain professions are excluded from the definition if the investment advice provided is solely incidental to the practice of that profession. Making suggestions as to how to invest proceeds from a legal settlement would certainly appear to be incidental to the practice of law. Banks are given a blanket exclusion.
- Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction?
- An accountant located in the state who offers general securities advice as an incidental part of his business
- An investment subsidiary of a bank holding company located in the state that manages $70 million in assets
- A commercial bank with a place of business in the state that advises clients on investment matters
- A federal covered adviser with clients in the state
Correct answer: An investment subsidiary of a bank holding company located in the state that manages $70 million in assets
A bank holding company's investment subsidiary that manages less than $100 million in assets is an investment adviser subject to the Uniform Securities Act (USA). Under the language of the USA, a commercial bank is excluded from the definition of investment adviser whereas a bank holding company subsidiary is not. While a federal covered adviser is an IA in practice (that is, it performs the functions of an investment adviser), it is excluded from the definition of an investment adviser under the USA to avoid duplicate regulation. An accountant located in the state that offers general securities advice as an incidental part of his business is not an IA.
- A federal covered investment adviser is a person
- Registered with the North American Securities Administrators Association (NASAA)
- Exempt from regulation under the Securities Exchange Act of 1934
- Registered, or excluded from the definition of investment adviser, under the Investment Advisers Act of 1940
- Registered under the Uniform Securities Act
Correct answer: Registered, or excluded from the definition of investment adviser, under the Investment Advisers Act of 1940
The term federal covered investment adviser refers to a natural person or entity registered under the Investment Advisers Act of 1940 or excluded from the definition under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the NSMIA and the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state-registered or federal covered, do not register with NASAA.
- 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 financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.
- A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company.
- A wealthy college professor gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed.
- The secretary of the U.S. Treasury, as part of her official duties, comments on conditions in the financial markets and their future investment implications.
Correct answer: A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.
If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all three elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.
- 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 an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more
- When an adviser has maintained assets of $100 million or more for 7 out of the last 10 years
- When an adviser only provides advice to registered investment companies
- When an adviser with numerous retail clients in the state has not been subject to disciplinary action within any state within the last 10 years
Correct answer: When an adviser only provides advice to registered investment companies
An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax-qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser are not what determine becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years.
- 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 with them being readily accessible for the first year
- Three years with them being readily accessible for the first two years
- Two years with them being readily accessible for the first three years
- Five years with them being readily accessible for the first two years
Correct answer: Three years with them being readily accessible for the first two years
For the most part, the recordkeeping requirements of the USA parallel those of the SEC. The SEC does have some that have a six-year retention requirement, but that is not something tested on the Series 63 exam. For the first two years, all records must be readily accessible to the Administrator. The total retention time is three years.
- 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
- I and IV
- II and III
- II and IV
Correct answer: I and IV
As long as communications are directed to no more than five noninstitutional clients in a 12-consecutive-month period and the adviser does not have a place of business in the state, an exemption from registration is provided. This is the de minimis exemption and applies only to investment advisers and investment adviser representatives, not to broker-dealers or agents.
- 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
- Had no more than 15 retail clients in that state within the past 12 months
- Had no more than 10 retail clients in that state within the past 12 months
- Had no more than 5 retail clients in that state within the past 12 months
- Is registered as a broker-dealer
Correct answer: Had no more than 5 retail clients in that state within the past 12 months
An investment adviser who had no more than five retail clients in a state within the prior 12-month period or who deals exclusively with institutions is not required to register in a state in which it has no place of business.
- 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 is required to register as an investment adviser because he regularly offers advice and receives compensation for advice concerning securities and investments, and he holds himself out as a financial planner.
- Harrison is not required to register as an investment adviser because his securities advice is purely incidental to his overall planning activities.
- Harrison is required to register as an investment adviser because he holds a recognized financial planning credential.
- Harrison is not required to register as an investment adviser because he holds a recognized financial planning credential.
Correct answer: Harrison is required to register as an investment adviser because he regularly offers advice and receives compensation for advice concerning securities and investments, and he holds himself out as a financial planner.
Under the Uniform Securities Act, an investment adviser is a person, corporation, partnership, or sole proprietorship who, in the regular course of business, advises others as to the advisability of selling securities. Harrison holds himself out as a financial planner and normally includes a section on investments in his plans. Furthermore, Harrison is compensated for his services—yet another standard of the definition of investment adviser. Under the USA, certain recognized professional designations are exempt from having to qualify by passing the licensing exam but not from registration.
- Which of the following would have to register as an investment adviser under the Uniform Securities Act?
- An economics professor who occasionally gives a lecture to business groups about the stock market
- A petroleum engineer who frequently is a paid speaker at seminars dealing with investment opportunities in oil and gas exploration limited partnerships
- An accountant who advises clients about investments as an incidental part of services
- A trust company
Correct answer: A petroleum engineer who frequently is a paid speaker at seminars dealing with investment opportunities in oil and gas exploration limited partnerships
Although engineers are included in the list of professionals excluded from the definition of investment adviser, that is only the case when any advice they give is incidental to the practice of their profession. Acting as a paid speaker for an investment seminar crosses the line.
- 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
- Has no place of business in the state and advises only savings and loan associations
- Has a place of business in the state but deals exclusively with covered advisers
- Has a place of business in the state but has conducted business with three individual investors during the preceding 12 consecutive months
- Is headquartered in a state where it conducts most of its business with broker-dealers only
Correct answer: Has no place of business in the state and advises only savings and loan associations
An investment adviser who has no place of business in the state and deals only with savings and loan associations is not required to register with the state securities Administrator. An IA with a place of business in the state must register with the Administrator whether clients are exclusively broker-dealers or federal covered advisers and regardless of the number of clients.
- 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?
- An investment adviser
- A governmental agency
- An insurance company
- An individual with net worth in excess of $1 million
Correct answer: An individual with net worth in excess of $1 million
An investment adviser need not register in a state if there is no place of business in this state and his only clients in this state are investment companies as defined in the Investment Company Act of 1940, other IAs, broker-dealers, banks, trust companies, savings and loan associations, insurance companies, employee benefit plans with assets of not less than $1 million, and governmental agencies or instrumentalities. The wealth of an individual client is of no consideration—if it is an individual, the IA must be registered. Now, you might ask, "What about the de minimis rule?" And you would be correct. If there were a bunch of institutional clients and five or fewer individuals, regardless of wealth, the IA would not have to register. But this is the way it is on the exam, so you have to take the best shot.
- Under the SEC Release IA-1092, who of the following would be considered to be in the business of rendering investment advice?
- A financial planner who charges no fee for developing a financial plan but takes commissions on recommended trades
- An agent who receives no separate compensation for investment advice but who takes commissions on recommended trades
- An accountant who provides investment advice to clients as an incidental part of the business
- An individual who provides investment advice to family members, but receives no compensation
Correct answer: A financial planner who charges no fee for developing a financial plan but takes commissions on recommended trades
A financial planner who takes commissions from a broker-dealer on recommended trades is considered to be compensated for giving advice and is therefore in the business of rendering investment advice. Agents and BDs who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice, as long as any advice given is incidental to the practice of the profession.
- Which of the following is an investment adviser?
- A lawyer with sophisticated investment experience who gratuitously offers his clients advice on the value of securities
- A columnist for a major news-magazine who writes on the business and economic functions of banking institutions
- A retired mechanical engineer who offers investment advice in his areas of expertise to a small number of clients for a fee
- A bank that purchases securities on behalf of its custodial accounts
Correct answer: A retired mechanical engineer who offers investment advice in his areas of expertise to a small number of clients for a fee
Even though an engineer is part of the acronym LATE, a retired or active mechanical engineer who offers investment advice to clients for a fee falls within the definition of investment adviser under the Uniform Securities Act. The LATE exclusion only applies to incidental advice given in the practice of a profession.
- The Uniform Securities Act considers all of the following to be investment advisers subject to registration in the state except
- An investment adviser with a place of business in the state who only provides advice on mutual funds
- An investment adviser with no place of business in the state who advises wealthy retail customers in the state on a fee basis only
- An investment adviser with no place of business in the state who, in the state, only provides advice on fixed annuities
- An investment adviser with a place of business in the state whose total fee income in the state amounts to $150
Correct answer: An investment adviser with no place of business in the state who, in the state, only provides advice on fixed annuities
Because fixed annuities are not securities, advising on them does not require registration. Unless the investment adviser is federal covered, any IA with a place of business in the state, no matter to whom the advice is sold or the nature of the security that is the subject of the advice, is required to register with the state. An IA with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, not individuals, wealthy or not.
- 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 wholly owned subsidiary of a commercial bank that is in the business of offering investment advice
- Investment adviser representative
- Economist whose advice is strictly incidental to her professional activity
- Broker-dealer receiving special compensation
Correct answer: Investment adviser representative
The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.
- Under the Uniform Securities Act, which of the following is an investment adviser?
- An investment adviser representative
- A firm with no office in the state that provides specific investment advice to 10 noninstitutional clients within the state
- A broker-dealer who receives no compensation for investment recommendations
- An individual who provides financial advice over the internet with no recommendations based on specific investment situations of individual clients
Correct answer: A firm with no office in the state that provides specific investment advice to 10 noninstitutional clients within the state
A firm with no office in the state that provides investment advice is not an investment adviser if its clients are investment companies or other institutions or if business communications or advice have been directed to no more than five noninstitutional (individual or "retail") clients within the state in the past 12 months. A broker-dealer is not required to register as an IA unless it receives special compensation for providing investment advice. Individuals who publish general advice (no specific recommendations to individual clients) in hard copy form, electronic communications, or otherwise are not required to register as IA.
- Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser?
- DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets
- GHI Consultants, a sole proprietorship, managing $89 million belonging to high-net-worth individuals
- ABC Money Managers, a partnership with $385 million under management
- Retire in Luxury Pension Plan Consultants advising several corporate retirement plans with combined total assets of $145 million
Correct answer: ABC Money Managers, a partnership with $385 million under management
It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Under the Dodd-Frank Act, the pension consultant must have $200 million under management to be eligible to be federal covered.
- 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.
- I, II, and III
- I and II
- III and IV
- I, II, III, and IV
Correct answer: I, II, III, and IV
As long as the investment adviser does not maintain a presence in this state and its only clients are broker-dealers, other IAs, or institutional clients, it is exempt from registration in this state. Indeed, if its only clients are registered investment companies, it must register with the SEC and is a federal covered IA.
- The National Securities Markets Improvement Act of 1996 (NSMIA)
- Created a national market system
- Defined the term federal covered adviser
- Overcame the restrictions of selling securities in interstate commerce
- Created the concept of fraud, as used in the Uniform Securities Act
Correct answer: Defined the term federal covered adviser
The NSMIA defined the term federal covered adviser (sometimes just shown as covered adviser on the exam), referring to advisers who must register with the SEC or who are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Fraud is a legal concept that is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent, provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.
- Which of the following statements is not true of investment advisers under the Uniform Securities Act?
- Compensation is a key factor in determining whether a person is required to register as an investment adviser.
- Only written advice concerning investments is covered by the act.
- Investment advisory contracts must be in writing.
- Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell.
Correct answer: Only written advice concerning investments is covered by the act.
Investment advice may be written or oral, and both are covered under the Uniform Securities Act. However, investment advisory contracts must be written. Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is a key factor in determining whether a person is required to register as an investment adviser.
- 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 is required to register with the Administrator of the New Jersey Department of Securities.
- Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities.
- Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities.
- Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.
Correct answer: Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.
Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million in assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the Administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of IAs with the states and the SEC. IAs are not required to register at both state and federal levels.
- The sole proprietor of an insurance business that exclusively provides advice on fixed-income annuity contracts
- Need not register under any securities laws
- Must register as an investment adviser representative under the Uniform Securities Act
- Must register as an investment adviser under the Investment Advisers Act of 1940
- Must register as a broker-dealer with the SEC
Correct answer: Need not register under any securities laws
The sole proprietor of an insurance business need not register under the Uniform Securities Act or Investment Advisers Act. He provides advice on fixed-income annuities only, which are insurance products, not securities. Regulations under the USA, as well as federal securities laws, only apply to securities.
- Under the Uniform Securities Act, which of the following is included in the definition of an investment adviser?
- Publisher that receives a yearly subscription fee for a newsletter that provides nonspecific investment advice
- A broker-dealer who receives a flat fee for analyzing a customer's investment objectives and recommending a portfolio of securities
- Antiques dealer who receives a fee for advising customers as to the value of antiques and rare coins
- Bank that offers investment counseling to its high-net-worth customers
Correct answer: A broker-dealer who receives a flat fee for analyzing a customer's investment objectives and recommending a portfolio of securities
A broker-dealer who receives fees for investment recommendations is an investment adviser because that fee is considered special compensation relating to securities advice. The antiques dealer provides non-securities-related advice. Publishers may provide generic investment advice without registering as IAs. Commercial bankers are excluded from the definition of an IA.
- 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
- II and III
- I and IV
- II and IV
- I and III
Correct answer: II and IV
The key to this question is that it deals with professionals qualifying for an exclusion. Lawyers, accountants, teachers, and engineers (LATE) are excluded from the definition when the advice provided is incidental to the practice of their profession. Financial institutions, such as banks, savings and loans, and trust companies, are excluded without any requirement that advice be rendered on an incidental basis. Broker-dealers are not included in the list of professionals qualifying for this exclusion; however, if they do not receive special compensation when advising their clients, they too are excluded.
- Which of the following firms would be a federal covered adviser?
- ABC Money Managers, a partnership with $112 million under management
- ABC Money Managers, a partnership with $112 million under management
- XYZ broker-dealer with custody over $50 million of clients' invested assets
- DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets
Correct answer: ABC Money Managers, a partnership with $112 million under management
The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.
- 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 who manages client accounts in excess of $100 million in value
- An adviser to investment companies registered under the Investment Company Act of 1940
- An adviser who manages client accounts with less than $100 million in value
- An adviser who acts as a pension consultant to employee benefit plans with assets of $200 million or more
Correct answer: An adviser who manages client accounts with less than $100 million in value
Under the Dodd-Frank Act of 2010, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million, advise registered investment companies, or act as pension consultants to large pension funds (at least $200 million in assets) are required (or are eligible, in the case of the pension consultant) to register with the SEC and are exempt from state registration. (There is a corridor between $100 and $110 million in which the adviser has a choice of state or federal 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.
- I, II, and III
- I only
- I, II, III, and IV
- II and III
Correct answer: I, II, III, and IV
None of these are included in the term investment adviser as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of IAs by federal and state authorities. If federal covered advisers were defined as IAs under the USA, then they would be subject to the same state registration procedures as local or state IAs.
- 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
- The adviser has no more than 14 retail customers within the state during the year
- Most of the adviser's customers are municipalities
- The adviser has no more than 5 retail clients who are residents of the state during the preceding 12 months
- Most of the adviser's clients are accredited investors
Correct answer: The adviser has no more than 5 retail clients who are residents of the state during the preceding 12 months
If an adviser has no more than five retail clients who are residents of the state during the year, the adviser does not have to register with the state. This is the de minimis exemption; advisers with no place of business in this state must register if they have more than five noninstitutional clients in the state.
- Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?
- A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price
- The publisher of a weekly news-magazine, sold on newsstands, that contains at least five stock recommendations per issue
- A broker-dealer charging a separate fee for investment advice
- "D) A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims
Correct answer: The publisher of a weekly news-magazine, sold on newsstands, that contains at least five stock recommendations per issue
Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice, as would appear to be the case here. On this examination, the term comprehensive financial planning always includes securities advice.
- Which of the following persons does not meet the definition of providing investment advice as a business outlined in SEC Release IA-1092?
- A financial planner who provides specific investment advice as part of his fee-based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer
- An attorney who advertises the availability of investment advice
- A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky
- An accountant who charges clients an additional fee for providing investment advice
Correct answer: A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky
The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other three choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers, provided the advice is incidental to their regular profession.
- 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
- An investment adviser
- A broker-dealer
- An agent
Correct answer: An investment adviser
The definition of investment adviser includes any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or who, as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid subscription basis.
- An investment adviser with $100 million or more in assets under management may register with
- FINRA.
- NASAA.
- The SEC
- The NYSE
Correct answer: The SEC
Investment advisers who manage at least $100 million but less than $110 million may register with either the SEC or the state Administrator, not FINRA. Advisers with $110 million or more in assets under management must register with the SEC. Advisers with less than $100 million in assets under management may not register with the SEC and must register at the state level. While the North American Securities Administrators Association (NASAA) is an important entity, it has no registration powers.
- Investment advisers who manage investment portfolios that total less than $100 million must register with
- The SEC only
- Neither the SEC nor a state
- Both a state and the SEC
- A state only
Correct answer: A state only
Investment advisers who manage less than $100 million of investment assets are generally prohibited from registering with the SEC and are required to register with a state Administrator unless exempt under the laws of that state.
- 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?
Correct answer: 5
There are provisions for exclusions from the definition of investment adviser in the Uniform Securities Act. Out-of-state advisers who have no place of business in the state are not defined as IAs if they have no more than five noninstitutional (retail) clients in this state in a 12-month period. This is known as the de minimis exemption.
- 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
- I and IV
- I and III
- II and III
Correct answer: I and III
The NSMIA defines a federal covered adviser as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of investment adviser under that act. Registration with the state Administrator is not required of a federal covered adviser.
- A fiduciary is
- A person entrusted with the duty of acting for the benefit of another party
- A broker who solely conducts agency trades
- A person who sells securities to the public on a nondiscretionary basis
- A principal in a broker-dealer who specializes in proprietary trading
Correct answer: A person entrusted with the duty of acting for the benefit of another party
A person entrusted with the duty of acting for the benefit of another party is a fiduciary and must follow the standards of fiduciary duty appropriate to the nature of the relationship.
- 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
- I and II
- III and IV
- II and III
- I and IV
Correct answer: II and III
Investment advisers (or IARs) having no place of business in a state are generally limited to contracting with fewer than six retail (individual) residents of that state within any 12-month period (de minimis exemption) before being required to register. Investment advisers with a place of business in the state who manage less than $100 million must register. Once they reach $100 million in assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC.
- Out-of-state investment advisers with no office in this state are not required to be registered if only giving advice
- On growth issues
- On securities issued by open-end investment management companies registered with the SEC under the Investment Company Act of 1940
- To insurance companies
- On preferred stock
Correct answer: To insurance companies
It is not the securities they advise on but who the clients are that counts. Out-of-state investment advisers with no office in this state must be registered under the Uniform Securities Act unless their only clients are insurance companies, registered investment companies, banks or other institutional investors, broker-dealers, and other IAs.
- 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
- I only
- Both I and II
- II only
Correct answer: I only
Investment advisers with less than $100 million in assets under management register with state securities Administrators. IAs with $110 million under management must register with the SEC. An adviser with at least $100 million but less than $110 million under management has the choice of registering with the SEC or the state Administrator; an IA must register with either the SEC or the state Administrator.
- 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.
- I and II
- II and III
- I and IV
- III and IV
Correct answer: III and IV
A broker-dealer must register as an investment adviser if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm must register as an IA. If a BD charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the BD need not register as an IA because it is not compensated for the research.
- 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, III, and IV
- I, II, and III
- I only
- I and II
Correct answer: I, II, and III
The Uniform Securities Act defines a place of business as one where the IAR regularly provides investment advisory services; solicits, meets with, or otherwise communicates with clients; or any other location held out to the public as a location where the representative will do any of these activities. The frequency of use is not a factor. Publicly advertising a hotel location only used once makes it a place of business that year and will probably subject the representative to regulation by the Administrator of the state in which the hotel is located. A hotel room is not included when it is not advertised and used only with existing clients, presumably when the adviser is traveling through their state.
- 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
- I and IV
- IV only
- II and IV
- II and III
Correct answer: IV only
Clerical and ministerial personnel, full time or temporary, are not included in the definition of either investment adviser representatives (supervised persons) or investment advisers. Other persons associated with an investment adviser, including officers of the firm, are generally considered to be IARs. An IAR is not an IA in the same manner that an agent is not a broker-dealer. A federal covered adviser is not, for definitional purposes, considered an adviser under the USA to avoid duplicate regulation by both the state and the federal government.
- 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
- Is not required to take any action
- Must register for the first time with the state Administrator
- Must update his registration with the state Administrator
- Must register with the SEC
Correct answer: Must register with the SEC
When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has 90 days to register with the SEC.
- The sole proprietor of a retirement planning business that exclusively provides advice on fixed-income annuity contracts
- Must register as an investment adviser under the Investment Advisers Act of 1940
- Need not register under any securities laws
- Must register as a broker-dealer with the SEC
- Must register as an investment adviser representative under the Uniform Securities Act
Correct answer: Need not register under any securities laws
The sole proprietor of this business need not register under the Uniform Securities Act or Investment Advisers Act. Advice is provided solely on fixed-income annuities, which are insurance products, not securities. Regulations under the USA, as well as federal securities laws, only apply to securities. If the advice was on variable annuities, because those are securities, registration is required.
- 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 advises his spouse, who also has an office in New York, that her investment in 15 technology stocks is too high
- The clients of his law firm are New York residents and seek advice on the construction of trust documents that may be helpful in reducing taxes on the securities in their estates
- His clients, none of whom are residents of New York, receive investment advice as an integral part of his legal services
- The clients of his law firm are all residents of Connecticut but conduct their business with him in New York
Correct answer: His clients, none of whom are residents of New York, receive investment advice as an integral part of his legal services
Smith must register as an investment adviser in New York when or if he is offering investment advice as an integral part of his practice. Because his place of business is in New York, he must register in New York as an IA, even though his clients are not themselves residents of the state. If Smith advises his spouse, who also has an office in New York, that her investment in 15 technology stocks is too high, he need not register in New York because he is not charging his spouse a fee for investment advice. Smith, as a securities lawyer, need not register in New York as an IA when he advises clients on the construction of trust documents.
- 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—the firm must register
- The firm does not have to register because they have no place of business in the state and their only clients in that state are registered investment companies
- This firm would be exempt from registration with the State D Administrator because it is doing business in more than one state
- As long as the IA does not have an office in State D, there are no conditions that would mandate registration there
Correct answer: The firm does not have to register because they have no place of business in the state and their only clients in that state are registered investment companies
As a federal covered adviser (they have investment companies as clients), they would not have to register with the state, other than perhaps do a notice filing. However, with no office in the state, even that would not be required.
- 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 journalist
- A broker-dealer
- An agent
- An investment adviser
Correct answer: An investment adviser
The definition of investment adviser includes any person who, for compensation engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or who, as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid subscription basis.
- Under the Uniform Securities Act, a person who exclusively provides advice on commodities is
- A registered insurance agent
- Not a registered investment adviser
- An options representative
- A registered investment adviser representative
Correct answer: Not a registered investment adviser
A person who only provides advice on commodities is not a registered investment adviser. To be an IA under the Uniform Securities Act, advice must be given on securities. The act specifically excludes commodities from the definition of security.
- Which of the following persons are investment advisers subject to state registration?
- Any other person that the Administrator excludes by rule or order
- A publisher of a bona fide newspaper, newsmagazine, or business or financial publication of general and regular circulation
- A financial planner or other person that provides investment advisory services to others for compensation
- A federal covered investment adviser
Correct answer: A financial planner or other person that provides investment advisory services to others for compensation
A financial planning firm or other person that, as an integral component of other financially related services, provides investment advisory services for compensation is an investment adviser. A publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation; a federal covered IA; or any other person that the Administrator specifies by rule or order, are excluded from the definition of an IA.
- When, if ever, would a broker-dealer be required to register as an investment adviser?
- If it charges distinct fees for investment advice or management
- If it is not registered with the SEC
- Never
- Always
Correct answer: If it charges distinct fees for investment advice or management
Although broker-dealers are generally exempt from having to register as investment advisers, the exemption is not available if the BD imposes a separate fee for account management or advice. One common instance where this applies is when the BD offers wrap fee programs.
- 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
- St. Amelia's college endowment fund.
- When the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state
- Amalgamated Bank.
- AAA Manufacturing Co., with respect to the quality of investment bankers available for an underwriting of AAA securities.
Correct answer: When the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state
An investment adviser with no place of business in the state is not exempt from registration with the state when making recommendations to individual accredited investors who are residents of that state, even when the securities being recommended are exempt from registration. The Uniform Securities Act exempts IAs with no place of business in the state who deal with certain institutional customers such as banks, insurance companies, investment management companies, and employee benefit plans with assets of $1 million or more. College endowments and other nonprofit organizations also carry exempt status, but not wealthy individuals. An adviser advising an issuer on the quality of potential underwriters does not fall within the definition of investment adviser under the USA and is therefore exempt from registration.
- Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of
- Rare convertible automobiles
- Apartments undergoing a conversion to condominiums
- Convertible bonds
- Gold coins
Correct answer: Convertible bonds
Only those persons in the business of giving advice on securities are required to register as investment advisers. The only securities here are the convertible bonds.
- 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?
- An economist who teaches a course in fundamental analysis at a local community college
- A personal injury attorney who recommends that clients consult with a CFP for advice on how to deal with the large settlements they receive
- A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities
- A CPA who gives high tax bracket clients a chart showing the tax-equivalent yield of municipal bonds
Correct answer: A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities
Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.
- 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 II
- II and IV
- IV only
- I, II, III, and IV
Correct answer: II and IV
An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an IAR. A trust company is not an investment adviser under the USA. An IA with no office in the state, that does business exclusively with other IAs located in that state, is also excluded as an IA under the USA.
- Under the Uniform Securities Act, which of the following persons has to register as an investment adviser?
- A broker-dealer who gives advice for which he charges a specific fee
- An attorney who writes a legal opinion for a municipal bond indenture
- A broker-dealer who gives investment advice that is incidental to the course of its business and for which no special compensation is received
- An agent of a broker-dealer who gives investment advice within the course of his duties with the firm for which a fee is charged
Correct answer: A broker-dealer who gives advice for which he charges a specific fee
Broker-dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. If the advice is strictly incidental and without a separate charge, the BD is not an IA. Attorneys are not IAs provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Persons, including agents of BDs, who charge a specific fee for advice and hold themselves out to the public as providers of investment advice must register as IAs. Agents giving advice for which a fee is charged must register as investment adviser representatives and their BDs as IAs.
- Which of the following is required to register as an investment adviser with the state securities Administrator?
- The author of a book on money and banking that was sold to residents of the state in which it is published
- A newly formed investment advisory firm with $130 million in assets under management
- An investment advisory firm with less than $100 million in assets under management that opens an office in the state
- A person with no office in the state whose only advisory clients are investment companies and banks in the state
Correct answer: An investment advisory firm with less than $100 million in assets under management that opens an office in the state
An investment adviser must register in a state if it manages less than $100 million in assets. Publishers of general circulation books are exempt from state registration, as are IAs with no offices in the state and whose only customers are banks in the state. IAs with $110 million or more in assets under management must register with the SEC, not the state Administrator.
- 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
- II and IV
- II and III
- I and IV
- I and III
Correct answer: II and IV
A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests tax-sheltered investments to high tax bracket clients are not investment advisers.
- 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?
- Receiving fees for providing advice on the difference between term and whole life insurance
- Presenting a seminar at the local Rotary Club on future stock market trends
- Receiving commissions for executing securities transactions for retail clients
- Receiving any compensation for investment advice other than commissions on securities transactions
Correct answer: Receiving any compensation for investment advice other than commissions on securities transactions
When federal and state laws created the exclusion from the definition of investment adviser for broker-dealers, also included were their agents (registered representatives). However, they can lose the exclusion in the same manner as the BDs. That is, the exclusion is available only as long as the advice is solely incidental to the agent's securities business and no compensation, other than commissions on securities transactions, is paid for that advice. If the agent fails either test, he may meet the definition of investment adviser or investment adviser representative. This situation occurs most frequently in the case of independent agents who conduct their own financial planning practice. A seminar at a local club does not constitute investment advice, and no mention is made of compensation. Whole life and term insurance are not 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.
- II and III
- I and IV
- III and IV
- I and II
Correct answer: III and IV
Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of notice filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not IAs. A person who conducts business exclusively with banks and savings institutions is a BD under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a BD subject to the regulatory control of the state Administrator.
- 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 and III
- I, II, and III
- I and III
- I and II
Correct answer: II and III
An investment adviser provides advice related to securities for compensation. However, the advice may be given orally or in writing.
- 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.
- II, III, and IV
- II only
- I, II, III, and IV
- III and IV only
Correct answer: II, III, and IV
If a person offering advice on securities has no place of business in a state and deals only with institutional investors or other investment advisers, registration is not required. Also, if a person has no place of business in a state and has five or fewer noninstitutional clients in the state during any rolling 12-month period, they are not deemed to be IAs in that state under the USA. Please note that Choice I specifies individuals who are accredited investors. Although institutional accredited investors would qualify the adviser for the exemption, individuals do not.
- An agent of a broker-dealer maintains wrap fee accounts for several customers of the firm. Which of the following registrations is required?
- The agent must be registered as an investment adviser.
- The firm must register as an investment adviser.
- Neither the broker-dealer nor the agent is required to have any license other than their regular securities licenses.
- Only the registered principal would need to be registered in the state(s) in which they do business.
Correct answer: The firm must register as an investment adviser.
Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Registration as an investment adviser representative is required for the agents handling these accounts.
- 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 engineer
- A lawyer
- A teacher
Correct answer: An economist
The Uniform Securities Act does not exclude an economist from the definition of an investment adviser as it does accountants, teachers, lawyers, and engineers if the investment advice is incidental to their business; thus the acronym LATE for lawyers, accountants, teachers, and engineers.
- 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?
- Peterson Financial Planning is required to register as an investment adviser with the SEC but has no requirement to register with the Administrator of the Missouri Department of Securities.
- Peterson Financial Planning is required to register as an investment adviser with the SEC and to notify the Administrator of the Missouri Department of Securities of its operation.
- Peterson Financial Planning is required to register as an adviser with both the SEC and the Administrator of the Missouri Department of Securities.
- Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities.
Correct answer: Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities.
With less than $25 million under management, Peterson Financial Planning is considered a small investment adviser and must register with the state. Advisers managing at least $25 million but less than $100 million are considered mid-size IAs and, unless qualifying for an exception, must also register with the state. IAs with at least $100 million in AUM, but not $110, register with the SEC or the state. Once the $110 million level is reached, SEC registration is mandatory.
- All of the following statements regarding the registration of an investment adviser in a state are true except
- The annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process
- The adviser's registration expires on December 31 each year
- The initial application must include a properly completed application form including a consent to service of process, an application for each investment adviser representative who will provide services on behalf of the investment adviser, and the appropriate fees
- If the investment adviser is not an individual, any officer or partner active in the advisory business as an IAR is automatically registered as an investment adviser representative
Correct answer: The annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process
The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with a completed application and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice (IARs) are automatically registered as IARs.
- 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
- Terminating the IA registration
- Affiliating with another broker-dealer within 30 days
- Qualifying by re-examination
Correct answer: Amending the Form ADV
You were probably looking for a choice that said "both the agent and the broker-dealer would have to notify the Administrator" because that's what the procedure is when an agent terminates employment. But this question is dealing with the fact that the IA registration remains. On the Form ADV, Part 1A, the IA indicated that he was also an agent for a BD. Because that is no longer the case, the ADV must be promptly amended.
- 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
- I and II
- II and III
- I and III
- I, II, and III
Correct answer: II and III
Only broker-dealers and investment advisers are required to file financial reports. Unlike a BD or IA, agents (or IARs) have no financial reporting requirements. It is the business entity, not the employees, whose financial records are of interest to the regulators.
- 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?
- No filing fee is required until December 31.
- The full year's fee must be paid.
- The fee will be prorated from the effective date.
- The fee will be prorated from the filing date.
Correct answer: The full year's fee must be paid.
While some states make exceptions for filings late in the year, under the USA, there is no prorating of filing fees. The full year's fee must be paid with the initial registration request.
- If a state-registered investment adviser moves to another location, the Administrator must be notified
- Within 15 days
- Within 7 days
- Promptly
- Within 30 days
Correct answer: Promptly
An address change must be communicated promptly to the Administrator.
- Under the Uniform Securities Act, a consent to service of process must accompany which of the following?
- A civil complaint against a broker-dealer
- An agent's application for renewal of registration
- The termination papers for an investment adviser representative associated with a state-registered investment adviser
- An investment adviser's initial registration application
Correct answer: An investment adviser's initial registration application
All initial applications for registration must be accompanied by a consent to service of process. This is not required for renewal applications and certainly not for terminations.
- The document that gives the Administrator the right to process complaints against a registrant is known as
- A writ of habeas corpus
- A consent to service of process
- An injunction
- A durable power of attorney
Correct answer: A consent to service of process
The consent to service of process gives the Administrator the right to process legal complaints against the applicant.
- Each of the following statements about post-registration provisions is true except
- A registered investment adviser may be required to file advertisements
- Investment advisers must comply with recordkeeping rules
- The securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state
- A correcting amendment to the Form ADV must be filed with the Administrator if any information filed becomes inaccurate or incomplete
Correct answer: The securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state
Administrators have the authority to conduct an onsite examination of a registered investment adviser, even if there is no place of business maintained in the Administrator's state. Under the act, Administrators may require the filing of advertising used by broker-dealers and IAs, who must also comply with certain recordkeeping requirements and file correcting amendments.
- Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator?
- With the original application only
- Never, unless requested by the Administrator
- With the original application and renewal
- When a case is pending
Correct answer: With the original application only
Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.
- 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 specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application.
- Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application.
- Unless specified earlier, registration becomes effective no later than 90 days after the application is filed.
- Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed.
Correct answer: Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application.
Although the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.
- 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,
- As a federal covered investment adviser, the flyers would need filing with the SEC
- These flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B
- As long as PIGGI did not maintain an office in either of these states, the flyers could be mailed
- These flyers could not be mailed until PIGGI was registered in States A and B
Correct answer: These flyers could not be mailed until PIGGI was registered in States A and B
Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state.
- 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 home office
- The principal office and place of business
- The office of supervisory jurisdiction (OSJ)
- The registered office
Correct answer: The principal office and place of business
This is the way it is defined in the act. It is generally the home office, but you must choose the answer that best meets the terminology referred to in the question. Office of supervisory jurisdiction (OSJ) is a FINRA term and is not applicable on this exam.
- 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 only
- I and III
- III only
- I, II, and III
Correct answer: I, II, and III
A broker-dealer, investment adviser, or agent (but not an IAR) who has discretion over or, in the case of BDs and advisers, custody of funds or securities may be required to post a bond.
- 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
- April 15.
- April 30.
- May 15.
- May 1.
Correct answer: May 15.
If no denials or stop orders are in effect and no proceedings are pending to do so, registration automatically takes effect at noon on the 30th day after the application was filed.
- 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
- Property and casualty insurance companies
- Retail investors
- Trust companies
- Investment companies
Correct answer: Retail investors
Once a broker-dealer has a retail (individual) client in a state, registration as a BD in that state is required. The fact that the BD does not have a place of business in the state is irrelevant. That distinction applies when the firm's clientele is limited to other BDs or institutional clients in the state. Trust companies and other banking institutions, along with investment companies and insurance companies (whether they offer life insurance or home/automobile insurance doesn't matter), are institutional investors for purposes of the rule.
- 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 an estate
- Limited to five or fewer retail investors over any 12-month period
- Savings institutions
- Accredited investors
Correct answer: Savings institutions
A broker-dealer with no place of business in a state is not deemed to be a BD in that state if its only customers are institutions like banks, insurance companies, investment companies, employee benefit plans with assets of at least $1 million, or other BDs. There is no de minimis rule for BDs like there is for investment advisers. Although there are many cases where a trust company is the executor of an estate, always go for the 100% correct answers. Don't look for exceptions when they are not necessary.
- Which of the following would meet the Uniform Securities Act's definition of broker-dealer?
- Rushmore Investments, a person specializing in the sale of mutual funds
- Strathmore Investments, a person specializing in buying and selling physical gold
- Cranmore Secured Investments, a person specializing in the sale of foreclosed single-family homes
- Baltimore Investment Specialists, a person concentrating in buying and selling rare stamps
Correct answer: Rushmore Investments, a person specializing in the sale of mutual funds
First of all, remember the broad definition of person. It includes far more than a natural person (an individual). Then, we must recognize that a broker-dealer means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. Gold is not a security. A single-family home is not a security. Stamps are not securities.
- Under the Uniform Securities Act, the term broker-dealer would include
- An issuer distributing its own common stock offering
- Agents registered under the act who from time to time sell stock from their personal brokerage accounts
- A person with no office in the state who effects securities transactions with over 25 different insurance companies domiciled in the state
- A person with no office in the state who sells variable life insurance policies to no more than five retail investors residing in the state during any 12-month period
Correct answer: A person with no office in the state who sells variable life insurance policies to no more than five retail investors residing in the state during any 12-month period
Although the person has no office in the state, securities transactions are effected with individual residents of the state. Under the USA, this person is defined as a broker-dealer. Remember, variable insurance products such as variable life and variable annuities are securities. There is no de minimis exemption for BDs. A person is exempt from the definition of broker-dealer if there is no office in the state and securities trades are confined to institutional clients such as insurance companies, without a numerical limit, or existing individual clients not residents of that state. The agents are merely selling their own stock as would any other individual. Doing so does not make one a broker-dealer. Issuers usually use BDs to distribute their stock offerings, and when they do it themselves, they are still issuers, not BDs.
- 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
- A broker-dealer
- A mutual fund
- An accountant
- A bank
Correct answer: A broker-dealer
Broker-dealers are in the business of buying and selling securities on behalf of investors. One of the investments this individual might make is into a mutual fund, but purchases of the securities in the fund are made by the fund, not the investor. Banks are not in the business of selling securities, although they usually have a subsidiary BD who does that. In that case, the individual is dealing with the BD, not the bank itself. An accountant may give some advice but is not in the business of executing securities transactions
- 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
- States M and A.
- State P only.
- States P, M, and A.
- States P and M.
Correct answer: States P and M.
Under the USA, BSS is a broker-dealer in State P because it maintains an office there. BSS is also a BD in State M because with four State M retail (noninstitutional) customers, registration is required even if there is no physical office in the state. Please note the de minimis exemption does not apply to BDs. Because none of BSS's clients have taken up residence in State A, such clients are transients rather than residents and the snowbird exemption applies. Thus, BSS is not a BD in State A and is not subject to the state's registration requirements.
- 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 corporation selling only to sophisticated investors
- A corporation selling to an employee pension fund
- A broker-dealer engaging in exempt transactions
- A broker-dealer that must be registered
Correct answer: A broker-dealer that must be registered
A broker-dealer is an entity in the business of effecting transactions in securities for its own account or for the accounts of others and that pays its sales agents commissions. Under the USA, the BD must register in the states where business is transacted.
- Under the Uniform Securities Act, which of the following are not excluded from the definition of broker-dealer?
- Issuers of securities
- Agents
- Banks
- Persons who effect securities transactions as part of a regular business solely for their own accounts
Correct answer: Persons who effect securities transactions as part of a regular business solely for their own accounts
Although broker-dealers generally act on behalf of others as well as themselves, there are cases where firms strictly trade for their own positions, such as over-the-counter market makers.
- 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 and IV
- I and III
- I, II, III, and IV
- I, II, and IV
Correct answer: I, II, and IV
A broker-dealer can be structured as any recognized business form. That would include a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. BDs become members of stock exchanges; they are not stock exchanges.
- 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
- I and II
- I, II, and IV
- I, II, III, and IV
- III and IV
Correct answer: I, II, and IV
As long as a broker-dealer does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the BD confine trading to financial institutions or other BDs. Unlike with investment advisers, there is no de minimis exemption for BDs. Trust companies are excluded from the definition of broker-dealer.
- 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
- An employee benefit plan with assets of $800,000
- Registered investment companies
- An individual who meets the definition of accredited investor
- Non-profit organizations
Correct answer: Registered investment companies
As long as there is no place of business in the state and the BD's only clients are those meeting the USA's definition of institutional investor, the firm is not defined as a BD in that state and registration is not required. Registered investment companies are in that list of institutions. Employee benefit plans are as well, but the minimum size is assets of at least $1 million. No individual is an institution. Although there can be exceptions, in general, a non-profit organization would not be considered an institutional investor.
- 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 limited liability company (LLC)
- A corporation
- A sole proprietorship
- A partnership
Correct answer: A sole proprietorship
While legally permitted, it is very rare to find a sole proprietorship broker-dealer. At last count, less than 5 of the 3,000+ BD members of FINRA are sole proprietorships. There are a number of legal and operational reasons for that, but none are testable.
- 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 must notify the State N Administrator before calling this customer in that state.
- Broker-dealer A may solicit this customer in State N.
- Broker-dealer A may not solicit this customer in State N unless Broker-dealer A and the agent making the call are registered in State N.
- Broker-dealer A may not solicit this customer in State N unless the broker-dealer has a branch office registered in that state.
Correct answer: Broker-dealer A may solicit this customer in State N.
This is an example of the Uniform Securities Act's position that, in certain situations, a broker-dealer is not a BD. If a BD registered in one state contacts an existing customer in another state and that customer is not a resident of the other state, the BD is not defined as a BD in the state in which the contact is made and is therefore not subject to the laws of that state. Of course, this is only true when the BD does not have an office in that state. This is commonly referred to as the snowbird exemption.
- Under the Uniform Securities Act, each of the following is specifically excluded from the definition of a broker-dealer except
- An international bank
- An agent
- An issuer
- An investment adviser
Correct answer: An investment adviser
The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers may have to register as BDs if their method of operation requires it.
- 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
- A maximum of five retail investors over a 12-month period
- Other broker-dealers
- Investment advisers registered in that state
- Accredited investors
Correct answer: Other broker-dealers
A broker-dealer must be registered in every state it sells or offers to sell securities unless it is excluded from the definition under the USA. If a BD has no office in a particular state and no business is done in that state other than with other BDs, registration there is not required. If the BD's only clients are institutions, the exclusion applies as well. The definition of accredited investor includes institutions, but also includes individuals reaching certain financial standards. Because the choice did not specify institutional accredited investors, the exclusion doesn't work for this BD. There is no de minimis exemption for BDs like there is for investment advisers and their representatives. We know it looks strange, but if a BD's only clients in a state where the BD does not maintain a place of business are registered IAs, the exclusion does not apply.
- Which of the following is included in the definition of a broker-dealer under the Uniform Securities Act?
- Out-of-state broker-dealer with no office in this state that services only other broker-dealers located in this state
- Agent
- One who effects securities transactions for his own account or on behalf of others
- Issuer of securities
Correct answer: One who effects securities transactions for his own account or on behalf of others
Only one who is in the business of effecting transactions for his account or on behalf of others fits the definition of a broker-dealer. All of the other choices are specifically excluded from the definition.
- The Uniform Securities Act provides several exclusions from the definition of broker-dealer. Those include all of the following except
- Any person engaged in the business of effecting transactions in commodities for the accounts of others or for his own account
- Any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account
- Any person engaged in the business of effecting transactions in rare coins for the accounts of others or for his own account
- Any person engaged in the business of effecting transactions in real estate for the accounts of others or for his own account
Correct answer: Any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account
The Uniform Securities Act concerns itself with those in the business of executing transactions in securities, not real estate, rare coins, commodities, or any other type of investment that is not a security.
- Under the Uniform Securities Act, which of the following is, by definition, a broker-dealer in a state?
- XYZ broker-dealer without an office in the state whose only clients are insurance companies
- XYZ broker-dealer with an office in the state whose only clients are banks
- A broker-dealer with no place of business in the state who only does business with other broker-dealers
- An agent effecting transactions for a broker-dealer
Correct answer: XYZ broker-dealer with an office in the state whose only clients are banks
Anytime the question tells you that there is a place of business in the state, regardless of who its clients are, the firm is considered a broker-dealer in that state and is required to register as such. If there is no place of business and the clientele is limited to institutions and other BDs, the exclusion applies.
- 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
- Life insurance
- Securities
- Investments
- Brokers
Correct answer: Securities
The Uniform Securities Act defines a broker-dealer as any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account. What is wrong with investments? It is not specific enough. There are all kinds of investments that are not securities. Similarly, some BDs sell variable life insurance, but most life insurance is not a security.
- 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 one of its clients was the CDL Corporation Employee Pension Trust with assets in excess of $9 million
- If the client meets the SEC's annual income standard to qualify as an accredited investor
- If any of its clients are state-chartered banks
- Never, because once a broker-dealer registers with the SEC, state registration is no longer required
Correct answer: If the client meets the SEC's annual income standard to qualify as an accredited investor
Once a broker-dealer has a retail (individual) client in a state, registration as a BD in that state is required. The fact that the BD does not have a place of business in the state is irrelevant. Although many accredited investors are institutions, it is only individuals who qualify under the income standard. The exemption applies when the firm's clientele is limited to other BDs or institutional clients in the state. Those would include banks, whether state or federal chartered, and employee benefit plans, such as a pension trust, with assets of at least $1 million. Every BD on the exam will be SEC-registered (unless the question states something to the contrary). That SEC registration does not remove the need for state registration.
- A broker-dealer would likely have to register in a state when
- One of the firm's agents sends an email to a resident of that state
- The firm does not maintain a place of business in the state and only deals with banks
- Individual residents of that state are able to view a listing of the firm's office locations on the firm's website
- The firm's website provides a list of recommendations based on general criteria such as income or growth
Correct answer: The firm's website provides a list of recommendations based on general criteria such as income or growth
Understanding that internet websites do not stop at state lines, NASAA has established a Model Rule for determining when registration in a state is required. When that website contains specific recommendations, it is likely that registration will be required. A simple listing of office locations would not. Without knowing the contents of the agent's email, we cannot tell if that would be considered doing securities business in the state. Obviously, if the agent is corresponding with a friend about last night's game scores, that would not trigger the need for registration on the part of either the BD or the agent. One of the exclusions under the USA is having no place of business in the state and limiting the clientele to institutions, such as banks.
- Under the Uniform Securities Act, which of the following is considered a broker-dealer in a state?
- First Federal Company Trust
- A broker-dealer with no place of business in the state who only does business with other broker-dealers
- An agent effecting transactions for a broker-dealer
- XYZ broker-dealer with an office in the state whose only clients are insurance companies
Correct answer: XYZ broker-dealer with an office in the state whose only clients are insurance companies
Anytime the question tells you that there is a place of business in the state, regardless of who its clients are, the firm is considered a broker-dealer in that state and is required to register as such.
- 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 limits its clientele in that state to registered investment companies
- It has fewer than six retail clients who reside in the state
- It confines its business in the state to dealing to other broker-dealers
- The only clients of the firm in the state are employee benefits plans with assets in excess of $3 million
Correct answer: It has fewer than six retail clients who reside in the state
Once there is even one retail client in a state, the firm is a broker-dealer in that state and must register as such. The exam is likely to throw something like this at you hoping you will confuse it with the de minimis exemption available to investment advisers and their representatives. There is an exclusion when there is no place of business in the state and the clientele is exclusively other BDs, institutions such as investment companies, and employee benefit plans with at least $1 million in assets.
- The Uniform Securities Act would not consider which of the following to be broker-dealers?
- Individual investors actively trading their own accounts
- Persons in the business of buying or selling securities for their own account
- Persons in the business of underwriting new securities issues
- Persons in the business of buying or selling securities on behalf of others
Correct answer: Individual investors actively trading their own accounts
"In the business" generally means persons compensated by others for securities activities and would exclude individual investors trading their own accounts. Persons in the business of buying or selling securities for their own account or on behalf of others are fulfilling the primary role of broker-dealers. Underwriting new securities issues is the investment banking function of a BD.
- 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 trust company
- Another broker-dealer
- An employee benefit plan with assets of $845,000
- A closed-end investment company registered under the Investment Company Act of 1940
Correct answer: An employee benefit plan with assets of $845,000
As defined in the Uniform Securities Act, broker-dealer does not include a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions; other BDs; or banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, employee benefit plans with assets of at least $1 million, or other financial institutions or institutional buyers.
- 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
- Mutual funds
- Whole life insurance
- NYSE-listed stocks.
- Variable life insurance
Correct answer: Whole life insurance
Until properly registered as an agent, an individual is prohibited from engaging in any securities-related transactions with customers or prospects. Rachel has a license to sell life insurance, and whole life insurance is not a security. Any insurance product using the word variable is a security and selling such requires registration as an agent.
- 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
- Refers customers to a clearly identified third-party brokerage house not under the control of the bank
- Bought and sold securities on behalf of customers in a wholly owned brokerage subsidiary
- Conducts personal trust activities
- Conducts securities custodial activities
Correct answer: Bought and sold securities on behalf of customers in a wholly owned brokerage subsidiary
Under financial modernization legislation (known as the Gramm-Leach-Bliley Act), banks can have wholly owned brokerage subsidiaries. In such cases, the bank would be a BD subject to registration. The bank is not a BD if it refers securities to unrelated third-party brokerage houses or limits its securities-related activities to trust and custodial activities.
- A broker-dealer with no place of business in the state would not be required to register if their only clients were
- Accredited investors
- Banks and insurance companies
- Persons acting in a fiduciary capacity
- Limited to a maximum of five individuals over any 12-month period
Correct answer: Banks and insurance companies
A broker-dealer with no place of business in a state is not deemed to be a BD in that state if its only customers are institutions like banks, insurance companies, investment companies, employee benefit plans with assets of at least $1 million, or other BDs. There is no de minimis rule for BDs like there is for investment advisers.
- Which of the following is least likely to be excluded from the Uniform Securities Act's definition of broker-dealer?
- An issuer of stock and bonds to the public
- A business entity that buys and sells securities for its own account or the accounts of others
- A corporate retirement plan that buys and sells securities on behalf of the company's employees
- A bank that buys and sells securities for its own account or the accounts of others
Correct answer: A business entity that buys and sells securities for its own account or the accounts of others
The exam often focuses more on the exceptions from a definition than the definition itself. Under the Uniform Securities Act, a broker-dealer is any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account. Banks and issuers are specifically excluded. A corporate retirement plan is not in the business of effecting securities trades.
- 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
- Savings and loan associations
- Registered as investment advisers in State C
- Individuals registered as agents with other broker-dealers
- High-net-worth individuals
Correct answer: Savings and loan associations
The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a BD in that state if its customers are exclusively institutional investors or other broker-dealers. Savings and loan associations, banks, and trust companies are part of the institutional definition. No individuals qualify, regardless of net worth or affiliation with securities firms. Although the exclusion applies when the clientele is limited to other BDs, it does not hold true when the clients are investment advisers.
- 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 broker-dealer with no office in the state that effects trades exclusively with other broker-dealers in the state
- A broker-dealer with no office in the state that has no more than five retail clients resident in the state within a 12-month period
- A broker-dealer with no office in the state that effects securities trades exclusively with trust companies or other broker-dealers
- A trust company with an office in the state that deals with the general public
Correct answer: A broker-dealer with no office in the state that has no more than five retail clients resident in the state within a 12-month period
Even without a place of business in a state, once a broker-dealer has even a single retail client residing in that state, registration is required. Unlike investment advisers, there is no de minimis exemption for BDs. As long as a BD does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the BD confines trading to financial institutions, issuers of the security being traded, or other BDs. Trust companies are excluded from the definition of broker-dealer; the place of business is irrelevant.
- 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.
- III and IV
- I and II
- II and III
- I and IV
Correct answer: II and III
A broker-dealer may be structured as a business entity or a sole proprietorship. Its primary business is effecting securities transactions for clients or for its own account. A person may be registered as both a BD and an investment adviser at the same time. Although a person is not a BD in this state if there is no office in this state and transactions within this state are limited to issuers, other BDs, and institutions if the BD wishes to offer securities to individuals, it must register in the 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
- I, II, III, and IV
- I and IV
- II and III
- I, II, and IV
Correct answer: I and IV
The term broker-dealer excludes a person who has no place of business in the state; who effects transactions exclusively through issuers, other BDs, or institutions; or who directs an offer in the state to an existing customer. When clients move from one state to another, the BD may continue to do business with that client without registering in that state for up to 30 days. Once the client has been a new resident for more than 30 days, the BD (and any agents handling that account) must register in that state or cease doing business with that customer.
- Under the Uniform Securities Act, which of the following is not excluded from the definition of broker-dealer?
- A person with an office in this state whose securities business is limited to effecting transactions with institutional investors
- Agents
- A broker-dealer domiciled in another state, having no offices in this state, dealing exclusively with broker-dealers in this state
- Issuers of securities
Correct answer: A person with an office in this state whose securities business is limited to effecting transactions with institutional investors
The definition of a broker-dealer is a person in the business of effecting transactions in his account or for the accounts of others. If the person has an office in this state, regardless of who the clients are, registration with this state is necessary. Under the USA, one is not defined as a BD if there is no office in the state and transactions are limited in this state to other BD.
- 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
- I, II, and IV
- III and IV
- I, II, III, and IV
- II and III
Correct answer: I, II, and IV
A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the accounts of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.
- Under the Uniform Securities Act, which of the following is a broker-dealer?
- Corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer
- Agent
- Issuer
- Credit union that issues its own shares
Correct answer: Corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer
A broker-dealer is any person that buys or sells for the accounts of others or for his own account. In this case, an entity structured as a corporation is selling a security in the form of limited partnership units and is therefore a BD. A BD is not an issuer (the credit union) or an agent.
- 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 registered in State Y
- A bank authorized to do business in State Y
- A registered investment company
Correct answer: An investment adviser registered in State Y
The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a BD in that state if its customers are exclusively institutional investors or other BDs. Banks and registered investment companies are in the list of institutional investors. When there is a client who is an investment adviser, the exclusion is lost.
- 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
- An investment company
- An investment adviser
- An agent
- A broker-dealer
Correct answer: A broker-dealer
The USA defines a broker-dealer as any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account. Investors open their accounts at the BD and the BD's agents service them. An investment adviser's role is giving investment advice, not the execution of buy and sell orders. An investment company is one of a variety of securities the clients may buy and sell through AAA.
- 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 employee benefit plan with $1.5 million in assets
- An insurance company
- A savings association
- An individual meeting the SEC's definition of accredited investor
Correct answer: An individual meeting the SEC's definition of accredited investor
As long as the BD does not maintain a place of business in a state, registration with that state is not required when the firm's only clients in that state meet the USA's definition of institution. No individual, accredited investor or not, is considered an institution for this exemption.
- An investor who trades securities for her own account is
- A public customer who does not need to register
- An agent for a broker-dealer and must register in her state of residence
- A broker-dealer and must register with the state
- A broker-dealer who does not need to be registered at the state level
Correct answer: A public customer who does not need to register
Investors who trade solely for their own accounts are public customers who do not need to register. Please note that the USA's definition of broker-dealer requires that the person be engaged in the business of effecting transactions in securities for the accounts of others or for his own account.
- All of the following statements regarding broker-dealers are true except
- They act as agents in executing orders to buy and sell securities on the various stock exchanges in the secondary market
- They may act as dealers who buy and sell securities for their own accounts
- They employ only registered investment adviser representatives
- They are regulated by the states where they conduct business
Correct answer: They employ only registered investment adviser representatives
Agents work for broker-dealers, while investment adviser representatives work for investment advisers. The term broker-dealer refers to the fact that they may act as brokers (agents) for their customers or as dealers (principals) for their own accounts. In most cases, BDs must register in states where they do business.
- 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
- A broker-dealer
- An investment banker
- Very generous
Correct answer: A broker-dealer
This is very sneaky. This is what broker-dealers, acting in the capacity of underwriters or investment bankers, do. So, why isn't investment banker the correct choice? Because there is no such term in the USA.
- 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 states having enacted the Uniform Securities Act
- Wisconsin only.
- Wisconsin, Illinois, and Florida.
- Wisconsin and Illinois.
Correct answer: Wisconsin and Illinois.
Under the USA, XYZ Securities is a broker-dealer in Wisconsin because it maintains an office there. XYZ Securities is also a BD in Illinois because with 30 Illinois retail (noninstitutional) customers, registration is required even if there is no physical office in Illinois. Because none of XYZ's clients have taken up residence in Florida, such clients are transients rather than residents. Thus, XYZ Securities is not a BD in Florida subject to the state's registration requirements.
- 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 IV
- I and III
- II and IV
- I, II, III, and IV
Correct answer: I, II, III, and IV
Agents represent broker-dealers; they are not BDs. Banks, savings institutions, and trust companies are specifically excluded from the definition. Issuers of securities, such as governments and corporations, are not defined as BDs. Please note that a bank subsidiary engaged in BD functions will generally be defined as a BD and need to register as such.
- 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 annual renewal of the broker-dealer's registrations
- Within 60 days of the change of residence
- Before the change of residence
- Within 30 days of the change of residence
Correct answer: Within 30 days of the change of residence
When a broker-dealer is taking advantage of the snowbird exemption, it can happen that the client can change permanent residence to that new state. If the BD is not registered in that state but wishes to keep the customer-firm relationship, registration with the Administrator must occur before 30 days have elapsed from the customer's change.
- 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 corporation planning to issue additional stock to finance an expansion
- Another broker-dealer looking for assistance in an underwriting
- A township seeking funds to build a new library
- A retail client looking o borrow money on her stock portfolio
Correct answer: A retail client looking o borrow money on her stock portfolio
There are several basic exemptions from registering in a state when there is no place of business there. The first is when the broker-dealer's only clients in the state are the issuers of the security dealt with. Another one is when the only clients are other broker-dealers. Borrowing money on a portfolio is a margin account transaction and, because this is a retail client, registration is going to be required if this transaction occurs.
- 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 mutual fund
- Employed by an insurance company
- An issuer whose securities are involved in the transactions
- A bank
Correct answer: Employed by an insurance company
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 institutions, such as banks, investment companies, and insurance companies. When the client is the issuer of the security involved in the transaction, the exclusion also applies. However, if there is even one noninstitutional (retail) client, regardless of the nature of the individual's employer, registration is required.
- 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?
- 1 mutual fund registered with the SEC
- 15 other broker-dealers
- 6 banks authorized to do business in State B
- 4 retail clients residing in State B
Correct answer: 4 retail clients residing in State B
The SEC registration is common to every broker-dealer on the exam unless something in the question indicates otherwise. It has nothing to do with answering this question correctly. As you will learn in an upcoming unit, unlike investment advisers who register with the state or the SEC but never both, BDs register with the SEC and the appropriate states. Excluded from the definition of broker-dealer under the Uniform Securities Act is a BD with no place of business in a given state whose clientele consists exclusively of other BDs, financial institutions (banks, investment companies), or existing customers who are temporarily in the state. However, once the BD has even one retail (noninstitutional) client who resides in the state, registration is required. There is no de minimis exemption for BDs (unlike IAs).
- 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
- An investment bank
- A market maker
- A broker-dealer
- A stockbrokerage firm
Correct answer: A broker-dealer
As stated in the Uniform Securities Act, broker-dealer means any person engaged in the business of effecting transactions in securities for the accounts of others or for his own account. On the exam, a question like this looks for the exact definition. WII could be referred to as a stockbrokerage firm, but that is not the language of the USA. WII could do investment banking and/or market making, but once again, we need to answer using the USA's language.
- 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
- Other broker-dealers, as long as they have assets of at least $1 million
- IRAs with assets of at least $1 million.
- Employee benefit plans with assets of at least $1 million
- Individuals with assets of at least $1 million
Correct answer: Employee benefit plans with assets of at least $1 million
The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a broker-dealer in that state if its customers are exclusively institutional investors or other BDs. Included in the definition of institutional investor is employee benefit plans with assets of no less than $1 million. What about the choice of other BDs? The USA makes no stipulation as to the minimum assets required of those BDs, while the choice limits it to those with assets of at least $1 million. IRAs are not employee benefit plans; they are individual plans and individuals are never included in the listing of institutional investors.
- 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 engaged in the business of effecting securities transactions for individuals resident in the state
- A person engaged in the business of effecting securities transactions for banks and other institutional investors domiciled in the state
- A person whose only securities transactions in the state are with issuers of those securities
- A person engaged in the business of making short-term loans to individuals resident in the state
Correct answer: A person engaged in the business of making short-term loans to individuals resident in the state
A person performing the functions of a broker-dealer cannot qualify for an exclusion from the USA's BD definition whenever there is a place of business in the state. However, the business of lending money to individuals is not part of the definition of the role of a BD.
- 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
- A closed-end investment company
- A trust company
- An employee benefit plan with at least $1 million in assets
- An individual meeting the SEC's definition of accredited investor
Correct answer: An individual meeting the SEC's definition of accredited investor
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 institutions, such as banks, investment companies, and insurance companies. The exclusion also applies when the client is a large (at least $1 million in assets) employee benefit plan. However, if there is even one noninstitutional (retail) client, regardless of the amount of the individual's wealth or income, registration is required.
- 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
- An investment adviser
- A stock trader
- A broker-dealer
- An agent
Correct answer: A broker-dealer
The question states the exact definition of broker-dealer in the United States. On a law exam (that is what this is), definitions must be precise. Agents are specifically excluded from the definition. The role of an investment adviser is getting paid for advice on securities, not effecting transactions. A stock trader could be an individual trading her own account or could be an employee of a BD who trades for the firm's account.
- 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 drivers license in the new state
- Registering to vote in the new state
- Joining a gym in the new state
- Establishing a permanent residence in the new state
Correct answer: Joining a gym in the new state
Joining a gym or club in a state where a client frequently vacations does not usually indicate a change of address. A new drivers license or voting registration are the strongest indicators. One can assume that establishing a permanent residence changes status from visitor to resident.
- One of the terms defined in the Uniform Securities Act is broker-dealer. Which of the following is included in that definition?
- An individual employed by a business entity to open new customer accounts for the purpose of trading securities
- A business entity seeking to raise additional capital using the regulated securities markets
- A person whose primary function is buying securities for his own account and for the accounts of others
- A person whose primary function is providing advice on what assets belong in clients' investment portfolios
Correct answer: A person whose primary function is buying securities for his own account and for the accounts of others
A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the accounts of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.
- 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
- Is not a broker-dealer in State D
- Is a broker-dealer in State D
- Must employ agents registered in State D in order to be able to make the purchase
- Is a broker-dealer in State D unless sales are confined to residents of State D
Correct answer: Is not a broker-dealer in State D
One of the exclusions from the definition of a broker-dealer in the state is when the BD has no place of business in the state and its only clients in the state are issuers of the securities the BD is buying. When BCA resells the GOP debentures, it will be selling them to its customers in States A, B, and C, where the BD is registered.
- Under the Uniform Securities Act, all of the following are specifically excluded from the definition of a broker-dealer except
- Agents
- Banks
- Issuers
- Investment advisers
Correct answer: Investment advisers
Banks, issuers, agents, and certain out-of-state broker-dealers are excluded from the definition of broker-dealer. However, investment advisers frequently also carry registration as a BD.
- Which of the following meets the definition of broker-dealer?
- A bank
- A savings and loan association
- A trust company
- A person who is in the business of effecting securities transactions for the accounts of others
Correct answer: A person who is in the business of effecting securities transactions for the accounts of others
A person buying and selling securities for customers' accounts is deemed a broker-dealer under the Uniform Securities Act and must be registered as such. Specifically excluded from the definition of a BD are banks, trust companies, and savings and loan associations.
- 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
- Life insurance companies
- Agents of broker-dealers registered in the state
- Investment advisers registered in the state
- Corporations whose shares are listed on the New York Stock Exchange
Correct answer: Life insurance companies
An exclusion from the definition of broker-dealer (meaning registration as one is not required) is available when there is no place of business in the state and the only clients are other BDs or institutions. Insurance companies are included in that group of institutional investors, but investment advisers are not. Agents are individuals and they do not qualify for this exclusion. The only time that issuers of securities would qualify is when the BD is transacting business with the issuers in securities they've issued (or are in the process of issuing). Simply having a major corporation as a client investing its surplus cash does not meet the exclusion.
- 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
- A bank
- A broker-dealer
- An issuer whose securities are involved in the transactions
- A state employee
Correct answer: A state employee
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 institutions, such as banks and insurance companies, are other BDs, or are the issuers of the security. However, if there is even one noninstitutional (retail) client, regardless of the nature of the individual's employer, registration is required.
- Which of the following statements concerning the snowbird exemption is true?
- It applies only when the clients of the broker-dealer seeking the exemption are institutions or other broker-dealers.
- A broker-dealer cannot make use of the snowbird exemption in more than two states during any 12-month period.
- It applies only when the broker-dealer does not maintain a place of business in the state in which the exemption is sought.
- Once the individual existing client has been in the state more than 30 days, the exemption is lost and registration is required.
Correct answer: It applies only when the broker-dealer does not maintain a place of business in the state in which the exemption is sought.
The snowbird exemption applies when a broker-dealer (or other securities professional) does not have a place of business in a state and its only clients in the state are existing clients temporarily in the state. The Uniform Securities Act does not define temporarily, but for practical (and exam) purposes, there is no time limit. The only concern is when that visiting or vacationing client decides to change their permanent residence address to that state. The most common evidence of that is a new voter registration or drivers license.
- 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?
- Broker-dealer A may not solicit this customer in State N unless Broker-dealer A and the agent making the call are registered in State N.
- Broker-dealer A may solicit this customer in State N.
- Broker-dealer A may not solicit this customer in State N unless the broker-dealer has a branch office registered in State N.
- Broker-dealer A must notify the State N Administrator before calling this customer in State N.
Correct answer: Broker-dealer A may solicit this customer in State N.
This is an example of the Uniform Securities Act's position that, in certain situations, a broker-dealer is not a BD. If a BD registered in one state contacts an existing customer in another state and that customer is not a resident of the other state, the BD is not defined as a BD in the state in which the contact is made and is therefore not subject to the laws of that state. Of course, this is only true when the BD does not have an office in that state.
- 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
- Individual family members of the broker-dealer's CEO
- Trusts
- Trust companies
- Registered investment advisers
Correct answer: Trust companies
The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a BD in that state if its customers are exclusively institutional investors or other BDs. Banks, including trust companies, are in the list of institutional investors. A trust and an investment adviser are not in the listing of qualifying institutions. An individual family member of the officer of a BD is not an institutional investor and does not exempt the BD from the state's registration requirements.
- 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.
- I, II, and IV
- III and IV
- I and II
- I, II, III, and IV
Correct answer: I, II, and IV
Form BD inquires about the business history of the firm's principal officers. The form also has a "check the box" listing literally from A to Z to indicate the types of business the firm is (or plans to be) engaged in. There are no credit reports on individuals, even those serving in an executive capacity. The only misdemeanors appearing on Form BD are those involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses. Other misdemeanors, even when there is a conviction, are not disclosed.
- Diligent Investment Services (DIS) is registered in several states as a broker-dealer. The annual renewal process requires DIS to
- Indicate the number of clients who are residents of the state for which renewal is being filed
- Pay the renewal registration fee
- Provide a consent to service of process
- Supply an amended Form BD
Correct answer: Pay the renewal registration fee
For all securities professionals, there is an initial registration fee and a renewal fee. Those fees may differ (it is up to the individual states). The consent to service of process is a permanent form. That is, until there is a change in status, the form remains in effect. Form BD is amended whenever there is a material change; it is not an annual requirement. There is no requirement for a broker-dealer to report the number of clients in the Administrator's state.
- Which of the following statements relating to the registration requirements of broker-dealers is true?
- Registrations of securities professionals expire 1 year after their effective date, unless renewed.
- A registration becomes effective at noon, 30 days after the application has been filed, provided the registration is not in the process of denial.
- A registration is automatically effective at noon, 30 days after the application has been filed.
- If an amendment to the registration is subsequently filed, the registration becomes effective 15 days after the amendment is filed.
Correct answer: A registration becomes effective at noon, 30 days after the application has been filed, provided the registration is not in the process of denial.
A registration is effective at noon, 30 days after the application has been filed if there is no denial or stop order in process. Registrations of securities professionals expire on December 31, unless renewed. If an amendment to the registration is subsequently filed, the registration becomes effective 30 days, not 15 days, after the amendment is filed; filing the amendment starts the process anew.
- 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)
- II and III
- I, II, III, and IV
- I and IV
- II, III, and IV
Correct answer: I, II, III, and IV
Although it is very rare to find a broker-dealer structured as a sole proprietorship, it is a permitted form of business structure (along with all of the other choices).
- Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of
- $50,000.
- $10,000.
- $25,000.
- An amount not in excess of that set by the SEC
Correct answer: An amount not in excess of that set by the SEC
The NSMIA states that the Administrator may not require a broker-dealer to be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of BDs that maintain a specified net capital.
- 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
- Customer account records
- Copies of customer tax returns
- Blotters reflecting trading activity
- Cash receipts and disbursement journals
Correct answer: Copies of customer tax returns
Although many broker-dealers ask customers for financial information in order to make suitable recommendations, there is no statutory requirement to obtain and retain copies of their tax returns. From a test-taking skill perspective, even if you are not familiar with some of the terms used in the other choices, you should not let yourself get baffled by them. Customer tax returns belong to the customer, not the firm, so there is no way the USA can ask BDs to keep copies of them.
- Fast Growth Securities, Inc. (FGSI), a member of the Financial Industry Regulatory Authority (FINRA), has its main office in State A and is therefore
- Only required to register in those states where FGSI maintains a place of business
- Registered by FINRA exempting the requirement to register with the State A Administrator
- Not required to register in any other state in which it does business
- Required to register as a broker-dealer in State A with the State A Administrator
Correct answer: Required to register as a broker-dealer in State A with the State A Administrator
Securities firms that are members of FINRA are registered with the SEC and must register as broker-dealers in the states in which they maintain a place of business. Under the USA, BDs are firms engaged in the business of effecting security transactions in customer or proprietary accounts. A BD is not a registered investment adviser, although many broker-dealers own separate legal entities that are IAs. FINRA does not license its members to conduct business in the states; the state securities licensing agent is the state securities Administrator. Although a BD must register in any state where it maintains a place of business, that is not exclusive. That is, if the BD does business with retail customers in a state, the presence or absence of a place of business does not have an impact on the requirement to register in that state.
- 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
- All must file a consent to service of process along with their application
- An incomplete application is cause for denial of registration
- The Administrator retains jurisdiction over each person for a period of one year after termination of registration
- The registration for all is two years in length
Correct answer: The registration for all is two years in length
Registrations of persons renew annually each December 31.
- 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?
- Proceedings in another state in which the Administrator found the person was in violation of an investment-related statute
- A proceeding before FINRA in which the adviser was barred or suspended from membership
- Conviction of a misdemeanor involving a securities-related business
- Conviction of a misdemeanor in a civil action regarding negligence in child support payments
Correct answer: Conviction of a misdemeanor in a civil action regarding negligence in child support payments
A broker-dealer (or investment adviser) must disclose to clients and prospective clients any adverse regulatory events that occurred within the last 10 years, such as a conviction relating to a misdemeanor involving an investment-related business; state or federal regulatory agency proceedings in which the person was found to have violated an investment-related statute; or proceedings before FINRA in which the adviser was barred or suspended from membership. Misdemeanors regarding non-investment-related actions are not considered material and need not be disclosed (e.g., domestic issues).
- 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
- Administrative detention
- Mutual reciprocity
- Statutory revocation
- Statutory disqualification
Correct answer: Statutory disqualification
In most cases, when a broker-dealer's registration has been revoked in one state, disclosure of that on the Form BD for registration in another state will result in a denial. That would be an example of statutory disqualification. The simple logic is if one Administrator found a BD's actions so bad that the registration was revoked rather than just suspended for a while, why would any other Administrator want to let the firm do business in his state?
- 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 firm will have to meet the net capital requirements of each state
- NOT needs to meet the average of the net capital requirements of the eight states.
- NOT needs to meet only the net capital of the state in which its principal office is located.
- The firm need only meet the requirements of the SEC
Correct answer: The firm need only meet the requirements of the SEC
The NSMIA of 1996 amended the Securities Exchange Act of 1934 to state that no state can impose a net capital requirement on a broker-dealer that exceeds the requirement of the SEC. This is also true of recordkeeping rules.
- An Administrator wishing to set the net capital requirement for a broker-dealer may not require an amount greater than that
- Under FINRA rules
- Of the state where the broker-dealer is registered with the lowest capital requirement
- Of the state in which the broker-dealer maintains its principal office
- Required under the Securities Exchange Act of 1934
Correct answer: Required under the Securities Exchange Act of 1934
The Administrator may, by rule or order, require a minimum capital for registered broker-dealers, subject to the limitations of Section 15 of the Securities Exchange Act of 1934. That means, as long as a BD meets the SEC's net capital requirements, the state cannot impose higher ones.
- Which of the following statements is not true regarding the authority of the Administrator under the Uniform Securities Act?
- The Administrator may require examinations for broker-dealers.
- The Administrator may not examine the records of a broker-dealer without seeking a court order from a federal court.
- The Administrator may require a broker-dealer to have a minimum net capital as a condition of registration.
- The Administrator may require financial reports from broker-dealers.
Correct answer: The Administrator may not examine the records of a broker-dealer without seeking a court order from a federal court.
The Administrator has inspection power to view all records within or outside the state as is appropriate or necessary in the public interest, without seeking court approval. Administrators may require minimum capitalization as a condition of registration. The Uniform Securities Act states that the Administrator may, by rule, provide for an examination, which may be written or oral or both, to be taken by any class of or all applicants. As a practical matter, an oral examination would apply to the business entity (broker-dealer or investment adviser), while written examinations are taken by agents and investment adviser representatives. The Administrator is also given the authority by the act to require the filing of financial reports regarding the net worth of the firm.
- In lieu of a surety bond, the Administrator is authorized to accept
- United States minted gold or silver coins.
- Cash or marketable securities
- Marketable real estate
- Marketable commodities
Correct answer: Cash or marketable securities
When a bond is required of a securities professional, instead of supplying the surety bond itself, the Uniform Securities Act permits the use of cash or marketable securities. Commodities and real estate are not securities, nor are the coins.
- 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 lowest capital required by a state in which the broker-dealer is registered
- The requirements of the state in which the most agents reside
- The requirements of the SEC
- The requirements of the state in which the broker-dealer's principal office is located
Correct answer: The requirements of the SEC
For test purposes, unless the question states that the broker-dealer is registered only in one state, all BDs are registered with the SEC and those states where registration is required. Therefore, whether it is bonding, recordkeeping, or net capital requirements, the Administrator can never impose a requirement greater than that of the SEC.
- Under the Uniform Securities Act, broker-dealers may not be required by the Administrator to
- Promptly file a correcting amendment to any document on file with the Administrator that becomes inaccurate or incomplete in any material respect
- File various financial reports
- Publish an announcement of the application for registration in a newspaper
- Post a surety bond if they do not have investment discretion over client accounts or do not maintain custody of customer funds and/or securities
Correct answer: Post a surety bond if they do not have investment discretion over client accounts or do not maintain custody of customer funds and/or securities
The question asks for something that cannot be required by the Administrator. The other choices are requirements you should memorize. The Administrator can require a bond only if registrants have custody or discretion.
- As part of the registration process as a broker-dealer in a state, the Administrator may require
- Publishing a notice of the registration in one or more newspapers in the state
- Net capital exceeding that required by the SEC
- Submission of a list of all of the broker-dealer's existing clients
- Records be kept for a longer period than required by the SEC
Correct answer: Publishing a notice of the registration in one or more newspapers in the state
Many newspapers carry legal notices. These are usually for new corporations, new liquor licenses, and, in our business, new registrations, with the Administrator.
- 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
- Result in a disciplinary action against the broker-dealer for failure to supervise Worthington
- Result in a disciplinary action against Worthington for unauthorized trading in a customer's account
- Cause the broker-dealer to close this customer's account
- Cause the broker-dealer to assign one of the firm's officers to handle this customer's account
Correct answer: Result in a disciplinary action against the broker-dealer for failure to supervise Worthington
Under normal cases of unethical or dishonest actions of an agent, the employing broker-dealer is not held responsible. However, when there is a clear case of failure to supervise, such as looking the other way when an agent engages in practices that conflict with the firm's compliance policies, action can be taken against the BD. It could be a fine, a suspension, or even a revocation of the firm's registration. The question tells us that Worthington's registration has already been revoked—the disciplinary action has already occurred. There certainly would have to be another agent assigned to the customer account, but there is no reason it would have to be an officer. It is more likely the customer would close her account rather than the reverse.
- 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 consent to service of process
- The servicing power of attorney
- The consent to representation
- The contumacy agreement
Correct answer: The consent to service of process
The consent to service of process is a legal document entered into by all broker-dealers, whereby the Administrator is given the power to accept legal papers on behalf of the registrant. It is part of Form BD and is permanent as long as the firm remains in business. In fact, every registrant—agents, investment advisers, and their representatives, as well as issuers—are required to file a consent.
- All of the following statements regarding registration of broker-dealers under the Uniform Securities Act are true except
- Broker-dealers with discretion over client accounts may be required to post a surety bond
- A successor firm is exempt from paying registration fees until the renewal date
- A successor firm is always exempt from filing a consent to service of process until the renewal date
- No broker-dealer can be required to meet financial requirements in excess of those of the SEC
Correct answer: A successor firm is always exempt from filing a consent to service of process until the renewal date
When one firm succeeds another, no fees are due until the renewal date. However, the successor firm may have to file a consent to service of process at the time it registers. This is the case when the successor firm is a new entity making their application an initial filing. Broker-dealers with discretionary authority may be required to post a surety bond or maintain minimum net capital. However, no state can impose financial or recordkeeping requirements that exceed those of the SEC.
- 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
- At the designated office of the Administrator
- At the SEC
- In every branch office of the broker-dealer
- In the broker-dealer's principal office
Correct answer: In the broker-dealer's principal office
The USA defines the readily accessible location as the principal (or executive) office of the firm. Although some records are kept at branch offices, those are usually copies relating to the operations of that branch. The originals are at the principal office. Regulators (the Administrator or the SEC) do not keep records belonging to registered firms.
- 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.
- III and IV
- I and II
- II, III, and IV
- I only
Correct answer: III and IV
Under the Uniform Securities Act, broker-dealers must register in any state where they engage in securities transactions with individual investors. The net worth of the individual is irrelevant. BDs with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a BD are exempt transactions.
- 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
- As an existing broker-dealer, no fee will be due
- The first renewal of the firm's registration will take place on December 31, 2020
- The first renewal of the firm's registration will take place on December 31, 2021
- The initial registration fee will be due no later than 30 days after October 19, 2020
Correct answer: The first renewal of the firm's registration will take place on December 31, 2020
Registrations become effective on the 30th day after an application is filed. That would make the effective date of DIS's registration November 18, 2020. Every initial registration comes up for renewal on the December 31 following the initial effective date. In our question, that would be about six weeks later on December 31, 2020. The fee must be submitted with the application, not within 30 days. If DIS was a successor to an existing firm in State C, then no fee is due, but this is a new registration for DIS and must have the fee enclosed.
- Form BD is used to register
- Agents of broker-dealers
- Bank dealers
- Business dealers
- Broker-dealers
Correct answer: Broker-dealers
Form BD is the application form for registration as a broker-dealer on both the state and federal levels. A few of the terms used in the exam, such as this, are self-evident.
- 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 broker-dealer need only be sure that the next scheduled filing with the Administrator reflects the change.
- The broker-dealer is not required to file an amendment to its registration with the Administrator.
- The broker-dealer need not file an amendment to its registration if it is scheduled for an examination by the Administrator.
- The broker-dealer must promptly notify the Administrator.
Correct answer: The broker-dealer must promptly notify the Administrator.
Prompt notification is required when a broker-dealer faces a potential financial impairment.
- Powers granted to the Administrator under the Uniform Securities Act include the ability to inspect the records of a broker-dealer
- After giving appropriate written notice
- Only when the Administrator can point to a specific rule, order, or section of the act that he believes has been violated
- At any time
- When desired but not more frequently than quarterly
Correct answer: At any time
If a broker-dealer is doing business in the Administrator's state, the Administrator has the authority to inspect that BD's records at any time (during normal business hours), regardless of the state in which the records are located. Don't confuse this with an issuer reporting not more frequently than quarterly.
- The Uniform Securities Act requires that broker-dealers maintain all of the following records except
- Trade blotters
- New account forms
- Originals of advertisements
- Copies of customers' tax returns
Correct answer: Copies of customers' tax returns
There are a large number of records that must be maintained by broker-dealers (just like any other business). However, there is no requirement to obtain and keep copies of tax returns of the firm's customers.
- First Growth Securities, Inc., a member of the Financial Industry Regulatory Authority (FINRA), has its main office in State I and is therefore
- Registered by FINRA to sell securities in State I
- Automatically registered as a securities agent in State I
- A registered investment adviser licensed to sell securities in State I
- Required to register as a broker-dealer in the state of State I
Correct answer: Required to register as a broker-dealer in the state of State I
Securities firms that are members of FINRA are registered with the SEC and must register as broker-dealers in the states in which they maintain a place of business. Under the USA, BDs are firms engaged in the business of effecting securities transactions in customer or proprietary accounts. A BD is not a registered investment adviser, although many BDs own separate legal entities that are IAs. FINRA does not license its members to conduct business in the states; the state securities licensing agent is the state securities Administrator. Also, a BD is not an agent; an agent is a person who is employed by a BD to conduct securities transactions as a representative of the BD.
- Records that must be kept by a broker-dealer include all of the following except
- A daily trade blotter
- Customer tax returns
- A cash receipts journal
- Customer ledgers
Correct answer: Customer tax returns
It is not required that any securities professional maintain copies of customers' tax returns.
- 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
- April 15, 2021.
- May 15, 2021.
- December 31, 2021.
- May 14, 2021.
Correct answer: May 15, 2021.
If no denials or stop orders are in effect and no proceedings are pending to do so, registration automatically takes effect at noon on the 30th day after the application was filed.
- 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
- Account ledgers
- Blotters and books
- Emails containing unsolicited testimonials
- Papers and memoranda
Correct answer: Emails containing unsolicited testimonials
The Administrator may require broker-dealers to keep and maintain account ledgers, correspondence including emails, papers and memoranda, and blotters and books, provided the state requirements do not exceed federal requirements under the Securities Exchange Act of 1934. An unsolicited testimonial is not considered correspondence initiated by the BD, and it may be discarded if the BD wishes.
- 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,
- This would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states
- This is permissible only if the broker-dealer is registered with the SEC
- This is permissible if the broker-dealer is properly registered in Alberta, deals only with existing clients, and registers in each of the states
- The broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the U.S.
Correct answer: This is permissible if the broker-dealer is properly registered in Alberta, deals only with existing clients, and registers in each of the states
The Uniform Securities Act provides for a type of limited registration for Canadian broker-dealers and their agents. They must be properly registered in their home Canadian province, file a consent to service of process, and file the appropriate application form.
- 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?
- Any charge, conviction, or guilty plea to a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses
- Any charge, conviction, or guilty plea to a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses, limited to the past 10 years
- Any charge, conviction, or guilty plea to a misdemeanor involving failure to pay child support or alimony or similar domestic offenses
- Financial condition and history including a recent credit report
Correct answer: Any charge, conviction, or guilty plea to a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses
Any felony must be disclosed. Any misdemeanor that involves investments and many other financial issues, such as those in the correct answer, require disclosure. Note that it is not only convictions, but charges as well. There is no time limit on the disclosures; the question is "have you ever . . . ?" The 10-year limit applies to statutory (automatic) disqualification.
- Under the Uniform Securities Act, who automatically becomes registered as an agent when a broker-dealer firm's registration becomes effective?
- Any individual who has contributed capital to fund the organization
- Any partner, officer, or director of the firm who is active as an agent in the firm's securities business
- All individuals for whom an agent's application has been filed
- Any individual who directly handles securities
Correct answer: Any partner, officer, or director of the firm who is active as an agent in the firm's securities business
Individuals who are active as agents in a broker-dealer's securities business and are listed on Form BD as officers, directors, or partners, are automatically registered as agents when a BD becomes registered in another state.
- The registration of a broker-dealer in this state would automatically register as an agent
- An investment adviser representative of the broker-dealer
- An agent who sits on the board of directors of the broker-dealer
- A secretary who has been employed by the firm for the past five years
- All employees of the broker-dealer
Correct answer: An agent who sits on the board of directors of the broker-dealer
Section 202(a) of the Uniform Securities Act states, "Registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer, or director, or a person occupying a similar status or performing similar functions." The correct choice states that this director is an agent, so this individual qualifies for the automatic registration.
- Under the Uniform Securities Act, an agent's license is effective for
- 20 years.
- 18 months, of which the first 6 months is a probationary period.
- 1 year initially and then renewing as of the following December 31.
- The time remaining until December 31 of that year, at which time it must be renewed
Correct answer: The time remaining until December 31 of that year, at which time it must be renewed
Registrations expire annually on December 31, unless renewed. The initial license will, obviously, be for less than one year.
- Under the Uniform Securities Act, the registration requirements for agents would never include
- A consent to service of process
- An examination
- Minimum capital
- Surety bonding
Correct answer: Minimum capital
Minimum capital may be required of broker-dealers and investment advisers but not agents.
- The Administrator may require an applicant for registration as an agent to do all of the following except
- Submit fingerprints
- Place an advertisement in one or more newspapers circulated in the state
- Pay a registration fee
- Pass a qualification examination
Correct answer: Submit fingerprints
Unlike the FINRA requirement, the Uniform Securities Act does not ask for fingerprints. This is a "test world" fact rather than the "real world." As part of your application, you had to pay a fee and you are taking this course to pass an examination. The Administrator may by rule or order require an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in his state
- 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 company underwriting the variable life insurance policy
- The broker-dealer with whom Adrian is registered
- The state insurance commissioner
- The Administrator of the state where the policy is sold
Correct answer: The broker-dealer with whom Adrian is registered
Independent insurance producers who sell variable insurance policies must have both an insurance and a securities license. The securities license is as an agent for a broker-dealer. Even though Adrian operates independently, the sponsoring BD has responsibility over any securities-related activity.
- An agent's registration is considered effective
- Once the licensing fee has been paid
- When approval has been granted by the Administrator
- When approval has been granted by FINRA
- Upon passing the Series 63 Uniform Securities Agent State Law exam
Correct answer: When approval has been granted by the Administrator
Although the Administrator doesn't approve much, it is correct to state that an agent's registration is not effective until approved by the Administrator.
- Registration with the Administrator as a broker-dealer generally requires the filing of
- Form U4.
- Form BD.
- Form Broker-Dealer.
- Form ADV.
Correct answer: Form BD.
The form for broker-dealer registration is Form BD. Form ADV is for investment advisers and Form U4 is for agents. There is no Form Broker-Dealer.
- The Administrator wishes to examine the books of a broker-dealer registered in her state. She may do so
- Anytime she wishes
- Only after an appointment has been made with the broker-dealer
- No more frequently than on a quarterly basis
- Only if the broker-dealer has a place of business in the state
Correct answer: Anytime she wishes
If the broker-dealer is registered in the state, regardless of where their principal office is located and even if they have no place of business in the state, the fact that they are registered with the Administrator gives her the right to examine their books at any time without any prior notice.
- 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 has no jurisdiction and must forward the complaint to the State E Administrator
- The State A Administrator can pay a surprise visit to the principal office in State E during normal business hours and demand to see the records relevant to the customer's complaint
- The State A Administrator must make an appointment with the designated HPS supervisor and schedule the investigation at a time convenient for both
- The State E Administrator will use the consent to service of process filed by HPS to act as the attorney for HPS
Correct answer: The State A Administrator can pay a surprise visit to the principal office in State E during normal business hours and demand to see the records relevant to the customer's complaint
When there is the need to investigate a complaint, the Administrator's authority does not stop at the state line. The Administrator, or his representative, of any state in which the person is registered may demand an inspection of any of these books and records during reasonable business hours with whatever frequency the Administrator deems necessary. Those records are located at the BD's principal office. A consent to service of process is almost always used when the subject of the complaint does not respond to a subpoena. Nothing in the question indicates that to be the case.
- 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
- Giving a seminar on the benefits of whole life insurance versus term insurance
- Prospecting for new clients by mail
- Prospecting for new clients in person
- Accepting unsolicited orders
Correct answer: Giving a seminar on the benefits of whole life insurance versus term insurance
A person who has passed the NASAA exam cannot transact securities business until the Administrator notifies the employer that the registration is effective. Insurance, unless variable, is not a security.
- 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 during regular business hours without prior notice
- Upon 15 days' notice
- Upon 1 day's notice
- Upon 1 hour's notice
Correct answer: At any time during regular business hours without prior notice
The Administrator does not have to give notice before conducting an audit of a firm. That is why it is known as a surprise audit.
- 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 may bring an action against PSII for a period of 2 years after the effective date of the withdrawal.
- The withdrawal from registration will normally take place on the 60th day after filing.
- Once the application for withdrawal is filed, any pending actions against the firm are canceled.
- The withdrawal from registration will normally take place on the 30th day after filing.
Correct answer: The withdrawal from registration will normally take place on the 30th day after filing.
Just as is the case with registration, withdrawal normally takes place on the 30th day after receipt of the application. The application is on Form BD-W, but that is unlikely to be on the exam. If a BD-W is filed when there is a pending action against the firm, the withdrawal request is suspended until the action is decided. Once the withdrawal is effective, should the Administrator discover activity deserving of an investigation, she has jurisdiction for a period of one year. For those of you who have taken a FINRA exam, FINRA's jurisdiction is for two years. Because of the difference, this is a common test question.
- 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 not affected.
- His registration is revoked.
- His registration is no longer active.
- His registration remains active as long as he registers with an active broker-dealer within 30 days.
Correct answer: His registration is no longer active.
An agent of a broker-dealer is just that: a representative of a registered BD. If something happens to eliminate that BD's registration, any agent with that firm is no longer registered. If Jamal wants to remain in the business, as long as he finds employment with a registered BD within two years, he will not have to pass the exam again. The only time the agent's registration would be revoked is if he is a named party to the legal action, but nothing in the question hints at that. On the exam, you might see terms describing Jamal's position as in suspense, in limbo, or on hold.
- 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 most stringent financial requirements
- The SEC
- FINRA.
- The state in which the principal office of the member is located
Correct answer: The SEC
In all cases, a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.
- 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
- Indicted for committing a securities-related misdemeanor two years ago
- Charged with committing a securities-related felony two years ago
- Convicted of a non-securities-related felony eight years ago
- Convicted of a non-securities-related misdemeanor eight years ago
Correct answer: Convicted of a non-securities-related felony eight years ago
Among the actions that can result in a statutory disqualification from registration are certain acts of control affiliates. These are individuals with the power to influence the activities of the firm. Conviction of any felony, securities-related or not, within the previous 10 years is listed as a specific justification for statutory disqualification. That would also be the case if the conviction was for a securities-related misdemeanor with the same 10-year limitation. If the misdemeanor is not securities-related, the action will not lead to statutory disqualification. It is important to understand that although arrests, charges, and indictments must be reported, it is only a conviction ("you are guilty") that leads to statutory disqualification.
- When filing the consent to service of process, which of the following is true?
- It is supplied with the initial registration and remains on file permanently.
- It must be filed annually on the dates specified by the Administrator.
- It expires simultaneously with the registration on December 31.
- It is not required of investment adviser representatives, only investment advisers.
Correct answer: It is supplied with the initial registration and remains on file permanently.
The consent to service of process is supplied with the initial registration and remains on file permanently.
- 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?
- Unless specified earlier, registration becomes effective no later than 90 days after the application is filed.
- Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed.
- Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application.
- Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application.
Correct answer: Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application.
While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.
- 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,
- PAM would not be required to post a surety bond.
- PAM would need to post a surety bond of $63,000.
- PAM would need to post a surety bond of $50,000.
- PAM would need to post a surety bond of $60,000.
Correct answer: PAM would not be required to post a surety bond.
The first thing to remember is that no state can require bonding or financial requirements in excess of those of the SEC. A state with a higher bonding requirement can apply that only to broker-dealers who are not SEC registered. The second point is that any SEC-registered BD whose net capital exceeds the SEC's requirement has no obligation to post a surety bond.
- 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?
- A description of PPI's form of business structure
- Fingerprint cards for each of PPI's officers who will be registered as agents
- A disclosure if the applicant has ever been the subject of any adjudications by the SEC or any securities SRO
- The location of PPI's principal office
Correct answer: Fingerprint cards for each of PPI's officers who will be registered as agents
Under the Uniform Securities Act, fingerprints for registered individuals, even those who will be serving as officers of a broker-dealer, are not 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
- Submit a personal guarantee from the LLC's members
- Deposit $30,000 of nonmarketable securities
- Supply a surety bond in the amount of $30,000
- Deposit $30,000 cash
Correct answer: Deposit $30,000 cash
When a surety bond is required, in lieu of the bond, the firm can supply cash or marketable securities in the amount of the required bond.
- Which of the following can be substituted for a surety bond?
- Real estate
- Cash or commodities
- Cash or marketable securities
- Commodities, cash, or securities
Correct answer: Cash or marketable securities
The Administrator may, by rule or order, require registered broker-dealers, agents, and investment advisers who have custody of (BDs and IAs) or discretionary authority over client funds or securities to post bonds in amounts as the Administrator may prescribe, subject to the limitations of Section 15 of the Securities Exchange Act of 1934 (for BDs) and Section 222 of the Investment Advisers Act of 1940 (for IAs). An appropriate deposit of cash or securities shall be accepted in lieu of any bond required.
- 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.
- I and II
- II and III
- I and III
- I, II, and III
Correct answer: I and III
Application may be made to register a successor firm whether or not the firm is then in existence. The filing fee is waived. The successor firm's registration will be effective for the unexpired portion of the year.
- 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 chief compliance officer of that broker-dealer
- The Administrator of State W
- An agent of that broker-dealer who was employed by that broker-dealer before Michal
- The designated supervisory individual with that broker-dealer
Correct answer: The designated supervisory individual with that broker-dealer
A broker-dealer is responsible for supervising the business activities of its agents. In practice, the BD designates a specific individual with supervisory responsibility for each agent. The number of agents an individual supervisor is responsible for depends on the firm's operating procedures. It would be unusual to have the chief compliance officer (CCO) supervising individual agents. Just because an agent has been with the BD longer than Michal does not create supervisory authority.
- 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 time PPI's registration becomes effective with the SEC as long as the firm used the coordination method of registration
- At noon of the 30th day after the filing of a completed Form BD subject to possible acceleration by the State X Administrator
- No later than the end of the 20-day cooling-off period applicable to registrations
- Once the executive officers of PPI have successfully completed the Series 63 examination
Correct answer: At noon of the 30th day after the filing of a completed Form BD subject to possible acceleration by the State X Administrator
For any securities professional, registration normally becomes effective at noon on the 30th day after the filing of a completed application. For a broker-dealer, that would be the Form BD. It is important to include the word complete. If the Administrator returns the initial filing because of incomplete information, the 30-day period starts all over again once the application is complete. As with other regulations, the Administrator frequently has the power to speed up the process; a "rush job" as such. The 20-day cooling-off period refers to registering a security with the SEC, as does the term coordination. In a large firm, not all of the executives are required to individually register. Even for those who do, in many cases, they take their exam well before the end of the 30-day period.
- If the Administrator wishes to conduct an examination of a broker-dealer's books and records, how much advance notice must be given?
- 15 days
- 60 days
- 30 days
- None
Correct answer: None
No advance notice is necessary for the Administrator to conduct an examination of the books and records of a broker-dealer (or of an investment adviser). The USA only requires that the examination be held during normal business hours of the registrant.
- In general, the Uniform Securities Act requires broker-dealers to keep most records for
- Five years with the first two in an easily accessible location
- Three years with the first year in an easily accessible location
- Three years with the first two in an easily accessible location
- Five years with the first three in an easily accessible location
Correct answer: Three years with the first two in an easily accessible location
The general recordkeeping requirement for broker-dealers is three years. The first two of those, the records must be in an easily accessible location.
- Defalcator Dependable Brokers (DDB) has changed its business structure from a general partnership to a corporation. Notification of this change
- Need not be made because it has no relevance to the way the firm does its securities business
- Is made by amending its Form BD when the annual renewal fee is paid
- Must be submitted to the Administrator promptly
- Must be submitted to the Administrator by noon of the 30th day after the change
Correct answer: Must be submitted to the Administrator promptly
If any material information in the documents relating to the application for registration becomes inaccurate or incomplete, the registrant must promptly file a corrected copy (amend their application) with the Administrator. Because the type of business structure—partnership, corporation, LLC, or sole proprietorship—is disclosed on Form BD, a change requires a prompt update. The USA never defines prompt and the exam never specifies a time—just answer promptly to a question like this.
- The Administrator may require registered broker-dealers to comply with all of the following except
- Keeping records for three years
- Filing financial information periodically
- Filing of advertisements and sales literature
- Renewal of registration semiannually
Correct answer: Renewal of registration semiannually
Registrations are renewed annually. The Administrator may require registered broker-dealers to file advertisements, sales literature, and financial reports. The Administrator may require that records created by the BD be maintained for any period of time; three years is the most common requirement for registered BDs.
- Under the National Securities Markets Improvement Act of 1996 (NSMIA), states are prevented from all of the following except
- Registering investment advisers
- Establishing capital and custody requirements that exceed those provided for in the Securities Exchange Act of 1934
- Establishing recordkeeping requirements for broker-dealers exceeding those required under federal law
- Requiring federal covered securities to register on the state level.
Correct answer: Registering investment advisers
The NSMIA streamlined much of federal and state securities laws and specifically eliminated dual regulation of investment advisers. If an IA is prohibited from registering with the SEC, it will register with the state. Under the NSMIA, states may not impose financial, custody, and recordkeeping requirements that exceed those under federal securities laws. Federal covered securities are exempt from registration on the state level. They may be required to notice file, but that is not considered registration.
- All of the following may be required of broker-dealers by the post-registration provisions of the Uniform Securities Act except
- Requiring a broker-dealer to maintain records for a period longer than specified in the Securities Exchange Act of 1934
- The Administrator may require the maintaining of correspondence for a specified period of time
- The Administrator may require the filing of any form letters sent to prospective investors
- The Administrator may require them to file financial reports
Correct answer: Requiring a broker-dealer to maintain records for a period longer than specified in the Securities Exchange Act of 1934
One of the specific provisions of the National Securities Markets Improvement Act of 1996 was that no state had the authority to impose financial or recordkeeping requirements on a broker-dealer that were in excess of those stated in the federal Securities Exchange Act of 1934.
- 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?
- 7 days
- 30 days
- 5 days
- 10 days
Correct answer: 30 days
Registration of securities professionals becomes effective at noon of the 30th day after the application is filed, unless the Administrator begins a proceeding or issues a stop order before that time. Remember also that the Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed.
- 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.
- II and III
- I and IV
- I and II
- III and IV
Correct answer: III and IV
Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Broker-dealers are generally required to provide a statement of financial condition (a balance sheet reflecting assets and liabilities). The Administrator has a maximum of one year after termination to initiate any actions.
- Under the Uniform Securities Act, registrations of securities professionals expire
- One year from their effective date, unless renewed
- Three years from their effective date, unless renewed
- Every December 31, unless renewed
- Two years from their effective date, unless renewed
Correct answer: Every December 31, unless renewed
Note that the question asks for the expiration date under the Uniform Securities Act, which is December 31. Do not be confused by actual practice, which may vary in some states.
- Which of the following statements regarding the Administrator's authority to examine the books and records of registrants is true?
- The records may be examined at any time for any reason within or outside the state if it is in the public interest to do so.
- Such examinations are not necessary or appropriate for the protection of investors or in the public interest.
- If a broker-dealer's or investment adviser's records are located outside the Administrator's state, they may only be examined to collect evidence for a hearing.
- Broker-dealer records may be examined at any time, but the same is not so in the case of investment advisers.
Correct answer: The records may be examined at any time for any reason within or outside the state if it is in the public interest to do so.
All required records must be made available for examination by a state Administrator, within or outside the state, as is appropriate or necessary in the public interest.
- Under the Uniform Securities Act, those persons carrying out a broker-dealer's supervisory regimen over agents
- Must be registered as principals
- Are not required to register unless they are directly involved with sales of securities
- Must pass the registered supervisor's exam
- Must be registered as agents
Correct answer: Must be registered as agents
There is no separate principal's registration under state law like there is under FINRA's rules. Supervising the activities of agents requires registration as an agent. Even if the individual is not directly involved with sales, the fact that she is supervising agents who are makes registration necessary.
- 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
- 6 years.
- For required time of each state where trade blotters are maintained
- 5 years.
- 10 years.
Correct answer: 6 years.
The NSMIA of 1996 amended the Securities Exchange Act of 1934 to the effect that no law, rule, regulation, order, or other administrative action of any state or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for broker-dealers, that differ from, or are in addition to, the requirements in those areas established under the Exchange Act. Simply put, BDs follow the SEC's rules when it comes to these details.
- 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
- By noon of the 30th day after the appointment
- Within 90 days after the end of PIP's fiscal year
- Promptly
- At the time of the annual renewal
Correct answer: Promptly
The Uniform Securities Act states that any material change to a registrant's application (and replacement of a BD's CCO) requires prompt notification to the Administrator. There is no definition of prompt in the law.
- A person meeting the definition of broker-dealer registers with the state by doing all of the following except
- Filing an application
- Submitting fingerprints
- Paying the appropriate fee
- Providing a consent to service of process
Correct answer: Submitting fingerprints
Fingerprints are not a requirement of registration, while all of the other choices are.
- What document must accompany an initial registration application for those natural persons required to register under the Uniform Securities Act?
- State photo identification
- Consent to service of process
- Proof of citizenship
- A birth certificate confirming the registrant is over 18 years of age
Correct answer: Consent to service of process
The USA requires that a consent to service of process accompany an application for registration. Proof of citizenship is unlikely to be requested by a state Administrator because foreign nationals can register. Proof of age is not a requirement.
- A consent to service of process allows the Administrator to
- Exercise the power of attorney on behalf of the registrant
- Verify the accuracy and completeness of registration without obtaining the registrant's prior approval
- Terminate a registrant's application
- Ensure that the legal appeal process is expedited as a result of the Administrator's access to information
Correct answer: Exercise the power of attorney on behalf of the registrant
The consent to service of process provides the Administrator with power of attorney for registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will, nor does it empower the Administrator to verify information or expedite the registration process.
- Which of the following is least likely to appear on a broker-dealer's application submitted to the Administrator?
- Disclosure of any charge, conviction, or guilty plea to any felony
- The form of business organization
- Proposed method of doing business
- The number of agents employed by the broker-dealer
Correct answer: The number of agents employed by the broker-dealer
Even if this is an established broker-dealer who is now registering in a new state, the number of agents employed by the firm is not part of Form BD.
- 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 Administrator of State M cannot require broker-dealers to retain books and records longer than required by the SEC.
- The Administrator of State M is empowered to make rules that are more stringent than those of the SEC.
- As long as the principal office of CDL Securities is not in State M, this rule has no effect on the firm's recordkeeping requirement.
- The Administrator of State M can bring action against CDL Securities to have its registration revoked.
Correct answer: The Administrator of State M cannot require broker-dealers to retain books and records longer than required by the SEC.
When a broker-dealer does business in more than one state, it is engaging in interstate commerce. That requires registration with the SEC. In addition, in those states where the firm meets the definition of a BD, registration is also required. The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits state securities regulators from establishing requirements in excess of those required by the Securities Exchange Act of 1934. The location of the principal office is irrelevant because it is the SEC's rules that count.
- 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
- Will have to pay a license fee along with its application
- Will not have to pay a license fee until the renewal date
- Will not have to file a consent to service of process because that is part of PAT's original filing
- Will not have to file a Form BD with State Z because it is already on record in States X and Y
Correct answer: Will not have to pay a license fee until the renewal date
A successor firm, a broker-dealer (or investment adviser) that takes over an existing firm, does not have to pay a licensing fee (in our question, PAT has already paid State Z for the year) until the December 31 renewal date. Succeeding to the existing firm requires that the new firm file a Form BD as an initial registrant. That would also mean a consent to service of process for State Z for RIP because PAT no longer exists.
- 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.
- I and III
- II and III
- II and IV
- I and IV
Correct answer: II and IV
The consent to service of process is filed with the initial application for registration and becomes a permanent part of the registrant's file. The USA states that all registrations of persons expire on December 31, unless renewed, withdrawn, or canceled.
- 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 consent to service of process
- The agreement to actionable offenses
- The cease and desist order
- The right of retribution
Correct answer: The consent to service of process
Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.
- Which of the following emails sent using the broker-dealer's account has no retention requirement?
- An email to all customers informing them of a fee change
- An email to select customers informing them of a new issue about to become public
- An email confirming a dinner reservation at a local restaurant with one of the firm's customers
- An email to a customer confirming a meeting to discuss the customer's portfolio, a spreadsheet of which is attached
Correct answer: An email to a customer confirming a meeting to discuss the customer's portfolio, a spreadsheet of which is attached
Electronic communication, such as email, it treated the same as hard copy on paper. Confirming a dinner reservation, even with a customer, is personal correspondence and has no retention requirements. If, as is the case with the confirmation of the meeting to discuss the customer's portfolio, the dinner email specified that business would be discussed, that changes the story. Promoting any security and changes to fees are part of the firm's business communication and need to be retained.
- 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 that has the highest net capital requirements
- The state in which the broker-dealer's principal office is located
- The SEC
- Each state in which the broker-dealer does business
Correct answer: The SEC
Under the NSMIA, Administrators can never insist on financial requirements that exceed those of the SEC.
- 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
- By sending the details of the new location using registered mail
- On the firm's website
- Through an email
- Through an amendment to TIP's Form BD
Correct answer: Through an amendment to TIP's Form BD
A change to a broker-dealer's principal office location is material. As such, prompt disclosure is required through the filing of an amended Form BD.
- 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.
- $65,000.
- $50,000.
Correct answer: $65,000.
When a broker-dealer is SEC-registered (it always is on the exam, unless told otherwise), no state can require more stringent financial or recordkeeping requirements than the SEC.
- 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
- To enable them to be modified as regulations change
- To reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved
- To maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction
- To limit access to the records to properly authorized personnel and the [Administrator] (including its examiners and other representatives)
Correct answer: To enable them to be modified as regulations change
One of the primary requirements of electronic (digital) storage is that the records cannot be changed in any way. A common acronym used is WORM, standing for Write Once, Read Many.
- 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 and II
- I, II, III, and IV
- II, III, and IV
- I and III
Correct answer: I, II, III, and IV
This is a partial list of the items required to be disclosed on a broker-dealer's application for registration.
- Under the Uniform Securities Act, a state-registered investment adviser's records may be examined by the Administrator or his designee
- Only if not repetitious of an SEC exam in the prior six months
- At any time during regular business hours
- Only by court order
- Only with permission from the investment adviser
Correct answer: At any time during regular business hours
All records must be available for examination by the Administrator at any time during regular business hours, within or outside the state.
- 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 original website for another year and the revision for three years
- Both the original and the revised website for three years from today
- As an electronic record, there are no filing requirements.
- The original website can be discarded and the new one kept for three years
Correct answer: The original website for another year and the revision for three years
Websites are treated as any other advertisement. The original site design is kept for three years, and, whenever revised, the new copy is maintained and starts a new retention requirement for that copy. Therefore, a broker-dealer will likely have several different versions in its advertising file at the same time.
- The Uniform Securities Act gives the Administrator the power to examine a broker-dealer's business records
- At any time, even across state lines
- Only after providing one week's advance notice to the broker-dealer
- Only after obtaining a court order
- Only after providing one week's advance notice or, if necessary for the protection of investors, after obtaining a court order to make an unannounced examination
Correct answer: At any time, even across state lines
There are no limitations on the Administrator's authority to examine a broker-dealer's records other than that the examination be held during normal 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
- Posting marketable securities in lieu of a surety bond
- Maintaining net capital in excess of that required by the SEC
- Posting a surety bond
- Posting cash in lieu of a surety bond
Correct answer: Maintaining net capital in excess of that required by the SEC
Remember, unless something is indicated to the contrary, all broker-dealers on the exam are registered with the SEC as well as the appropriate states. No state can require a higher net capital than that of the SEC. If the BD has custody or discretion, a surety bond may be required. That requirement can be met with a bond issued by a bonding corporation organized under the laws of the state and duly authorized to transact the business of indemnity and suretyship in the state. Alternatively, the Administrator may accept cash or marketable securities in lieu of the surety bond.
- If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must
- Amend or update the information promptly, regardless of the renewal date
- Amend the registration statement within 60 days of the material change
- Update the information on the registration on the next annual renewal date
- Submit an entirely new registration form within 30 days of the material change in information
Correct answer: Amend or update the information promptly, regardless of the renewal date
When material information changes, the registrant must promptly amend or update the information, regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term promptly.
- Omega Tav Securities (OTS), a FINRA member broker-dealer, is registered in seven southern states. Regarding financial requirements, OTS must meet those of
- The state in which the principal office of the member is located
- The SEC
- The state in which the most agents are registered
- The state where most of the firm's clients reside
Correct answer: The SEC
In all cases, a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.
- 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?
- The broker-dealer must satisfy the requirements of the most stringent state.
- The broker-dealer must satisfy the requirements of the Administrator for the state in which their principal office is located.
- The broker-dealer need only satisfy the requirements of the SEC.
- The broker-dealer must satisfy the requirements of the state in which the majority of its agents are registered.
Correct answer: The broker-dealer need only satisfy the requirements of the SEC.
Under the NSMIA, Administrators are prohibited from setting financial requirements in excess of those required by the SEC. In virtually every question like this, the SEC rules.
- 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?
- If the broker-dealer is registered with the SEC, it is not required to register in any state.
- The broker-dealer must register in Iowa and Nebraska.
- The broker-dealer must register in Nebraska only.
- The broker-dealer must register in Iowa only.
Correct answer: The broker-dealer must register in Iowa and Nebraska.
Under the USA, a broker-dealer must register in any state in which it has an office or conducts business with noninstitutional (retail) clients. Soliciting by mail constitutes making an offer in the state. Remember, there is no de minimis rule for broker-dealers. Unlike investment advisers, who register with the state or the SEC, never both, SEC-registered broker-dealers also must meet 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
- When in receipt of a warrant from a court of competent jurisdiction
- As long as not done more often than quarterly
- During normal business hours without any prior notice
- During normal business hours with reasonable prior notice
Correct answer: During normal business hours without any prior notice
If a broker-dealer is registered in the Administrator's state, the Administrator has the authority to inspect the BD's records at any time during normal business hours. Advance notice is not required (which is why these are known as surprise inspections).
- If information on file with the Administrator changes, a broker-dealer must give notification
- Promptly
- Within 30 calendar days
- Within 20 calendar days
- Within 10 business days
Correct answer: Promptly
A broker-dealer must promptly file a notice of any changes to the registration information on file with the Administrator. (There is no current USA definition of promptly.)
- 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 appropriate supervisory personnel of the broker-dealer holding Washington's agent's license
- The Administrator of the state where Washington's agent's registration is effective
- The Financial Industry Regulatory Authority (FINRA)
- The appropriate supervisory personnel of the investment advisory firm where Washington is registered
Correct answer: The appropriate supervisory personnel of the broker-dealer holding Washington's agent's license
It is not uncommon for individuals who operate a stand-alone advisory or financial planning business to have an agent's license through a registered broker-dealer. As with any in-house agent, the responsibility for supervision lies with the designated supervisory personnel of the BD.
- 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 begins when the application containing that information is submitted
- The application will likely be permanently rejected
- The 30-day period is tolled and picks up once the omitted material is submitted
- The 30-day period begins with the initial application and the omission has no effect as long as the missing information is submitted during that period
Correct answer: The 30-day period begins when the application containing that information is submitted
Registration as a broker-dealer (or any securities professional) takes effect at noon of the 30th day after submission of a complete application. If the initial application has omitted material information, the 30-day period begins with the filing of the corrected application.
- It is common for a registered broker-dealer to maintain a website. Which of the following statements is true?
- The original site design is kept for five years.
- When the website is revised, the new design replaces the previous one in the broker-dealer's files.
- Revisions made to the site design do not have to be filed until the end of the initial retention period.
- The original site design is kept for three years.
Correct answer: The original site design is kept for three years.
A website is viewed as any other advertisement and must be retained for three years. If there are any revisions, those are retained with their own three-year period. Therefore, there could be several versions in the file at the same time—the initial and one or more revisions.
- 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 any felony within the past 10 years
- Disclosure of a personal bankruptcy within the past 10 years
- Any charge of a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses within the past 10 years
- Any conviction for a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses within the past 10 years
Correct answer: Any conviction for a misdemeanor involving investments or an investment-related business or bribery, forgery, extortion, or similar offenses within the past 10 years
It is convictions for financially related misdemeanors (or any felony) within the previous 10 years that can result in statutory disqualification. Disclosure of an arrest or a charge for felonies or certain misdemeanors is required. However, it is only a guilty plea or conviction within the past 10 years that creates the disqualification. If there was an undisclosed personal bankruptcy, that could create a problem.
- All of the following must register as agents when representing a broker-dealer except
- An individual selling shares of a trust company chartered in this state
- A partner in a broker-dealer who has no securities sales functions
- An employee who accepts solicited orders
- An individual who represents an underwriter only in transactions between an issuer and the underwriter
Correct answer: A partner in a broker-dealer who has no securities sales functions
A partner (or any employee) of a broker-dealer with no securities sales functions (and that includes supervising sales) need not register as an agent. An employee of a BD who accepts solicited (or unsolicited) orders must register as an agent. An individual who represents an underwriter (one of the roles of a BD) in transactions between an issuer and the underwriter is an agent for the BD (it is the individual representing the issuer who is not an agent). Trust companies are exempt securities and their employees selling shares are not defined as agents, but this individual is working for the BD selling the shares and, as such, must register as an agent.
- 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 organized and supervised under the laws of this state
- A building and loan association organized under the laws of any state and authorized to do business in this state
- A savings institution organized and supervised under the laws of any state
- A savings institution organized and supervised under the laws of any state
Correct answer: A savings institution organized and supervised under the laws of any state
Although each of the answer choices meets the USA's definition of exempt security, the savings institution is the only issuer where the act grants an exemption from the definition of agent to those individuals selling on its behalf. Please note that a savings institution is not the same as a savings and loan or building and loan association.
- An individual representing a broker-dealer is an agent when attempting to effect the sale of
- A fixed annuity
- A term life insurance policy
- A security that is exempt from registration
- The firm's surplus furniture
Correct answer: A security that is exempt from registration
A security's exemption from registration with the state has no bearing on the individual's requirement to register as an agent. It is unlikely you will ever see a question on the exam where an individual representing a broker-dealer in a securities transaction is not deemed to be an agent. Life insurance or annuities, unless you see the word variable, are not a security.
- A president of a bank sells shares of the bank to public investors. Under the Uniform Securities Act, she is
- An agent
- An investment adviser
- Not defined as an agent
- Underwriting the issue in the role of a broker-dealer
Correct answer: Not defined as an agent
Any individual selling securities on behalf of an issuer of certain exempt securities (bank securities are in that list) is not an agent under the USA.
- 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 not required to register as an agent because she is representing the S&L, an issuer of exempt securities
- Cannot sell these securities without being registered as an agent of the S&L
- Can sell these securities only to individuals who are accredited investors without being registered as an agent
- Is not required to register as an agent because the S&L is domiciled in State C
Correct answer: Cannot sell these securities without being registered as an agent of the S&L
In a number of cases, individuals representing the issuer are excluded from the definition of agent. Although those representing banks and savings institutions qualify for the exclusion, the exclusion does not extend to savings and loan or building and loan associations, even though their securities are exempt from registration with the state. The fact that an individual is an accredited investor is of no relevance here.
- 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 IV
- II and III
- I and IV
- I and III
Correct answer: I and III
Under the USA, only an individual can be an agent (a person who sells securities for a broker-dealer). An administrative person, such as the assistant to the president of a BD, is considered an agent if that individual takes securities orders from the public. Corporate entities, BDs, and issuers are all excluded from the definition of an agent.
- The term agent as defined in the Uniform Securities Act, would not include which of the following individuals?
- One who represents a registered broker-dealer selling unregistered exempt securities
- One who represents a registered broker-dealer selling securities listed on the NYSE to individual clients
- One who represents an issuer in effecting exempt transactions
- One who represents an issuer of any exempt security
Correct answer: One who represents an issuer in effecting exempt transactions
The USA defines an agent as an individual representing a broker-dealer or an issuer in the sale of securities. This exam will never have a case of an individual selling on behalf of a broker-dealer excluded from that definition. The securities listed on the NYSE are exempt from state registration because, under the NSMIA, they are federal covered securities. But anyone selling securities, exempt or not, while representing a registered BD must be licensed as an agent of that BD. The only case in which an individual selling securities as a representative of an issuer is always excluded from the definition of agent is when the transactions are exempt. There are five different categories of exempt securities where this exclusion applies as well, but it doesn't apply to all exempt securities.
- The Uniform Securities Act's definition of an agent excludes all of the following except
- An individual who is in the business of providing investment advice on behalf of his employer
- A broker-dealer that charges a commission as a regular part of its business
- An individual who supervises those who effect securities transactions for customers
- A clerical person who files trade reports for the broker-dealer
Correct answer: An individual who supervises those who effect securities transactions for customers
The Uniform Securities Act defines an agent as any individual (other than a broker-dealer) who represents a BD (or an issuer in certain cases) in effecting securities transactions. That would include those who supervise agents (remember, there is no principal-level designation like there is with FINRA). Those who provide investment advice on behalf of their employers are investment adviser representatives of an investment adviser. Can an individual be both an agent and an IAR? Yes, but those are two different "hats" and meet two different definitions requiring two different examinations.
- Under the Uniform Securities Act, an agent is
- An individual who represents an issuer in an exempt transaction
- An individual representing a broker-dealer who sells federal covered securities
- A broker-dealer who sells registered securities to the general public
- An individual who represents an issuer in a transaction exempt from the act
Correct answer: An individual representing a broker-dealer who sells federal covered securities
An individual employed by a broker-dealer who sells securities to the public is an agent under the Uniform Securities Act. The USA defines an agent as "any individual other than a BD who represents a BD or issuer in effecting or attempting to effect purchases or sales of securities." The USA excludes from the definition of an agent those individuals who represent an issuer in exempt transactions, the sale of certain exempt securities, and transactions with issuers' employees when no commission is paid. There is virtually no case in which a salesperson representing a BD is not an 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?
- Sally, the company president
- Suzie, who qualifies prospective customers based on a list of names supplied by several agents in the office
- Stuart, the company receptionist
- Sandy, who reviews and approves all orders at the end of the day
Correct answer: Stuart, the company receptionist
Excluded from the definition of agent is any individual whose job is clerical or administrative. That describes a typical receptionist's work. The president of a broker-dealer must register as an agent. Any individual who has the authority to approve orders is an agent. Although cold-calling generally will not make one an agent, qualifying prospects does.
- 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, II, III, and IV
- III and IV
- I and IV
- I and III
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. Prequalifying clients requires registration. Officers and directors are not agents if they are not involved in the transactions of securities with the public. Under the USA, even though the term principal may be used to refer to a supervisory person, there is no separate registration category for these people. They are licensed as agents, just like you.
- As defined in the Uniform Securities Act, which of the following persons is included in the term agent?
- An individual who represents an issuer in an exempt transaction.
- An individual who sells to public investors the sovereign debt securities of a foreign government with which the United States has diplomatic relations in the capacity of an employee of that government
- An individual, employed by a broker-dealer, who sells NYSE-listed securities exclusively to institutional clients
- A broker-dealer who sells registered securities to the general public
Correct answer: An individual, employed by a broker-dealer, who sells NYSE-listed securities exclusively to institutional clients
An agent, under the Uniform Securities Act, is a person (an individual) who sells securities to both retail and institutional members of the public. The term agent is not applicable to a person who represents an issuer in an exempt transaction or in the sale of certain exempt securities, such as those issued or guaranteed by a foreign government with which the United States has diplomatic relations. The term agent specifically excludes broker-dealers.
- 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 Act of 1933
- In violation of the Securities Exchange Act of 1934
- In violation of the Uniform Securities Act
- Not in violation of any applicable statutes
Correct answer: Not in violation of any applicable statutes
Provided Sarah does not solicit business, offer advice to customers, or accept orders, she has not committed a violation of any act. Her work functions cause her to be excluded from the definition of an agent.
- Which of the following is required to have a Series 63 license?
- An issuer
- A broker-dealer
- An agent representing a broker-dealer when offering securities to the public
- An individual who is a silent partner of a broker-dealer
Correct answer: An agent representing a broker-dealer when offering securities to the public
Passing the Series 63 exam (Uniform Securities State Law) is required before an agent may sell securities to the public as a representative of a broker-dealer.
- Which of the following would not be considered an agent under the Uniform Securities Act?
- A natural person who sells variable life insurance policies as an employee of a life insurance company authorized to do business in this state
- A broker-dealer who transacts business with the general public
- An individual who sells foreign securities required to be registered with the state
- An individual working for a broker-dealer who sells commercial paper to wealthy individuals
Correct answer: A broker-dealer who transacts business with the general public
The definition of an agent specifically excludes broker-dealers. Agents are individuals who sell securities on behalf of BDs or issuers. The fact that commercial paper is exempt and that the sales are to wealthy individuals is not important. Variable life insurance is considered both an insurance and securities product, requiring licensing as an insurance agent and a securities agent. Anyone working for a BD selling securities is acting in the capacity of an agent.
- 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 obtain a limited agent registration
- Are not required to register as agents
- Must register as agents
- May choose to register as agents
Correct answer: Must register as agents
A security's exemption from registration with the state has no bearing on the individual's requirement to register as an agent. It is unlikely you will ever see a question on the exam where an individual representing a broker-dealer in a securities transaction is not deemed to be an agent.
- Under the Uniform Securities Act, an agent is an individual representing
- A broker-dealer in the sale of bonds issued by a foreign government with whom the U.S. has diplomatic relations.
- The issuer in the sale of bonds issued by a foreign government with whom the U.S. has diplomatic relations.
- A savings institution that is organized and supervised under the laws of any state, in the sale of the institution's securities
- The issuer in a transaction exempt from the act
Correct answer: A broker-dealer in the sale of bonds issued by a foreign government with whom the U.S. has diplomatic relations.
Read carefully. Two of the choices shown are almost the same. The only difference is that one individual represents a broker-dealer and the other the issuer. It is doubtful you will ever encounter a question on this exam where an individual representing a BD in the buying and selling of securities is not an agent. On the other hand, those who represent the issuer in any exempt transaction or certain specified exempt securities (the list is noted in your study materials), are excluded from the definition of an agent.
- Which of the following would be eligible to register as an agent of a broker-dealer?
- Samuel Schwartz
- City National Bank
- Alpha Life Insurance Company
- Protective Securities, Inc.
Correct answer: Samuel Schwartz
Registration as an agent of a BD is limited to individuals.
- 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 as long as the security is exempt from registration
- An existing client visiting the state for a 2-month period
- An existing client's brother who is a long-time resident of that state
- An existing client who established residency in that state less than 60 days ago
Correct answer: An existing client visiting the state for a 2-month period
The snowbird exemption does not have a specified time limit. Whether one is traveling through the state or on an extended vacation, unless there is a change in legal residence, there are no registration requirements in that state for this agent. However, once there is a change in residence, the agent can continue to service the account for a maximum of 30 days. When an answer says residence was established less than 60 days ago, although that could be less than 30, it could also be 35, 40, and up to 59—all of which are too long to continue without registration. A security's exemption from registration has nothing to do with an exemption from registration of an agent.
- Under the provisions of the Uniform Securities Act, a securities agent may not
- Be registered with a licensed real estate broker as well as with a licensed securities broker-dealer
- Accept an unsolicited order for an exempt security from a retail client of the broker-dealer who resides in a state in which the agent is not registered
- Be licensed by both an independent insurance company and a securities broker-dealer
- Be registered with two broker-dealers under common control
Correct answer: Accept an unsolicited order for an exempt security from a retail client of the broker-dealer who resides in a state in which the agent is not registered
In order to accept an order from a retail client who lives in a state, the agent must be registered in that state. It makes no difference if the transaction (unsolicited order) or security is exempt; registration as an agent in the state is still required. Agents of broker-dealers may be simultaneously registered with real estate agencies, insurance companies, and two BDs, provided the BDs are under common ownership or control or the arrangement has been authorized by the Administrator.
- 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?
- Route the call to a licensed agent in the office.
- Accept the order because it is from an existing customer.
- Explain that the agent is out of town and ask the client to call back with the order next week.
- Accept and place the order because it is unsolicited.
Correct answer: Route the call to a licensed agent in the office.
The fact that the order is unsolicited does not preclude the rule that under no circumstances shall an unregistered individual accept and place orders.
- 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
- II, III, and IV
- I, II, III, and IV
- II and III
- I and III
Correct answer: I, II, III, and IV
An agent is described in the Uniform Securities Act as an individual, other than a broker-dealer or issuer, who represents a BD or issuer in effecting transactions in securities. The lawyer is not engaged in effecting securities transactions on behalf of the issuer or BD. Therefore, the lawyer is not considered an agent subject to regulation by the Uniform Securities Act. A partner (or anyone else) of a securities firm making a personal investment is not an agent. An officer of an issuer not receiving any compensation for sales of the issuer's stock to employees is not an agent under the USA.
- 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
- Is defined as an agent but is exempt from registration because it is clerical work
- Must register as an agent because securities transactions are involved
- Would be defined as an agent if ABC Securities paid Patrice a year-end bonus based on the company's profits
- Is not defined as an agent
Correct answer: Is not defined as an agent
The most common exception from the definition of an agent is for those individuals whose work for the broker-dealer is solely clerical or administrative. Posting to the trade blotter is squarely in that exception. Even though Patrice (or any other clerical/ministerial personnel) cannot receive compensation based on sales, the payment of a bonus related to company profits is allowable.
- 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 registration
- Not to be an agent of the issuer but subject to civil penalties under the Uniform Securities Act
- An agent of the issuer not subject to registration
- Not to be an agent of the issuer
Correct answer: An agent of the issuer subject to registration
An officer of an issuer who sells the issuer's nonexempt securities to the public is acting as an agent and must register. Don't assume the sales are made in an exempt transaction unless something indicates that to be the case. However, an officer who sells an issuer's securities, exempt or not, to existing employees without compensation, is not an agent.
- 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 and IV
- I and III
- III and IV
- II and III
Correct answer: I and IV
Although clerical personnel are generally exempt from registration as agents, once they assume certain sales-related duties, the exemption is lost. In this case, accepting orders, even though unsolicited, and soliciting new clients for the firm would require licensing.
- Regarding the definition of an agent found in the Uniform Securities Act, which of the following statements is true?
- An agent may be an individual or a partnership.
- If someone meets the definition of an agent, that person is exempt from registration requirements.
- An agent may be a broker-dealer.
- An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities.
Correct answer: An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities.
The text in Section 401(b) of the Uniform Securities Act reads, "'Agent' means any individual other than a broker-dealer who represents a BD or issuer in effecting or attempting to effect purchases or sales of securities. There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition.
- 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
- Any government with which the United States maintains diplomatic relations
- A savings institution or trust company
- The Canadian government, a province, or a municipality
- A Canadian corporation
Correct answer: A Canadian corporation
While an agent representing only the Canadian government or any other government with which the United States has diplomatic relations is exempt from registration, agents representing private Canadian corporations must register. Individuals who only represent certain depository institutions, such as savings institutions or trust companies, are exempt under the USA.
- 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
- II and IV
- III and IV
- I and III
- I and II
Correct answer: I and III
Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading certain exempt securities or in any exempt transactions are not defined as agents.
- 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
- II and IV
- II and III
- I and IV
- I and III
Correct answer: I and III
An agent may conduct business in a state in which he is not registered if an existing client is visiting in that state or if the client moved to that state within the past 30 days.
- 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 engaging in a prohibited transaction.
- The individual is not required to be registered.
- The individual can only participate in this transaction with permission from the Administrator.
- The individual is acting as a broker-dealer and must be registered as a broker-dealer.
Correct answer: The individual is not required to be registered.
An individual representing an issuer is exempt from registration as an agent when selling certain exempt securities (see your study materials for the five categories that qualify) or any securities in an exempt transaction. Included in that list of five categories of exempt securities is a savings institution (but not a savings and loan association). Although it is legally possible to have a BD organized as a sole proprietorship, in a question like this, an individual will not be a broker-dealer.
- Which of the following must register as an agent?
- An individual representing a broker-dealer who sells commercial paper
- An individual who is paid a commission to sell FDIC-insured certificates of deposit for ABC National Bank
- An individual who sells commercial paper for ABC National Bank
- An employee of the Fed whose job is selling Treasury bonds to the public
Correct answer: An individual representing a broker-dealer who sells commercial paper
An individual who represents a broker-dealer selling commercial paper must register under the USA. Though the securities (commercial paper) are exempt, the representative must be registered as an agent of the BD. An individual who sells commercial paper for ABC National Bank would not have to register because the bank is excluded from the definition of broker-dealer. An employee of the federal government need not register with the state because he represents an issuer of exempt securities. An individual who is paid a commission to sell certificates of deposit for a commercial bank does not have to register as an agent because he is not selling a security.
- A study of the Uniform Securities Act would reveal that not included in the definition of a security would be
- Preferred stock in the Colonel Corn Processing Corporation
- Common stock in the Shining Silver Mining Company
- Whole life insurance policies issued by the Dividend Mutual Life Insurance Association of America
- Debentures issued by the XYZ Retirement Planning Company
Correct answer: Whole life insurance policies issued by the Dividend Mutual Life Insurance Association of America
Nonvariable contracts issued by insurance companies are not securities.
- As defined in the Uniform Securities Act, which of the following is not a security?
- A preorganization certificate
- A bond whose interest payments are guaranteed by a state government
- $10,000 worth of gold ingots
- Treasury stock
Correct answer: $10,000 worth of gold ingots
Precious metals are commodities, not securities. All types of stocks and bonds are securities.
- All of the following are correct statements when referring to a nonissuer transaction except
- It does not benefit the issuer
- It is a secondary transaction
- It is between two persons on a stock exchange or over the counter
- It must take place in the over-the-counter market rather than on the floor of an organized stock exchange
Correct answer: It must take place in the over-the-counter market rather than on the floor of an organized stock exchange
Nonissuer transactions do not directly or indirectly benefit the issuer. Such transactions do not involve the issuer but may take place on a securities exchange (e.g., the New York Stock Exchange) or OTC. Transactions executed between persons other than an issuer are secondary transactions.
- In the Howey decision, the U.S. Supreme Court held that a security must represent
- Personal interest in a business
- Debt in a publicly traded corporation whose managers are engaged in commercial activity
- An investment of money in a common enterprise with the expectation of profit from the efforts of the investor
- An investment of money in a common enterprise with the expectation of profit from the managerial efforts of others
Correct answer: An investment of money in a common enterprise with the expectation of profit from the managerial efforts of others
In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.
- Which of the following are not classified as securities under the Uniform Securities Act?
- Options on commodities futures
- Options on stocks
- Commodities futures
- Stocks
Correct answer: Commodities futures
Commodities such as gold, silver, wheat, and pork bellies are not securities. Options to purchase or sell commodity futures, options on stocks, and stocks are securities.
- As defined in the Uniform Securities Act, which of the following items is not a security?
- A voting trust certificate
- An interest in a cattle feeding program organized as a limited partnership
- An American depositary receipt (ADR)
- A whole life insurance contract issued by an incorporated life insurance company having its shares trade on the New York Stock Exchange (NYSE)
Correct answer: A whole life insurance contract issued by an incorporated life insurance company having its shares trade on the New York Stock Exchange (NYSE)
Under the USA, a traditional life insurance contract is not a security. The manner in which the insurance company operates has no effect. Interests in farmland and animals (such as the cattle feeding program) are securities under the USA, as are certificates of deposit for a security such as ADRs. Voting trust certificates are part of the long list of items defined as securities. Remember the short list of items that are not securities.
- A primary issue is
- A secondary market transaction in a security recently offered to the public
- The first transaction between two parties in the over-the-counter market
- A sale between investors of securities traded on the New York Stock Exchange
- A new offering of an issuer sold to investors
Correct answer: A new offering of an issuer sold to investors
A primary issue is a new offering of securities by an issuer sold to investors. Transactions between two investors in the over-the-counter market refer to secondary transactions (the market between investors). A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction.
- Which of the following is not a security?
- Treasury stock
- Commercial paper with less than 270 days to maturity
- Limited partnership in a cattle breeding program
- A condominium purchased as a primary residence
Correct answer: A condominium purchased as a primary residence
A fixed annuity is not a security. All types of stocks and bonds, as well as listed stock options, are securities.
- 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
- II and III
- I only
- III only
Correct answer: I, II, III, and IV
The USA considers interests in merchandising marketing schemes, multilevel distributorship arrangements, oil and gas drilling programs, and farm animals (whether it is a feeding or a breeding program) to be investment contracts and, therefore, securities. The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.
- Which of the following is an example of a nonissuer transaction?
- Private placement by an issuer
- Primary issue of corporate stock
- Secondary offering by an institutional seller
- Preemptive rights offering
Correct answer: Secondary offering by an institutional seller
Investors or shareholders routinely receive the proceeds from a secondary transaction. About the only time a secondary offering is an issuer transaction is if the issuer were reselling treasury stock because the proceeds go to the issuer.
- 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
- II and IV
- I and III
- I, II, and III
Correct answer: I, II, and III
An investment into an individual condominium used as a residence is not a security. However, an interest in the rental income from a group of condos, where the rent is pooled, is a security under the USA. While the sale of the debentures in this case is an exempt transaction, the debentures are securities. Treasury bills, notes, and bonds are securities, although they are exempt from registration under the USA. A Roth IRA is not a security. Securities may be put in an IRA, but the IRA is not a security.
- Under the Uniform Securities Act, all of the following are securities except
- A trade confirmation for the purchase of 100 shares of a listed common stock
- A put or call traded on a national exchange relating to foreign currency
- A bank-issued certificate representing an interest in a foreign security
- A real estate investment trust
Correct answer: A trade confirmation for the purchase of 100 shares of a listed common stock
A confirmation of a securities trade is not a security; it is merely a document that verifies trade information. Puts, calls, or other options traded on major exchanges that relate to foreign currency are securities under the act. A certificate issued by a bank representing ownership in a foreign security, better known as an American depositary receipt (ADR), is a security.
- Under the Uniform Securities Act, the definition of issuer includes
- A specialist on the floor of an exchange
- An officer or a director of a company traded at the NYSE
- A person proposing to issue a security
- A market maker for publicly traded securities
Correct answer: A person proposing to issue a security
An issuer is any person who issues or proposes to issue any security for sale to the public. Stock exchange specialists, company directors, and market makers do not issue securities and, therefore, are not issuers.
- 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?
- Investment in options to acquire a security
- Investment in commodities futures
- Purchase of a house in a desirable real estate market with the expectation that the house will be resold at a profit within a few years
- Purchase of jewelry for speculative purposes as opposed to personal use
Correct answer: Investment in options to acquire a security
The investment in options meets the definition of a security. It is an investment in a common enterprise with the expectation that the owner will profit as a result of the managerial efforts of others. The purchase of a house or jewelry is a purchase of a real asset or product that may result in a profit for the owner, but not as a result of the managerial efforts of a third party. Commodities futures contracts are specifically excluded from the definition of a security. Options on futures, however, are securities under the USA. Remember the list of items that are not securities.
- 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.
- III and IV
- I only
- I, II, III, and IV
- I, II, and IV
Correct answer: I, II, III, and IV
ABC Manufacturing Corp. is an issuer raising debt capital, whereas Dot.Com, Inc., is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue.
- Under the Uniform Securities Act, which of the following are securities? I. Commodity option contract II. Treasury stock III. Keogh plan
- I and II
- I, II, and III
- II and III
- I and III
Correct answer: I and II
A commodity option contract and treasury stock are securities under the USA. A commodity option contract is a security, while a commodity futures contract is not. A Keogh plan is a vehicle for an investment, but it is not a security in and of itself.
- 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, III, and IV
- I, III, and IV
- II, III, and IV
- I, II, and IV
Correct answer: I, II, and IV
Securities include stocks, bonds, notes, certificates of interest in any profit-sharing agreement or participation plan (oil, gas, mining, lease, or real estate partnerships), preorganization certificates or subscription agreements, certificates of deposit for a security, evidence of indebtedness, warrants, rights, options, variable annuities, commodity options, and multi-level distributorships. Excluded from the definition are insurance contracts, endowments with fixed benefits, fixed annuities, Keogh or IRA plans, written confirmations of a trade, futures contracts, real estate held as a personal residence, currencies, precious metals, and other collectibles.
- 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
- I and IV
- I, II, and III
- I only
- I, II, III, and IV
Correct answer: I, II, III, and IV
All of the choices listed are defined as securities under state law. We believe the best thing for you to do is remember those few things that are not securities.
- 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
- II and III
- I and II
- III and IV
- I, II, III, and IV
Correct answer: II and III
Under the USA, commodities futures contracts are not considered to be securities. The presumption is the instrument that underlies the futures contract is a commodity rather than a security. However, options on commodity futures are securities under the USA. Warrants to purchase individual stocks, regardless of where they are traded, are considered to be securities, whereas a confirmation is not; it is merely a report that a trade in a security occurred.
- Which of the following is not defined as a security under the Uniform Securities Act?
- A fixed annuity contract
- A bond issued by the Canadian national government
- Common stock issued by a bank
- A Treasury bond issued by the U.S. government
Correct answer: A fixed annuity contract
A fixed annuity contract is an insurance contract, not a security.
- Which of the following is not included in the definition of a security in the Uniform Securities Act (USA)?
- A variable annuity
- A $100,000 whole life insurance policy
- A preorganization certificate
- Commercial paper issued with an eight-month maturity
Correct answer: A $100,000 whole life insurance policy
Life insurance and fixed annuities are not listed as securities under the USA, while their variable counterparts are. It is best to concentrate on learning the few things that are not securities.
- 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.
- III only
- I only
- I, II, III, and IV
- I and II
Correct answer: III only
A primary transaction occurs when the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is a primary transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm, the original issuer of the securities, did not receive the proceeds of the transaction. These transactions are called nonissuer transactions.
- 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.
- II only
- I, II, and III
- III and IV
- I and II
Correct answer: II only
Nonvariable life insurance contracts, IRAs, collectibles, and mortgages are not among those instruments listed as securities under the act. However, variable contracts, annuities, or life insurance are considered to be securities.
- Under the Uniform Securities Act, which of the following is not defined as a security?
- Stock option
- Fixed annuity
- Limited partnership unit
- Commodity option
Correct answer: Fixed annuity
A fixed annuity is an insurance contract and is not considered a security under the USA. Stock options, interests in limited partnerships, and commodity options are all defined as securities under the USA.
- A securities transaction where there is no benefit to the issuer is called
- A nonprofit transaction
- A primary transaction
- An issuer transaction
- A nonissuer transaction
Correct answer: A nonissuer transaction
In a nonissuer transaction, the proceeds do not benefit or go to the issuer directly. In a primary transaction, the proceeds of an underwriting go to the issuing corporation directly.
- 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
- I, II, and IV
- I, II, and III
- II, III, and IV
- I and II
Correct answer: I, II, and IV
The Supreme Court in the Howey case established standards for identifying a security. The four criteria associated with the Howey test are (1) an investment of money (2) in a common enterprise with (3) expectation of profits (4) solely from the efforts of others. The Howey test contains no standard referring to income distributions, guaranteed or otherwise.
- Under the Uniform Securities Act, which of the following is a security?
- A $100,000 cashier's check
- A bond issued and backed by the French government
- A rare painting by Picasso
- A checking account with automatic overdraft protection
Correct answer: A bond issued and backed by the French government
Any bond is a security, regardless of who the issuer is. Collectibles, precious metals, and currency or checks are not considered securities.
- The Uniform Securities Act defines all of the following as securities except
- Fixed-premium variable life insurance policies
- Common stock
- Unlisted options
- Term life insurance
Correct answer: Term life insurance
Term life insurance is an insurance contract, not a security. Remember the short list of those items that are not securities.
- 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?
- She has engaged in a prohibited transaction because American investors are generally prohibited from trading in foreign currencies under the Uniform Securities Act.
- She has not engaged in a securities transaction because options on foreign currencies are not considered to be securities under the Uniform Securities Act.
- She has not engaged in a securities transaction because she purchased the options to hedge a business risk.
- She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the Uniform Securities Act.
Correct answer: She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the Uniform Securities Act.
Options, regardless of the underlying asset, are considered securities under the USA. Therefore, Joan engaged in a securities transaction by purchasing call options on the Swiss franc. While there is no prohibition against American investors trading in foreign currency options or futures under the USA, acquiring the currency itself, rather than the option, would not have involved a securities transaction; currency is not a security.
- If a broker-dealer purchases 100,000 shares of common stock from an individual investor, this is
- A local transaction
- A prohibited transaction
- A nonissuer transaction
- A private placement
Correct answer: A nonissuer transaction
In a nonissuer transaction, the proceeds of the trade do not benefit or go to the issuer.
- All of the following are defined as securities except
- Options on the S&P 500 Index
- Variable annuities
- Voting trust certificates
- A commodity futures contract
Correct answer: A commodity futures contract
Under the USA, commodities futures contracts are excluded from the definition of a security. Options contracts, regardless of the underlying asset, are considered securities.
- 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
- II and III
- I, II, III, and IV
- II, III, and IV
- I and II
Correct answer: I, II, III, and IV
Collateral trust certificates, investment contracts, options, and options contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are.
- As defined in the Uniform Securities act, which of the following is not an issuer?
- A corporation that proposes to issue securities but has not done so as of yet
- A company whose shares trade on the New York Stock Exchange
- A new company that offers shares to the public in an IPO
- A broker-dealer trading securities as an agent for the accounts of others
Correct answer: A broker-dealer trading securities as an agent for the accounts of others
A broker-dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the BD were organized as a corporation and offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not yet done so is, for purposes of the act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market.
- Which of the following is defined as a security under the Uniform Securities Act?
- An investment contract
- A modified endowment policy
- Fixed, guaranteed payments made for life or for a specified period
- Commodities futures contracts
Correct answer: An investment contract
As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. A modified endowment policy is an insurance policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodities futures contracts and the commodities themselves are not securities.
- Under the Uniform Securities Act, a registration statement for a securities issue may be filed by any of the following except
- The Administrator of the state in which the issue is to be sold
- Any person for whose benefit the issue will be sold
- The issuer
- A broker-dealer
Correct answer: The Administrator of the state in which the issue is to be sold
Come on—did you really think that the Administrator would file a registration statement with himself? Another exception in a question like this would be an agent.
- 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 it is sold in an exempt transaction
- That it is registered with the SEC
- That it is an exempt or federal covered security
- That it is properly registered with the Administrator
Correct answer: That it is registered with the SEC
It is unlawful to sell a security in a state unless the security is a federal covered security, exempt from registration under the USA, sold in an exempt transaction, or registered under the act. There is no requirement that a security be registered with the SEC; that is the primary purpose of registration by qualification—registering a security on the state level that is not SEC registered.
- 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?
- Lucy has violated the Uniform Securities Act because she solicited an order in an unregistered nonexempt security.
- Lucy has violated the Uniform Securities Act because Perfect Pasta, failed to register its stock with the Securities Department in Ohio.
- Lucy has violated the Uniform Securities Act because Perfect Pasta, failed to register its stock with the Securities Departments in both Kansas and Ohio.
- Lucy has not violated the Uniform Securities Act because the transaction with Clark is an exempt transaction.
Correct answer: Lucy has violated the Uniform Securities Act because she solicited an order in an unregistered nonexempt security.
The agent violated the USA by engaging in the prohibited practice of soliciting transactions in an unregistered nonexempt security.
- All of the following statements are consistent with the Uniform Securities Act except
- State Administrators do not require consent to service of process to be submitted with notice filings for covered securities
- A security for which a registration statement is filed under the Securities Act of 1933 may simultaneously register with the state by the procedure known as registration by coordination
- Any security may be registered with the state by the procedure known as registration by qualification
- State Administrators may require federal covered investment companies to file documents with the Administrator using a procedure known as notice filing
Correct answer: State Administrators do not require consent to service of process to be submitted with notice filings for covered securities
The Administrator will require the filing of a consent to service of process with any securities registration. Notice filing is the state registration procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.
- Under the Uniform Securities Act, registration by coordination becomes effective
- In 10 days
- When the registration with the SEC becomes effective
- Immediately
- In 30 days
Correct answer: When the registration with the SEC becomes effective
Registration by coordination becomes effective at the same time it is released (made effective) by the SEC, provided it was filed with the Administrator (in most states) at least 10 days before the SEC effective date.
- Registration by qualification is effective
- 20 days after the filing date.
- No earlier than 10 days after the filing date
- When the federal registration becomes effective
- When determined by the Administrator
Correct answer: When determined by the Administrator
Registration by qualification is effective when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator.
- An open-end investment company registered under the Investment Company Act of 1940 would most likely use the process known as
- Consternation
- Coordination
- Notice filing
- Qualification
Correct answer: Notice filing
Investment companies registered under the Investment Company Act of 1940 are federal covered securities and, if required by the state Administrator, are only required to engage in notice filing.
- 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
- Unlawfully because he did not mark the orders as solicited
- Lawfully because no customer orders were executed
- Unlawfully because soliciting orders in nonexempt, unregistered securities is prohibited
- Lawfully because he ceased soliciting orders immediately after learning that the security was not properly registered
Correct answer: Unlawfully because soliciting orders in nonexempt, unregistered securities is prohibited
Soliciting orders in unregistered nonexempt securities is unlawful, regardless of whether or not orders are placed. Stopping was the correct action, but that does not relieve him of his initial error.
- 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
- Is exempt from registration because there are fewer than 10 restaurants in the state
- May issue shares under the notice filing procedure available for federal covered securities
- Must register by qualification
- Must register by coordination
Correct answer: Must register by qualification
Perfect Pasta must register by qualification because the other methods listed are not available to an initial public offering for an intrastate (as opposed to interstate) offering. Perfect Pasta is not a federal covered security and may not use the notice filing procedure. The private placement exemption refers to the number of persons being offered the security, not the number of restaurants the issuer runs.
- Under the registration provisions of the Uniform Securities Act, it is unlawful for an agent in the state to sell XYZ securities unless
- XYZ is a federal covered security.
- Both the agent and XYZ are nonexempt and unregistered
- The agent is an unregistered nonexempt person
- XYZ is an unregistered nonexempt security.
Correct answer: XYZ is a federal covered security.
If XYZ is a federal covered security, it is not required to register with the state. Nonexempt securities and nonexempt persons must be registered to be sold (securities) or to do business (persons).
- Under the Uniform Securities Act, if no stop order is pending, a registration under coordination will become effective
- When the issue is declared effective by FINRA
- When the issue is declared effective with the SEC
- Two business days after filing of the documents with the Administrator
- When declared by the Administrator
Correct answer: When the issue is declared effective with the SEC
The registration method known as coordination contemplates that state registration, in the absence of a stop order, becomes effective simultaneously with the federal effective date declared by the SEC.
- 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?
- Coordination
- Qualification
- Notice filing.
- Allocation
Correct answer: Qualification
If the Administrator determines (perhaps because of a long delay between the effectiveness of the federal registration and the filing with the state) the securities to be registered with the state are not part of the same offering, the securities would not be eligible for filing by coordination; the securities must be registered by qualification. Notice filing is used for federal covered securities, and nothing in the question provides evidence that this security meets that definition.
- Under the Uniform Securities Act, which of the following is true regarding the registration of securities?
- State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering.
- The Administrator may require that a prospectus be delivered to every purchaser of a registered security no sooner than the time at which the security is delivered.
- The effectiveness of a registration statement ensures the accuracy of the information contained in the statement.
- Registration by coordination becomes effective on a date ordered by the Administrator.
Correct answer: State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering.
Registration by coordination becomes effective simultaneously with the federal registration. A prospectus may be delivered at or prior to the time actual delivery of the security is made. The act prohibits any statement or implication that registration involves approval of accuracy of facts by the Administrator. The federal registration statement is what the state registration is being coordinated with.
- Which of the following securities is most likely to register by qualification under the Uniform Securities Act?
- An initial public offering of a corporate bond to be offered in 15 states
- A public offering of a stock to be offered exclusively in 1 state
- An initial public offering of a stock to be offered in 40 states
- A subsequent primary offering of stock in a large, established company to be offered in 30 states
Correct answer: A public offering of a stock to be offered exclusively in 1 state
Offerings of corporate securities in a single state are most likely to be made through qualification. Multistate public offerings of stock are generally registered by coordination, which describes the simultaneous registration of a public issue of a corporate security at both state and federal (SEC) levels.
- If required by the Administrator, a prospectus for securities registered by qualification must be given to each offeree
- Prior to or concurrently with the filing of the registration statement
- Only upon request of the offeree
- Prior to the sale
- Prior to or concurrently with the effective date
Correct answer: Prior to the sale
There is no prospectus prior to the filing. The USA specifically states that the Administrator may require delivery prior to the sale.
- When a security registration statement filed under the Uniform Securities Act with the state Administrator becomes effective, this means
- The registration statement is true in all respects
- The securities that are the subject of that registration statement may be lawfully sold
- The registration statement is accurate
- The registration statement is not misleading
Correct answer: The securities that are the subject of that registration statement may be lawfully sold
For a security to be offered for sale within a state, either as a new issue or in a secondary market transaction, the security must be either registered with the state or exempt from registration with the state. The effective date of registration is not related to the quality of information in the document. A registered agent may not express or imply to a customer the filing of the registration statement guarantees truthfulness, accuracy, or lack of misleading statements.
- 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
- Registration by qualification
- Registration by coordination
- Notice filing
- Registration by requirement
Correct answer: Notice filing
Federal covered securities do not register with the state Administrator; however, they may be required to file records with the state Administrator that are filed with federal registration. This procedure is called notice filing.
- Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be
- Registered in one other state and with the SEC
- Exempt from registration in other states in which it is issued
- Registered with the SEC and in the state of issue
- Registered in the state or exempt from registration in the state
Correct answer: Registered in the state or exempt from registration in the state
Before issuing a security in a state, the issuer must either register the security in the state or be exempt from registration under the Uniform Securities Act.
- Which of the following statements regarding state registration of securities is true?
- Registration by coordination is effective on the 10th day after filing with the Administrator.
- Registration by coordination is effective concurrently with federal registration.
- Registration by qualification is effective after 30 days.
- Notice filing is effective when ordered by the Administrator.
Correct answer: Registration by coordination is effective concurrently with federal registration.
Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required materials, the two registrations can be declared effective at the same time.
- 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.
- II and III
- II and IV
- I and III
- I and IV
Correct answer: II and III
It is unlawful for anyone to conduct business as a broker-dealer in a state unless properly registered as such; an agent is not a BD. A registration statement can be filed by an issuer itself, any other person on whose behalf the offering is to be made, or a BD. Registration of an agent is not effective when the agent is not associated with a BD registered under the act. Registrations of securities professionals expire December 31, unless renewed, regardless of violations.
- Broker-dealers are prohibited from
- Acting as a principal in a corporate underwriting
- Soliciting nonexempt transactions in unregistered nonexempt securities
- Engaging in activities common to a broker-dealer when underwriting a corporate offering by acting as an agent for the issuer
- Operating as a market maker in more than one stock
Correct answer: Soliciting nonexempt transactions in unregistered nonexempt securities
Under the Uniform Securities Act, the solicitation of unregistered nonexempt securities by a broker-dealer prior to registration is prohibited. BDs may act as principals or agents in corporate underwritings and as market makers in any number of stocks.
- Which of the following statements best describes the effect of the NSMIA of 1996 on securities regulation?
- Established the need for dual registration of securities
- Increased the power of state securities Administrators over registration of securities
- Preempts state registration of covered securities
- Provided for the registration of intrastate securities
Correct answer: Preempts state registration of covered securities
The National Securities Markets Improvement Act preempts state registration of covered securities. On the exam, the word federal is sometimes omitted, but covered still means federal covered securities. State Administrators may not impose registration requirements on securities that are subject to federal regulation. This has had the effect of reducing their power, not increasing it. Unlike the NSMIA's effect on investment advisers where there is no longer dual registration, the requirement to register as a securities offering on both the state and federal levels still exists for those securities that are not federal covered. Registration for intrastate securities goes back to the earliest of the blue-sky laws, well before the NSMIA.
- 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?
- Qualification
- Registration
- Coordination
- Notice filing
Correct answer: Notice filing
Notice filing is the procedure by which federal covered securities, most commonly registered investment company securities, receive clearance to be sold in a specific state. No formal registration is required, but payment of fees and filing of certain documents may be.
- When an issue is registered by coordination, it is also registered under the provisions of
- The Securities Act of 1933
- The Investment Advisers Act of 1940
- The Uniform Securities Act
- The Securities Exchange Act of 1934
Correct answer: The Securities Act of 1933
Registration by coordination coordinates state registration of a security with federal registration of that security. Securities are registered at the federal level under the Securities Act of 1933.
- Under the Uniform Securities Act, it is unlawful to sell
- A security of a commercial bank not registered in the state
- A nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations.
- A federal covered security not registered in the state
- A security registered in the state under the Uniform Securities Act but not registered in any other state
Correct answer: A nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations.
Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities.
- Which of the following statements regarding registration provisions is not true?
- The Administrator may, by order, permit omission of items of information or documents from a registration statement.
- The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator.
- The Administrator may not, as a condition of registration by qualification or coordination, require that the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount.
- Every registration must specify the total amount of securities offered, the states in which offering is to be made, and any adverse order or judgment by a regulatory authority.
Correct answer: The Administrator may not, as a condition of registration by qualification or coordination, require that the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount.
The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may, by order, permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator.
- 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
- I and IV
- I and III
- II and IV
Correct answer: II and IV
A registration under qualification is good for one year from the effective date, unless the issuer or underwriter still has unsold shares. In that case, it may be extended until those shares are sold. The offering could be enlarged as long as the share price is not changed. Another requirement, not in this question, is that the underwriting commissions cannot be changed. So, why isn't Choice I part of the correct answer? Because on the exam, when you are given two answers that are correct statements, you must choose the one that is the most correct; the one that more completely tells the story.
- 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?
- Condemnation
- Obfuscation
- Coordination
- Qualification.
Correct answer: Qualification.
Securities of a nonexempt corporate issuer that do not have a federal registration must be registered with the Administrator by qualifying with the Administrator. This process is called registration by qualification.
- The Administrator may do all of the following with respect to federal covered securities except
- Require the payment of a filing fee to the state
- Initiate enforcement action in the case of fraud committed in the Administrator's state
- Require that the issuer meet minimum financial standards
- Require submission of a consent to service of process
Correct answer: Require that the issuer meet minimum financial standards
One of the effects of the NSMIA is that a state securities Administrator may not require that any financial standards be met by an issuer of federal covered securities. The Administrator, however, may initiate enforcement action, require payment of filing fees to the state, and require submission of a consent to service of process. That is all part of notice filing.
- If an issuer of a nonexempt security wants to register simultaneously with the state and the SEC, which method would be used?
- Registration by qualification.
- Registration by coordination
- Registration by notification
- Notice filing for certain federal covered securities
Correct answer: Registration by coordination
Registration by coordination is done concurrently with registration at the federal level. Registration by qualification is the method for local companies sold only within the state.
- Which of the following practices is considered unlawful under the Uniform Securities Act?
- An agent accepting indications of interest in securities that are in the process of registering with the SEC
- An individual, with no place of business in the state, claiming to be registered and authorized to solicit business in the state in which the prospective client resides
- A broker-dealer maintaining its records electronically
- An agent soliciting orders from retail clients for unregistered nonexempt securities
Correct answer: An agent soliciting orders from retail clients for unregistered nonexempt securities
Unless the transaction is exempt (generally with an institution or unsolicited from retail clients), it is unlawful under the USA for an agent to solicit orders for securities that must be registered (nonexempt) unless those securities are registered. An individual may claim that he is registered to conduct business in a state, if that is true (it is not necessary to have a place of business in a state in order to be registered there). Records may be kept electronically (most are today). An agent may accept indications of interest for securities during the registration process. The red herring prospectus is used during this period and neither offers to sell nor orders to buy may be accepted prior to the effective date.
- 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
- Notice filing
- Coordination
- Securitization
Correct answer: Notice filing
When a new open-end investment company registers with the SEC, it carries the legal status of a federal covered security, and the NSMIA provides that individual states may not impose normal registration requirements. Instead, the procedure used to notify the Administrator that the securities will be offered for sale in the state (along with payment of a fee) is known as notice filing.
- 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 and III
- I, II, III, and IV
- II, III, and IV
- I, II, and IV
Correct answer: I, II, and IV
Notice filing is only available to securities that meet the definition of federal covered security. Just as with other registrations under the act, a registration is effective for a one-year period. In this case, it is the later of the filing with the state or the SEC effective date that sets the clock. The initial filing requires a consent to service of process that may be incorporated by reference into the renewals. A consent to service of process need not be renewed annually because it remains on file. Any time fees are not paid, the Administrator will take action.
- 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.
- I and III
- I, II, and III
- II and III
- I and II
Correct answer: I, II, and III
A registration statement must include all three items listed, plus any adverse finding by any court, any Administrator, or the SEC.
- All of the following must be specified in a security's state registration statement except
- A stop order from another state that affects the offering of the security within that state
- The total amount of the security that will be offered in other states
- The amount of securities to be offered in the state
- The expected use of the projected proceeds of the offering
Correct answer: The total amount of the security that will be offered in other states
The total amount of the security to be offered in other states need not be specified, although identifying those states is required. The amount of the security to be offered in the state of registration is required, as it generally provides the basis on which the registration fee is calculated. A stop order from another state that affects the offering of the security within the state must be included. The registration statement will always describe the intended use of the proceeds.
- Which of the following securities is most likely to register by qualification in the state of Virginia?
- An offering of common stock by a Virginia-based corporation that will be simultaneously registered at the federal level
- An offering of common stock by a Virginia-based corporation to Virginia residents only
- An offering of common stock by a Virginia-based corporation to residents of Virginia and the Carolinas
- An offering of common stock by a Virginia-based corporation that will be offered on a nationwide basis
Correct answer: An offering of common stock by a Virginia-based corporation to Virginia residents only
Although any issuer may register its securities at the state level by qualification, this cumbersome means of registration is mainly used in conjunction with intrastate (single-state) offerings. If a security is offered by a corporation beyond its own home state, the issuer must register with the SEC at the federal level. Registration by qualification, while permitted, would be an unlikely choice.
- The National Securities Markets Improvement Act of 1996 (NSMIA) affects federal and state laws in that
- Federal laws and state laws remain the same
- State laws preempt federal laws
- Federal securities laws preempt state laws
- The Uniform Securities Act supersedes the Investment Advisers Act of 1940
Correct answer: Federal securities laws preempt state laws
The NSMIA defines the functions and respective responsibilities of the SEC and state Administrators. State laws do not preempt federal laws, and the NSMIA requires states to adapt their securities laws to comply with the standards required by the NSMIA.
- 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?
- A rights offering by ABC Corporation whose common stock is listed on the NYSE
- Common stock issued by The First National Bank of Largeville
- First mortgage bonds issued by XYZ Computers, a company whose common stock was issued only in this state
- An equipment trust certificate for the Great American Railroad's newest locomotives
Correct answer: First mortgage bonds issued by XYZ Computers, a company whose common stock was issued only in this state
When a company's stock is issued only in one state, that is known as an intrastate offering. As such, the issue can not register with the SEC but registers with the state using qualification. Any subsequent capital issue from that company in this state would also use qualification. Bank stock and equipment trust certificates are exempt securities. Rights offered by a company whose stock is listed are considered federal covered securities.
- Each of the following statements regarding registration of securities by coordination is true except
- State registration must be effective prior to federal registration
- The registration statement must contain or be accompanied by a consent to service of process
- The Administrator may reduce the required time that the registration statement must be on file prior to becoming effective
- The registration becomes effective at the state level concurrently with SEC registration if the Administrator has not entered an order to deny it
Correct answer: State registration must be effective prior to federal registration
State registration must be coordinated with federal registration. In most cases, the registration statement must be on file with the Administrator for 10 days, but the Administrator has the power to shorten that period. The registration statement becomes effective concurrently with the SEC and must contain or be accompanied by a consent to service of process.
- 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 II
- III and IV
- I and III
Correct answer: I and III
Under the NSMIA, the Administrator may request copies of the documents filed with the SEC but does not review them because of lack of jurisdiction. There is some review of the information filed in a registration by coordination, but because the primary responsibility falls upon the SEC, the states generally just spot check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator.
- While several methods of registration are described under the Uniform Securities Act, which of the following would be most appropriate for federal covered securities?
- Notice filing
- Qualification
- Coordination
- Mobilization
Correct answer: Notice filing
Federal covered securities (those listed on the NYSE, the NYSE American LLC [formerly known as the American Stock Exchange], the Nasdaq Stock Market, and investment companies registered under the Investment Company Act of 1940) are exempt from registration under the USA. However, the states are permitted to assess fees, and most require filing of certain information. This is notice filing and most commonly occurs with investment companies registered under the Investment Company Act of 1940.
- 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?
- Qualification
- Coordination.
- Registration by publication
- Notice filing
Correct answer: Coordination.
Because the offering will be made in more than one state, registration with the SEC is required. Coordination is concurrent registration with the SEC and the state for public offerings. Notice filing pertains to certain federal covered securities, primarily by investment companies (mutual funds).
- Under the registration provisions of the Uniform Securities Act, a currently effective registration statement may be amended to
- Increase the number of shares in the offering
- Change the underwriter's concession
- Change the fee paid to the finder
- Increase the public offering price of the offering
Correct answer: Increase the number of shares in the offering
The Uniform Securities Act provides that, once a securities issue has become effective, an amendment may be filed to increase the number of shares in the offering but not the offering price or any form of compensation.
- Registration statements for securities
- Expire on December 31 of each year and must be renewed if further sales are to be continued
- Need not be filed with the Administrator if the securities are only sold in one state
- Are effective for at least two years from their effective dates, or longer if the securities are still under distribution by the underwriters
- May be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed
Correct answer: May be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed
Registration statements of securities under the USA may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and initial offering prices have not changed. Securities registration statements remain effective for one year from their effective dates (or longer if the securities are still under distribution by the underwriters) and do not expire on December 31 of each year. Registrations of agents, investment advisers, and broker-dealers expire on December 31 and need to be renewed.
- All of the following must be specified in the state registration statement of a security except
- The total amount of the security that will be offered in each state
- A stop order from another state that affects the offering of the security within that state
- All other states where the security is currently registered or will be registered
- The total amount of the security that will be offered in this state
Correct answer: The total amount of the security that will be offered in each state
It is not necessary to list the total amount of the security to be offered in each state. However, for filing fee purposes, the amount to be sold in this state must be disclosed.
- 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
- Notice filing
- Supplementation
- Coordination
- Qualification
Correct answer: Notice filing
Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.
- 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
- Will most likely occur by coordination
- Will most likely occur by notice filing
- Is not required because of the de minimis test
- Will most likely occur by qualification
Correct answer: Will most likely occur by qualification
An issue done solely within one state (intrastate offering) is registered using qualification. Notice filing is used by certain issues of federal covered securities, primarily investment companies. Coordination is the simultaneous registration on both the federal and state levels; neither of those two could possibly apply to the Circular offering.
- 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
- Coordination
- Qualification
- Implementation
- Notice filing
Correct answer: Coordination
Coordination is the method used for nonexempt companies that are registering with the SEC. Qualification is for intrastate registration of those companies not registered with the SEC. Notice filing is the procedure whereby federal covered investment companies notify the states in which they want to issue shares and to whom they must pay a fee.
- Which of the following is exempt from state registration under the Uniform Securities Act?
- Sale of variable annuities offered to the general public by an insurance company licensed to do business in the state
- Sale of interests in a limited partnership to 500 individuals in an offering available to the general public
- Common stock of a manufacturing company whose shares are not registered with the SEC and will only be sold to residents of the state
- Common stock of the First National Bank of Boston, a major American commercial bank with branches and representative offices in the United States and abroad
Correct answer: Common stock of the First National Bank of Boston, a major American commercial bank with branches and representative offices in the United States and abroad
Securities of domestic banks are exempt from state registration under the USA.
- 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, II, and III
- IV only
- I, II, III, and IV
- I and II
Correct answer: I, II, and III
NSMIA eliminated duplicate federal and state registration of securities. Securities registered under federal law are federal covered securities and include issuers listed on the New York Stock Exchange, on the NYSE American LLC (formerly known as the American Stock Exchange), and on the Nasdaq Stock Market System. Securities offered on the OTC Bulletin Board are not federal covered securities and must register in the states in which 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
- III only
- I and III
- I and II
- I, II, and III
Correct answer: III only
An exempt security is only exempt from the registration requirements and the requirements for filing advertising and sales literature. No security is exempt from the antifraud provisions of the act and the liabilities that arise from fraudulent practices.
- Under the Uniform Securities Act, all of the following are exempt from registration except
- Equipment trust certificates issued by a regulated common carrier
- Common stock only sold intrastate
- Airport authority bonds
- Securities issued by a religious organization
Correct answer: Common stock only sold intrastate
Local companies that issue common stock sold only within the state must register their securities with the state Administrator. Airport authority bonds (municipal bonds), equipment trust certificates, and securities issued by religious organizations are exempt from registration with the state Administrator.
- Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transactionexcept
- A sale of unregistered nonexempt securities in an unsolicited transaction
- A sale of securities to a bank
- A sale of securities to an individual investor with a net worth of more than $5 million
- A sale of nonexempt securities to a broker-dealer
Correct answer: A sale of securities to an individual investor with a net worth of more than $5 million
Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions (e.g., isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.
- All of the following are exempt transactions under the Uniform Securities Act except
- A securities transaction by an executor
- A sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator
- A rescission offer, sale, or purchase
- An initial sale of shares to in-state residents of a local manufacturing company
Correct answer: An initial sale of shares to in-state residents of a local manufacturing company
An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor; a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator; or a rescission offer, sale, or purchase are exempt transactions.
- Under the Uniform Securities Act, all of the following are exempt transactions except
- Unsolicited customer orders
- A sale of a primary offering registered with the SEC
- Isolated nonissuer transactions
- A transaction executed by a trustee in bankruptcy
Correct answer: A sale of a primary offering registered with the SEC
In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transactions; transactions between an issuer and an underwriter; transactions by an executor, administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements.
- Under the Uniform Securities Act, bonds issued by which of the following are nonexempt securities?
- Canadian province of Ontario
- ABC, Inc., of Canada, a distributor of beverages in the United States and other countries
- Canadian city of Montreal
- The Canadian government
Correct answer: ABC, Inc., of Canada, a distributor of beverages in the United States and other countries
Government bonds issued by nations with which the United States maintains diplomatic relations, such as Canada, are exempt securities under the USA. In addition, securities issued by Canadian political subdivisions are also exempt from registration. For example, the province of Ontario and the city of Montreal are Canadian political subdivisions and, therefore, are exempt. No exemption from the USA is available for corporate securities issued in countries with which the United States has diplomatic relations.
- 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 sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid
- A sale of securities by the executor of an estate
- The sale of U.S. government securities to a wealthy client's IRA by a registered broker-dealer
- An offer of a security for which a registration statement has been filed but has not yet become effective
Correct answer: The sale of U.S. government securities to a wealthy client's IRA by a registered broker-dealer
In the sale of U.S. government securities to a wealthy client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.
- 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
- New Jersey.
- New York.
- New Jersey and New York.
- Neither New Jersey nor New York
Correct answer: Neither New Jersey nor New York
An offer is not made when a newspaper is circulated but not published in the state or if it is published in the state but has more than two-thirds of its circulation outside of the state.
- 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 inquires about purchasing securities from a broker-dealer.
- A prospective client located in a neighboring state receives, at his home address, a direct letter offering securities for sale.
- A prospective client located in the state receives, at his home address, a direct letter offering securities for sale.
- A prospective client residing in another state, whose mail has been forwarded to her children's home in this state, receives, at their address, a direct letter offering securities for sale.
Correct answer: A prospective client located in the state receives, at his home address, a direct letter offering securities for sale.
Anyone who offers to sell or buy a security in the state is subject to the statutes of the state to which the offer is directed, even if the sale is not completed. Offers by mail directed to persons in other states are considered to have been made in the other state, if received where originally addressed. Under the USA, the address that is critical is the one to which the mailing is directed. If it is forwarded to another state, it is not considered an offer in that state.
- What is the difference between an offer and a sale?
- An offer must be approved by a branch manager and a sale needs no approval.
- An offer can be made only by a customer and a sale can be made only by a broker-dealer.
- An offer is the attempt to sell and a sale is a binding contract to transfer a security for value.
- An offer is a binding proposal to sell and a sale is a nonbinding proposal to sell.
Correct answer: An offer is the attempt to sell and a sale is a binding contract to transfer a security for value.
An offer is the attempt to sell a security. A sale is the binding contract to sell a security for value when the offer has been accepted. An offer will not require a principal's approval, but a designated supervisory individual must approve all sales on the date the order is executed.
- Under the Uniform Securities Act, Administrators of all of the following states have jurisdiction except
- The state in which an offer to sell securities was accepted
- The state into which an offer to sell securities was directed
- The state from which payment for the purchase of securities was made
- The state from which an offer to sell securities originated
Correct answer: The state from which payment for the purchase of securities was made
The state from which payment is made is not relevant in determining whether the Administrator of that state has 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 state until a transaction takes place
- Both New York and Ohio
- New York.
- Ohio.
Correct answer: Both New York and Ohio
This recommendation is considered an offer, and no offer of a security may be made in a state unless the security is exempt (this one isn't), the transaction is exempt (this one isn't because it is solicited), or the security is registered (this one isn't). Administrators have jurisdiction over offers made in the originating state (New York), the state to which the offer is directed (Ohio), and the state in which the offer is accepted (the question doesn't tell us if it ever was, but that is not necessary because the offer on its own is in violation—we don't need a sale).
- 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?
- Indiana and Connecticut
- Alabama and Indiana
- Alabama and Connecticut
- Alabama, Connecticut, and Indiana
Correct answer: Alabama, Connecticut, and Indiana
The Administrator from any state from which an offer is made, directed, or accepted has jurisdiction over the offer.
- As defined in the Uniform Securities Act, which of the following is not an offer or a sale?
- A contract of sale for a security
- An NYSE-listed corporation declares a 2-for-1 stock split
- A purported gift of assessable stock
- The sale of a warrant
Correct answer: An NYSE-listed corporation declares a 2-for-1 stock split
A stock split would not be considered a sale, as there is no consideration paid for the additional shares. A purported gift of assessable stock is both an offer and a sale.
- Which of the following involves an offer or sale?
- A stock dividend with no cost to the shareholder
- A pledge of stock as collateral for a loan
- An exchange of securities due to a corporate reorganization
- A gift of an assessable security
Correct answer: A gift of an assessable security
The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale. Each of the other choices are included in the list of exceptions from the terms offer and sale.
- According to the Uniform Securities Act, a sale is
- A solicitation of an offer to buy
- An attempt to transfer ownership of a security
- An offer of an equivalent contract
- A contract to transfer ownership of a security for value
Correct answer: A contract to transfer ownership of a security for value
A sale is defined as every contract to sell a security or an interest in a security, including a security given as a bonus with the purchase of another security or a gift of assessable stock when something of value is given. A sale is not an attempt to transfer ownership of a security, a solicitation of an offer to buy, or an offer of an equivalent contract (i.e., an offer or offer to sell).
- Under the Uniform Securities Act, which of the following constitutes an offer of a security?
- A stock dividend distributed to current shareholders at no cost to them
- The delivery of a prospectus to a prospective purchaser
- A tombstone advertisement
- An agreement between an issuer and an underwriter
Correct answer: The delivery of a prospectus to a prospective purchaser
A prospectus is the document that offers a security for sale. A tombstone advertisement always states that, in and of itself, it is not an offer to sell and that such an offer may only be made by prospectus; it states where a prospectus may be obtained. Stock dividends are specifically excluded from the definition of an offer or a sale. It is true that the rule requires that the stockholders receiving the stock dividend give nothing of value. An offer refers to making a security available to investors. Agreements between the issuer and an underwriter do not involve investors. It is only when the underwriter offers those shares to investors, either in a private or public offering, that we have an offer.
- Under the Uniform Securities Act, a sale includes all of the following except
- A contract of sale
- A disposition of a security for value
- A pledge of securities for the purpose of obtaining a margin loan
- A contract to sell
Correct answer: A pledge of securities for the purpose of obtaining a margin loan
Under the Uniform Securities Act, a sale includes every contract of sale, contract to sell, or disposition of a security for value. A pledge of securities is not a sale because the title to the shares is not transferred; it is merely assigned.
- 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 offer to sell only if it is accepted
- An unsolicited trade
- An offer to purchase
- An offer to sell
Correct answer: An offer to sell
Under the Uniform Securities Act, the term offer is the solicitation of an offer. By suggesting the entry of an unsolicited order, the agent is soliciting an offer from the customer to buy a security. A solicitation is considered to have occurred even if the customer fails to act on the solicitation. Unsolicited orders are exempt transactions and can be accepted even when the security is not registered and is not exempt. The problem is, this is not truly unsolicited. The agent has induced the customer to submit the order, making it solicited.
- Under the Uniform Securities Act, which of the following fits the definition of a sale?
- Issuing a prospectus
- An attempt to dispose of a security for value
- A contract to dispose of a security for value
- A solicitation of an offer to buy a security for value
Correct answer: A contract to dispose of a security for value
The definitions are important. Here is how the USA defines sale: Sale or sell includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value. The companion term is offer and the definition is as follows: Offer or offer to sell includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. Sales involve any contract or disposition for value. Solicitations and attempts to dispose are offers; the sale occurs when the offer is accepted. It is possible you will see "for consideration" instead of "for value."
- As defined in the Uniform Securities Act, the terms sale or sell would include
- An investor using a cash dividend to automatically purchase additional shares of the issuer
- The receipt of a stock dividend
- The pledging of securities as collateral for a loan
- A gift of nonassessable stock
Correct answer: An investor using a cash dividend to automatically purchase additional shares of the issuer
Sale or sell include every contract to sell or dispose of a security for value. When the cash from a dividend is used to purchase additional shares, value is being exchanged. This is unlike the pledge of stock, where ownership does not change hands, or the receipt of a stock dividend, where no consideration is exchanged. Although a stock dividend cannot require any payment if it I s to be excluded from the definition of sale, you can assume on the exam that no payment is required unless something in the question indicates otherwise. Gifts of securities, unless assessable stock, are not sales.
- As defined in the Uniform Securities Act, a sale or an offer to sell would not include
- A sale or an offer of a warrant or right to purchase or subscribe to another security of the same or another issuer
- Any security given or delivered with, or as a bonus on account of, any purchase of securities
- A purported gift of nonassessable stock
- A stock dividend that requires only a nominal payment by the shareholder
Correct answer: A purported gift of nonassessable stock
A gift of assessable stock would be an offer or a sale, but a gift of nonassessable stock is just a gift. The USA considers that any security given along with the purchase of a security is a sale of that "bonus" security. Stock dividends are not considered a sale or an offer to sell only when there is no monetary payment involved. Selling a right or a warrant is both a sale and an offer of the underlying security.
- 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
- III and IV
- I and II
- II and III
- I and IV
Correct answer: II and III
A gift of assessable stock is always considered a sale. Although the receipt of preemptive rights is not a sale, the exercise of them is. An offer does not become a sale until the exchange of consideration. Choosing to take a stock dividend rather than a cash dividend is not a sale.
- Which of the following would be included in the Uniform Securities Act's definition of a sale?
- Transfers for value of shares to a nontaxable organization
- Conveying for value precious metals to a jewelry distributor
- Sale of a large fixed annuity contract to a taxable institution
- "D) Donation of interests in rights, warrants, or options on a nonexempt security
Correct answer: Transfers for value of shares to a nontaxable organization
For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.
- Under the Uniform Securities Act, which of the following is an offer or a sale?
- The use of securities as collateral for a car loan at a bank
- A gift of stock from a mother to a son
- A 10-for-1 stock split paid to shareholders
- A gift of stock given as a bonus with a purchase of a parcel of real estate
Correct answer: A gift of stock given as a bonus with a purchase of a parcel of real estate
A gift of securities given as a bonus for any purchase is considered part of the purchase. Stock splits, bona fide gifts, and bona fide pledges or loans made with no purpose of evading the act are not considered sales.
- 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
- Engaging in the offering for sale of a security
- Committing fraud
- Offering a warrant to buy securities
- Engaging in an unlawful competitive marketing practice
Correct answer: Engaging in the offering for sale of a security
According to the Uniform Securities Act, offering securities as a bonus on the purchase of another thing for value, such as a car, constitutes an offer of securities. Therefore, the automobile dealer is making an offer of securities and is subject to the registration provisions of the act. The practice is not fraudulent, but registration as a broker-dealer would be required.
- 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?
- Administrator of the state in which the customer lives
- Administrator of the state in which the transaction took place
- Administrators of all three states involved
- Administrator of the state in which the agent is registered
Correct answer: Administrators of all three states involved
Under the scope of the Uniform Securities Act, if any part of a transaction occurs in a state, the transaction falls under the jurisdiction of the state Administrator. The transaction is under the control of the Administrator of the state in which the customer received the offer, the Administrator of the state from which the agent made the offer, and the Administrator of the state in which the transaction took place.
- 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.
- I, II, and III
- I, II, III, and IV
- I only
- I and II
Correct answer: I and II
Under the USA, the term offer includes an attempt to dispose of securities for value or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered offers.
- 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, II, and III
- I only
- I and III
- II and III
Correct answer: I only
An offer is made when it originates in a state. An offer is also considered to be made in a state when it is directed by the offeror to that state and is received at the place to which it is directed. However, offers received via a TV or radio broadcast that originated out of state or offers contained in a newspaper published out of state are specifically excluded.
- 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 and II
- I, II, and III
- II and IV
- I, II, III, and IV
Correct answer: I, II, III, and IV
This exceptionally legal question describes four of the Uniform Securities Act's specific exclusions from the definition of offer and/or sale. Another exclusion would be a stock dividend distributed to current shareholders at no cost to them. Remember, a purported gift of assessable stock is considered to involve an offer and sale. It is a gift of nonassessable stock that is neither an offer nor 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
- Nobody Walks Motor Company may not pay a commission on the sale of a car to any salesperson who is not registered with the Administrator as an agent.
- The offer must be made available to anyone who purchases a used car during the specified period
- No specific requirements need to be met because the company is a licensed automobile dealer and, as a result of the free offer, no sale of securities is involved
- Nobody Walks Motor Company must be registered as a broker-dealer in the state.
Correct answer: Nobody Walks Motor Company must be registered as a broker-dealer in the state.
The USA states that "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered to constitute part of the subject of the purchase and to have been offered and sold for value". Therefore, Nobody Walks Motor Company would have to be registered as a broker-dealer in this state. Assuming the auto dealer registers as a BD, it would not have to make this offer available to anyone who purchases a used car; the offer is only for those purchasing a new car. Commissions on the sales of the cars do not require registration as an agent.
- An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of his state
- With at least a third of its circulation in the state
- With at least two-thirds of its circulation in the state
- Under no circumstances
- With at least half of its circulation in the state
Correct answer: Under no circumstances
A state Administrator never has jurisdiction over a securities offering made in a bona fide newspaper published out of state. However, the Administrator has jurisdiction if the paper is published in his state. There is an exception to that when two-thirds or more of the paper's circulation is out of that state.
- An Administrator may deny or revoke a security's exemption
- Without a hearing if the issuer is given an opportunity for a hearing after the revocation
- If the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law
- For a federal covered security if its issuer is in violation of state law
- By providing the burden of proof that the exemption is not deserved
Correct answer: Without a hearing if the issuer is given an opportunity for a hearing after the revocation
An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.
- 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 III
- I, II, and III
- I and II
- II and III
Correct answer: I and II
The Administrator may examine files of any registered person, whether located in state or out of state. The Administrator may invest a designated officer with the power to conduct formal investigations: subpoena witnesses, compel testimony, etc. Although the Administrator may refer evidence for criminal prosecution, only a court may sentence a person convicted of a violation.
- The Administrator has authority to
- Issue a cease and desist order with or without a hearing
- Suspend the securities registration of an issue traded on the NYSE after learning that the issuer’s CEO has been convicted of a securities-related crime
- Issue a cease and desist order only after a hearing
- Order the arrest of a person who refuses to obey a subpoena issued in connection with an investigation or proceeding under the Uniform Securities Act
Correct answer: Issue a cease and desist order with or without a hearing
The Administrator may issue a cease and desist order with or without a hearing. It is the stop order that requires a hearing. A security traded on the NYSE is federal covered. Think for a moment about what that means in terms of state registration. It means that, as a federal covered security, it is exempt from registration in any state. Therefore, regardless of the CEO's criminal activity, how can the Administrator suspend a registration that doesn't exist? The SEC has the power to do that because NYSE issues are registered with them, not on the state level. Although the Administrator can do many things, the power to arrest someone is not one of them. If a person refuses to obey a subpoena, the Administrator can apply to the appropriate court. If the court order is ignored, that becomes contempt of court and the court can then issue a warrant for the person's arrest.
- Under which of the following circumstances may an Administrator revoke an adviser's registration?
- The adviser has been declared mentally incompetent by a court of jurisdiction.
- The adviser cannot be located after a reasonable search by the Administrator.
- The adviser is no longer in business.
- The adviser has been convicted of a nonsecurities-related felony.
Correct answer: The adviser has been convicted of a nonsecurities-related felony.
If a registered investment adviser (IA) committed a felony, regardless of whether it was securities-related or not, its registration will be revoked, not canceled. An IA's registration may be canceled if the IA is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing.
- 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, the Administrator may require witness oaths because the Administrator is appointed as a judge.
- Yes, the Administrator has the power to require witness oaths because an Administrative hearing is functionally a legal proceeding.
- Yes, the Administrator is empowered to administer oaths as provided in the Uniform Securities Act, as enacted in the Administrator’s state of jurisdiction.
- No, the Administrator was merely attempting to emphasize the seriousness of the hearing, but he holds no such power.
Correct answer: Yes, the Administrator is empowered to administer oaths as provided in the Uniform Securities Act, as enacted in the Administrator’s state of jurisdiction.
The USA empowers Administrators to administer oaths. Sworn oaths typically occur in conjunction with hearings.
- 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
- Discovering the firm has liabilities that exceed its assets
- Learning that nine years ago, the Administrator of another state found that the president of the firm violated the securities laws of that other state
- A shareholder, with no management role in the broker-dealer, being unable meet his financial obligations as they come due
- "D) suspicion that the broker-dealer has violated the securities laws of her state
Correct answer: A shareholder, with no management role in the broker-dealer, being unable meet his financial obligations as they come due
An Administrator cannot bring an action against a broker-dealer (BD) organized as a corporation because one of its shareholders is financially unstable. Even if the individual had a management role in the BD's operations, it would be unlikely the Administrator would take action against the firm, only the individual. Violation of another state's securities laws within the past 10 years by the president of the firm might be cause for action against a BD; so is insolvency of the firm, defined as having liabilities in excess of one's assets or the inability to meet financial obligations as they come due. Most actions begin with suspicion of wrongdoing; that is why the Administrator has the power to investigate and subpoena witnesses.
- The Administrator could deny or revoke the registration of a broker-dealer if
- An officer of the firm was found to be in violation of SEC rules 22 years ago
- One of the firm’s officers was convicted of a misdemeanor for being a scofflaw
- The CEO has intentionally failed to file advertising material with the Administrator
- The major stockholder of the firm was convicted of a securities-related misdemeanor 125 months ago
Correct answer: The CEO has intentionally failed to file advertising material with the Administrator
One of the causes for denial or revocation is a willful violation of the USA; failing to file advertising meets that criteria. You must know your calendar—125 months is longer than 10 years ago.
- 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?
- In conducting an investigation, an Administrator can compel the testimony of witnesses.
- An Administrator may, by order, deny the registration of a securities professional who has been convicted of any felony within the past 10 years.
- Investigations of serious violations must be open to the public.
- An Administrator in State A may only enforce subpoenas from State B if the alleged violation would be a violation of State A’s statutes.
Correct answer: Investigations of serious violations must be open to the public.
Investigations of serious violations do not have to be public hearings; there can be public or private hearings. An Administrator can compel the testimony of witnesses when conducting an investigation. An Administrator in State A may enforce subpoenas from another state only if the alleged violation would also be a violation in his state. Conviction of any felony within the past 10 years is one of a number of reasons the Administrator may deny a registration.
- 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
- I, II, and III
- I only
- I and III
Correct answer: I, II, and III
The Administrator is empowered to issue cease and desist orders, which require the immediate halt of a specific activity. If the agent fails to stop engaging in the activity, the Administrator may seek an injunction from a court of competent jurisdiction.
- An Administrator may deny or suspend a registration in all of the following situations except
- If the applicant was convicted of a misdemeanor involving securities within the last 10 years
- If the applicant is not qualified on the basis of experience
- If the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years
- If the registrant has failed to properly supervise agents and investment adviser representatives
Correct answer: If the applicant is not qualified on the basis of experience
The Administrator may restrict a registration on the basis of lack of training and knowledge but not for a lack of experience alone. The standard example of that is not granting registration to an investment adviser solely based on the firm's experience as a broker-dealer. The Administrator may deny a registration if the applicant was convicted of a misdemeanor involving securities within the last 10 years. The Administrator may deny a registration if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years. Registrations may be suspended if agents or investment adviser representatives are not properly supervised.
- 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 that permanently bars the investment adviser representative from conducting business in the state
- Issue a cease and desist order
- Withdraw the investment adviser representative’s license
- Seek a court injunction to prevent the pending violation
Correct answer: Issue a cease and desist order
The Administrator would initiate action by issuing a cease and desist order. If the registered investment adviser representative continues to pursue activities that result in a violation of the USA, the Administrator may seek a court injunction to prevent the abuse.
- 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
- II and III
- I and III
- I, II, and III
Correct answer: I, II, and III
Whenever it appears to the Administrator that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of the Uniform Securities Act or any rule or order, he may, at his discretion, bring either or both of the following remedies: Issue a cease and desist order, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to cease and desist from further illegal activity. Bring an action in the appropriate court to enjoin the acts or practices to enforce compliance with this act or any rule or order hereunder. Upon a proper showing, a permanent or temporary injunction will be granted and a receiver or conservator may be appointed for the defendant or the defendant's assets. In addition, upon a proper showing by the Administrator, the court may enter an order of rescission, restitution, or disgorgement directed to any person who has engaged in any act constituting a violation of any provision of this act or any rule or order hereunder.
- According to the Uniform Securities Act, under which of the following circumstances may an Administrator cancel an agent's registration?
- The agent is the subject of an insider trading lawsuit.
- The Administrator determines it would be in the public interest.
- The agent is judged to be mentally incompetent.
- The agent has admitted to selling unregistered exempt securities to individual clients.
Correct answer: The agent is judged to be mentally incompetent.
Cancellation is a nonpunitive action of the Administrator. That is, the agent did not do anything wrong. Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent.
- An Administrator has specific authority under the Uniform Securities Act to do all of the following except
- Enforce subpoenas in the state at the request of an Administrator of another state for alleged violations that occurred in another state
- Issue emergency injunctions to prevent a violation of the act
- Require that the proceeds from an offering be held in escrow until the issuer receives a certain percentage of the sale of the securities offered
- Suspend the registration of a security if the suspension is in the public interest and the offering has excessive commissions
Correct answer: Issue emergency injunctions to prevent a violation of the act
Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator. The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced.
- Which of the following statements is true?
- An Administrator can summarily suspend a pending registration.
- An Administrator may not vacate an order without a hearing.
- An Administrator may issue a stop order without prior notice and opportunity for a hearing.
- An Administrator may cancel a registration for the same reasons he revoked or suspended a registration.
Correct answer: An Administrator can summarily suspend a pending registration.
An Administrator can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located. The Administrator may vacate or modify a stop order if he finds that the conditions that prompted its entry have changed; no hearing is necessary for that.
- 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 State X Administrator would publish a warning to all residents.
- The State X Administrator would contact a court of competent jurisdiction to obtain an injunction.
- The State X Administrator would immediately begin an investigation.
- Because several states are involved, the Administrator must turn this information over to the SEC.
Correct answer: The State X Administrator would immediately begin an investigation.
It's the old saying, "Where the Administrator smells smoke, he can go looking for the fire."
- Under the Uniform Securities Act, which of the following is not a reason for canceling an agent's registration?
- The agent has engaged in an unethical business practice.
- The agent has been found by a court to be mentally incompetent.
- The agent cannot be located after a reasonable search.
- The agent has ceased to do business as an agent.
Correct answer: The agent has engaged in an unethical business practice.
The other choices are causes for cancellation, which is not intended to be punitive. Engaging in unethical business practices is a cause for disciplinary action by the Administrator, court-imposed penalties, criminal prosecution, and civil legal remedies.
- Under the Uniform Securities Act, all of the following statements regarding a broker-dealer withdrawing its registration are true except
- It cannot take effect if the Administrator is instituting a revocation proceeding
- It must be in writing
- It prevents the broker-dealer from re-registration in the future
- It is generally effective 30 days after written notification
Correct answer: It prevents the broker-dealer from re-registration in the future
If a broker-dealer withdraws its registration, it retains the right to re-register at some future date. The USA provides for a 30-day withdrawal period.
- 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 must be promptly notified of the action and given an opportunity for a hearing.
- Broker-dealers may only accept unsolicited orders during the period of suspension.
- The suspension will not go into effect until after a hearing.
- A hearing must be held within 10 days of written request by the registrant.
Correct answer: The registrant must be promptly notified of the action and given an opportunity for a hearing.
Acting summarily means acting without prior notice. An Administrator who has grounds may postpone or suspend a registration by issuing a stop order. The registrant must be promptly notified of the action and of the opportunity for a hearing. The hearing must be held within 15 days of a written request, and the suspension will remain in effect until final disposition. Even though unsolicited orders are exempt transactions, once a registered security has been the subject of a summary suspension, all trading in that security is halted.
- It is a violation of the Uniform Securities Act if an agent
- Makes any material representation in the offer or sale of a security
- Engages in honest or ethical business practices
- Offers or sells any security unless it is registered
- Files a fraudulent application
Correct answer: Files a fraudulent application
It is a violation of the Uniform Securities Act to file a fraudulent or misleading application for registration as a securities industry professional (agent, broker-dealer, investment adviser, or investment adviser representative). An agent may always make a material representation in the sale of a security; it is a material misrepresentation that is not permitted. An unregistered nonexempt security may be sold in an exempt transaction and an exempt security does not need registration.
- Under the Uniform Securities Act, all of the following are grounds for suspension, denial, or revocation of an issuer's registration statement except
- Failure to pay filing fees
- The security is subject to an administrative stop order in a federal court
- Unreasonable compensation to the underwriters
- Information in the registration statement is complete
Correct answer: Information in the registration statement is complete
Incomplete information on the registration statement would be a problem, but complete information meets the requirement. Unreasonable underwriting compensation, failure to pay filing fees, and a security subject to an administrative stop order in federal court are all grounds for suspension, denial, or revocation of an issuer's registration statement.
- 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 is found by a court to be mentally incompetent.
- The agent is found by a court to have violated a securities statute.
- The agent cannot be located after a reasonable search.
- The agent has died.
Correct answer: The agent is found by a court to have violated a securities statute.
The key word is canceled. The Administrator would cancel an agent's registration in the event of death or mental incompetence of the registrant. Failure to locate an agent, such as mail being returned without a forwarding address, is also a cause for cancellation. Cancellation carries no connotation of wrongdoing; for violations, the appropriate action is revocation.
- 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 is financially insolvent
- The applicant is not qualified due to a lack of experience
- A willful violation of the Uniform Securities Act has occurred
- The applicant is enjoined temporarily from engaging in the securities business
Correct answer: The applicant is not qualified due to a lack of experience
If the broker-dealer qualifies by virtue of training or knowledge, registration cannot be denied for lack of experience only. Registration may be denied if the applicant willfully violates the Uniform Securities Act, is financially insolvent, or has been enjoined from engaging in the securities business.
- To protect the public, the Administrator may do all of the following except
- Require an applicant for registration to submit to an oral examination
- Deny the registration of an agent with insufficient net capital
- Deny the registration of an investment adviser whose assets under management are less than $100 million
- Require an applicant for registration as both a broker-dealer and an investment adviser to limit activities to those of a broker-dealer due to lack of qualifications to render investment advice
Correct answer: Deny the registration of an agent with insufficient net capital
Agents never have a net capital requirement, but broker-dealers (BDs) do. In fact, the Administrator cannot require net capital in excess of the SEC's requirement. It is not uncommon for an Administrator to deny an application for registration as an investment adviser (IA) to a firm that does not appear to have the necessary qualifications. The Administrator will permit the firm to function as a BD and resubmit its request for adviser status at a later time. While it is rare, the USA does reserve the right to require a potential registrant to submit to an oral examination in addition to or instead of a written test. There is no minimum AUM to register with the state, but once it gets to $100 million, the IA can choose state or SEC registration. Once it reaches $110 million, SEC registration is the only choice.
- 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 III
- I and II
- I, II, and III
- II and III
Correct answer: II and III
Disciplinary actions, with respect to registration, may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets.
- 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
- I and II
- II and III
- III and IV
Correct answer: I and II
The Administrator may deny a license to individuals who have been convicted of any felony or a securities- or money-related misdemeanor within the last 10 years. Civil lawsuits will rarely have an effect upon securities 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 and II
- I only
- I, II, and III
- II, III, and IV
Correct answer: I, II, and III
Prior to the entry of a final order, the Administrator must provide appropriate prior notice to the registrant, provide the opportunity for a hearing, and present findings of fact and conclusions of law. A registrant is not required to provide written acknowledgement before an order is issued.
- Under the Uniform Securities Act, which of the following would most likely be a cause for denial of a registration?
- A revocation order by another state’s Administrator
- Lack of a degree from an accredited degree-granting institution
- Conviction of a securities-related violation 12 years ago for which the prison sentence ended last month
- Conviction of a nonfinancial misdemeanor 7 years ago
Correct answer: A revocation order by another state’s Administrator
When one's registration has been revoked by another state's Administrator, any other Administrator will deny registration in their state. The securities-related violation occurred more than 10 years ago, and the misdemeanor is only a problem if it is securities or money related.
- Which of the following accurately describes a cease and desist order as authorized by the Uniform Securities Act?
- An order issued by a federal agency to a brokerage firm to stop an advertising campaign
- An order from one brokerage firm to another brokerage firm to refrain from unfair business practices
- An order issued by a court of competent jurisdiction in the state requiring a business to stop an unfair practice
- An order by the Administrator demanding a person to refrain from a practice of business believed by that Administrator to be unfair
Correct answer: An order by the Administrator demanding a person to refrain from a practice of business believed by that Administrator to be unfair
A cease and desist order is a directive from an administrative agency to immediately stop a particular action. The order can come from a federal, state, or judicial body; it is not exclusive to any single body. However, because this question is referring to the Uniform Securities Act, we focus on the actions of the Administrator, not a federal agency. Administrators may issue cease and desist orders with or without a hearing. Courts issue injunctions, usually when the cease and desist order is ignored. Brokerage houses cannot issue cease and desist orders to each other.
- 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.
- III and IV
- II and III
- I and II
- II and IV
Correct answer: II and IV
An Administrator may not deny a registration solely on the basis of lack of experience. An Administrator may deny, revoke, or suspend a registration if it is in the public interest and a registrant failed to include the fact that he was convicted of a securities-related misdemeanor (or any felony) within the last 10 years. The Administrator may also deny a registration if a registrant has engaged in dishonest or unethical practices and it is in the public interest to deny the registration. Registration can also be denied if a registrant violated securities laws of a foreign country.
- 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 II
- I, II, and III
- II and IV
- I only
Correct answer: I and II
In issuing a cease and desist order, the Administrator may provide prior notice and a hearing or may issue the order without prior notice or a hearing (summarily). There is no time period associated with the order. Cease and desist orders are directed against persons; it is stop orders that are directed against securities.
- The state securities Administrator has the authority to
- Amend or alter the Uniform Securities Act
- Issue a ruling under its authority with no requirement to publish that ruling
- Make, amend, or rescind rules, forms, and orders necessary to administer the Uniform Securities Act
- Issue and enforce an injunction against a registered party
Correct answer: Make, amend, or rescind rules, forms, and orders necessary to administer the Uniform Securities Act
A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms but does not have authority to amend or alter the Uniform Securities Act (USA) itself. Amending the version of the USA used in that state is the role of the state legislature. All rules and forms of the Administrator must be published. Only the courts can issue injunctions.
- 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.
- I and IV
- II and III
- III and IV
- I and II
Correct answer: II and III
The Administrator may deny, suspend, or revoke a registration for many reasons, but they must be in the interest of the public. The Administrator may determine that an applicant, in its initial application for registration for an investment adviser (IA), is not qualified to act as an adviser and thus limit the registration to that of a broker-dealer (BD). The Administrator can also take into consideration whether the registrant will work under the supervision of a registered IA or BD when approving an application. Lack of experience by itself is an insufficient reason for denial.
- Under the Uniform Securities Act, all of the following could be cause for disciplinary review action by the state securities Administrator except
- Ed is suspended from conducting business in the securities industry for a period of 6 months by FINRA.
- The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors
- Joe files an application for registration as an investment adviser and omits the fact that he was convicted of fraud 12 years ago.
- Tom, a registered investment adviser, fails to disclose that he recently filed for bankruptcy protection.
Correct answer: The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors
Investment advisers may employ investment adviser representatives as independent contractors. This is very common for independent financial planners. Even though the Administrator's power to deny a registration is limited to convictions within the past 10 years, being charged with or being convicted of any felony or a securities-related misdemeanor requires disclosure. Similarly, failing to disclose a bankruptcy filing is cause for disciplinary action on the part of the Administrator. Administrators are sensitive to actions by other industry regulators, so a suspension by FINRA (may say NASD on your exam) could also lead to taking action.
- 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 and III
- I, II, and III
- I and II
- II and III
Correct answer: II and III
The Administrator is not restricted to her state's boundaries. If appropriate, the Administrator may apply to a court of competent jurisdiction to have a receiver appointed over the assets of a suspected violator. The Administrator is empowered to publish information regarding violations.
- When the Administrator issues a cease and desist order,
- The subject of the order must promptly put a halt to the specified activity
- It is tantamount to a suspension
- The subject of the order may appeal to the proper court
- Clients who purchased the affected securities must receive a prompt refund of the consideration paid
Correct answer: The subject of the order must promptly put a halt to the specified activity
When you receive a cease and desist order from the Administrator, it means just what it says—you are to cease doing whatever it is that is the subject of the order and desist from doing it in the future. Cease and desist orders may be issued, with or without a prior hearing, against the person or persons engaged in the prohibited activity, directing them to cease and desist from further improper activity.
- 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
- Revoke the registration
- Issue a cease and desist order
- Cancel the registration or application
- Cancel or suspend the registration
Correct answer: Cancel the registration or application
A registration may be canceled if the registrant cannot be located, is found mentally incompetent, or has disbanded. This is known as nonpunitive termination of registration. Suspension, revocation, and a cease and desist order are for violations of the Uniform Securities Act.
- 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
- Subpoena witnesses from State C
- Gather evidence from State B
- Issue an injunction against Fusion Financial
- Gather evidence from State A
Correct answer: Issue an injunction against Fusion Financial
An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state. Only the courts can issue an injunction.
- The issuance of a stop order by a state securities Administrator requires
- The subject to stop the activity without the opportunity for a hearing
- An issuance of an injunction by a court with jurisdiction over such issues
- An issuance of criminal charges
- The subject of the stop order to be given an opportunity for a hearing
Correct answer: The subject of the stop order to be given an opportunity for a hearing
The subject of a stop order must be given the opportunity for a hearing. As long as the stop order is in effect, the security subject to the order may not be sold to the public or the proscribed activity may not continue. Stop orders do not require an injunction by a court. The Uniform Securities Act does not grant the Administrator the authority to issue criminal charges; that is the role of the court system
- 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
- The applicant has filed a complete application
- The applicant has been convicted of a felony within 10 years of the date of application
- The applicant has been convicted of a misdemeanor involving securities fraud within the past 120 months
Correct answer: The applicant has filed a complete application
In order to register, it is required that your application be complete; filing of an incomplete one would be cause for denial. A record of any felony conviction or misdemeanor involving securities fraud during the past 10 years is sufficient grounds for the Administrator to deny an application for registration in the securities industry. Insolvency is also grounds for denial.
- 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
- Is empowered to deny this application for just cause
- Will probably turn to the SEC for guidance
- Will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit
- May only justify denial for reasons listed in the Uniform Securities Act
Correct answer: May only justify denial for reasons listed in the Uniform Securities Act
A denial of registration must be based on the concept of law. There are stated reasons for denial, such as felony convictions, outstanding injunctions, and insolvency. Where in the USA does it say an adviser can't use palm readers, a Ouija board, or a Magic 8 Ball? Although disclosure of methods of analysis is required, the Administrator is not empowered to pass judgment on the merits of those methods. The USA does state that the Administrator is empowered to "condition a particular applicant's registration as a broker-dealer upon his not transacting business as an investment adviser if the Administrator finds that he is not qualified as an investment adviser." But nowhere in this question does it indicate that the applicant is, or is applying for, registration as a broker-dealer.
- Which of the following would subject an agent to a denial of registration?
- An arrest for felony embezzlement
- Failure to pay the filing fees
- Losing a civil lawsuit three years ago relating to the agent’s actions as a landlord
- Conviction on a charge for a non-securities-related misdemeanor six years ago
Correct answer: Failure to pay the filing fees
Conviction, not merely an arrest, for a felony or misdemeanor involving securities within the past 10 years and failure to pay filing fees are grounds for denial. Loss of a civil suit not related to the securities industry is not a cause for denial to an agent or IAR.
- 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
- Censure the investment adviser for even thinking of employing this individual
- Treat the crime as any felony
- Treat the crime as a nonfinancial felony
- Treat the crime as a nonfinancial misdemeanor
Correct answer: Treat the crime as a nonfinancial misdemeanor
Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor; therefore, this individual would not be subject to statutory disqualification.
- 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 III
- I, II, and III
- I and II
- III only
Correct answer: I, II, and III
In general, the Administrator must provide appropriate prior notice, opportunity for a hearing, and written findings of fact and conclusions of law. Even if an order is issued summarily—that is, made effective upon issue without prior notice—the registrant must be notified upon issue of the order and given the opportunity to request a hearing.
- 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 based on this conviction because it was a misdemeanor in the state where he was convicted
- Be denied based on this conviction because the crime is a felony in the state where he seeks registration
- Be denied based on this conviction because it was less than 10 years ago
- Not be denied based on this conviction because it was 9 years ago
Correct answer: Not be denied based on this conviction because it was a misdemeanor in the state where he was convicted
In this context, only a conviction for a felony within the past 10 years may be grounds for denying a registration. Because the conviction does not show up on Joe's record as a felony, the fact that this state has different penalties for the same offence is irrelevant. This is a commonly tested concept on the exam.
- 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 and IV
- I and II
- I, II, III, and IV
- II and IV
Correct answer: I and II
Filing an incomplete application or willfully violating a provision of the Uniform Securities Act are reasons for denial or revocation of an agent's registration. Lack of experience itself is not a cause. The Administrator can only judge based on what is on the applicant's record—in this case, a misdemeanor.
- The Administrator may take disciplinary action against a registered person when the registrant has done any of the following except
- Violated the provisions of federal securities law
- Failed to properly supervise an employee who committed prohibited practices as defined by the act
- Engaged in unethical practices, even if no law was broken
- Failed to lend money to a very good customer
Correct answer: Failed to lend money to a very good customer
Disciplinary action may be imposed by a state Administrator for violations of federal securities regulations, improper supervision, and unethical practices committed, whether or not a law was broken. Even in those few cases where a broker-dealer or investment adviser is permitted to lend money to a client, there is never a case where they are obligated to do so.
- 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 and III
- I and II
- II and IV
- II and III
Correct answer: I and III
Under the USA, the Administrator has a broad investigative authority and may begin an investigation against a registrant before a violation has occurred and may subpoena witnesses in any state.
- 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, II, and III
- I and III
- III only
- I only
Correct answer: I and III
An Administrator may deny the registration of a security when the activity to be conducted in the state is illegal. The underwriter's compensation may not be unreasonable. There is no requirement that dividends be paid in order to register a security.
- 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.
- II only
- I, II, and III
- I and II
- I only
Correct answer: I, II, and III
Once an agent's registration is revoked, any future applications for registration in the securities industry (as an agent, a broker-dealer, or an investment adviser) may be denied. You may see this expressed as a permanent bar from the industry.
- Among the powers granted to the Administrator under the Uniform Securities Act is the power to
- Subpoena witnesses or documents
- Take criminal action against an agent who has committed fraud
- Deny the registration of an agent solely because of lack of experience
- Appoint a SIPC trustee
Correct answer: Subpoena witnesses or documents
When conducting an investigation, the Administrator may gather evidence by issuing subpoenas to witnesses. Documents may also be the subject of a subpoena. Lack of experience in itself is not a justification for denial of registration. Although the Administrator will generally refer a case to the proper legal authorities for criminal action, many states do permit the Administrator to initiate criminal proceedings. This is an example of a test question where you have to pick the universally correct answer. The USA specifically states that the Administrator has the power to issue subpoenas—it is silent on the issue of the Administrator's power to take criminal action.
- 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
- Issue a stop order to deny or revoke the registration statement, but must provide the applicant with the opportunity for a hearing
- Revoke the registration statement, denying the applicant a hearing for an unlimited amount of time
- Not revoke or deny the registration statement until a hearing takes place
- Revoke or deny the registration statement and must schedule a hearing within 30 days of issuing the summary process order
Correct answer: Issue a stop order to deny or revoke the registration statement, but must provide the applicant with the opportunity for a hearing
The Administrator may deny or revoke the registration statement but must provide the applicant with an opportunity for a hearing. In addition, the Administrator must give appropriate prior notice to the applicant or registrant, the issuer, and the person on whose behalf the securities are to be or have been offered and present written findings of fact and conclusions of law.
- Under the Uniform Securities Act, the Administrator may do all of the following except
- Revoke a previously allowed exemption
- Issue a stop order to revoke the effectiveness of a registration statement
- Issue an injunction to force compliance with an Administrator's rule
- Issue a cease and desist order without a prior hearing
Correct answer: Issue an injunction to force compliance with an Administrator's rule
Administrators cannot issue injunctions, but they may petition a court to issue an injunction against certain activities. An Administrator may issue a stop order to revoke the effectiveness of a registration, issue a cease and desist order without a prior hearing, and may also revoke a previously allowed exemption.
- 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, and III
- I and III
- II and III
- I and II
Correct answer: I, II, and III
Once the registrant is found guilty at a hearing, the Administrator is authorized to take any of the listed actions against a person's registration.
- An agent's license can be revoked if he is any of these except
- Convicted of a securities-related misdemeanor
- Declared insolvent
- Convicted of a non-securities-related felony
- Under 21 years of age
Correct answer: Under 21 years of age
The Uniform Securities Act has no age specifications (other than that the individual be of legal age, which in most states is 18). Once registered, an agent's license can be revoked if the agent is convicted of a securities-related misdemeanor or any felony. Insolvency is a cause for revocation of the registration of any securities professional.
- Under the Uniform Securities Act, which of the following concerning the withdrawal of an agent's registration is not true?
- Absent any disciplinary proceedings, withdrawal is effective 30 days after application.
- Absent any disciplinary proceedings, withdrawal is effective 60 days after application.
- Disciplinary proceedings may be taken against an agent after the agent’s withdrawal is effective.
- At the Administrator’s discretion, disciplinary proceedings may delay effectiveness of a withdrawal application indefinitely.
Correct answer: Absent any disciplinary proceedings, withdrawal is effective 60 days after application.
Under the USA, withdrawals of registration are generally effective on the 30th day after filing, unless a disciplinary action is instituted. The Administrator may institute a revocation or suspension proceeding within one year after an agent's withdrawal has become effective.
- Under the Uniform Securities Act, the Administrator has the power to do all of the following except
- Administer oaths
- Indict offenders
- Take evidence
- Subpoena witnesses
Correct answer: Indict offenders
The Administrator has the power to administer oaths, subpoena witnesses, and take evidence. The Administrator also has the power to compel testimony and require the production of books and records. However, while the Administrator is authorized to refer violations for possible criminal prosecution, the actual powers of criminal prosecution belong to others. For example, indicting offenders is the function of a grand jury.
- An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state
- Based upon facts known to the Administrator at the time of the broker-dealer’s initial registration
- Upon discovery that an agent of the broker-dealer was convicted of a felony violation involving securities fraud
- Upon discovery that the broker-dealer’s registration had been suspended in another state
- Up to two years after the broker-dealer voluntarily withdrew its registration
Correct answer: Upon discovery that the broker-dealer’s registration had been suspended in another state
Suspension (or revocation) of a broker-dealer's (BD's) registration in another state is adequate cause for this state's Administrator to initiate the process to suspend the BD's registration in his state. A felony committed by an agent of the BD is not usually cause for the Administrator to initiate a proceeding against the BD. It is only when the question states that the individual is an officer, director, or partner of the firm or that the agent's actions are due to failure to supervise that action against the firm will generally commence. The Administrator maintains jurisdiction over a license that has been withdrawn for a period of one year after the effective date of the withdrawal (it is FINRA who maintains jurisdiction for two years). It is only the discovery of new facts unknown to the Administrator at the time of initial registration that can lead to a proceeding.
- 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
- The agent is enjoined by a court of law from engaging in the securities business
- The agent is accused of violations of the antifraud provisions of the Uniform Securities Act
- The agent is convicted of willful violations of the Uniform Securities Act
- It has been determination that the agent is not properly supervising her subordinates
Correct answer: The agent is accused of violations of the antifraud provisions of the Uniform Securities Act
An accusation is not grounds for suspension; one is presumed innocent until proven guilty. Once proof is obtained, such as through a conviction, suspension is an option. Being subject to a court injunction prohibiting engaging in the securities business or the determination of failure to supervise can certainly result in a license suspension. Please note, for those of you who have taken a FINRA exam, you know that supervision is the role of registered principals. In the NASAA world, there is no distinction—all supervisory persons register with the state(s) as agents.
- In order for the Administrator to suspend an agent's registration, compliance with the requirements of the Uniform Securities Act would not require that
- Notice be given of the proposed action and hearing
- The agent receive court-appointed defense counsel if she can’t afford her own
- The agent be presented with an opportunity for a hearing
- Notification be given to the employing broker-dealer of the final order
Correct answer: The agent receive court-appointed defense counsel if she can’t afford her own
The Administrator may, by order, summarily postpone or suspend registration, pending final determination of any proceeding under the USA. The hearing is not in a formal court, so there is no court to appoint defense counsel. The agent is permitted to appear with counsel (we hope this never happens to you, but it is a good idea to be represented by an experienced securities lawyer). However, it is the agent's responsibility to pay for that service. Upon the entry of the order, the Administrator shall promptly notify the applicant or registrant (as well as the employer or prospective employer if the applicant or registrant is an agent or investment adviser representative) that it has been entered, of the reasons therefor, and that the matter will be set down for a hearing within 15 days after the receipt of a written request. Because the law states that the employer will be notified once the action commences, it should be obvious that once the suspension order becomes final, the employer will be notified of that fact.
- A state-registered investment adviser is the subject of an injunction requested by the Administrator. As a result,
- A hearing must be granted within 15 days after receipt of a written request from the investment adviser
- The registration of the investment adviser's investment adviser representatives will be suspended
- The registration of the investment adviser will be suspended
- Upon the request of the Administrator, a receiver or conservator may be appointed over the investment adviser's assets
Correct answer: Upon the request of the Administrator, a receiver or conservator may be appointed over the investment adviser's assets
The Administrator does not have the legal power to compel compliance with the cease and desist order. To compel compliance in the face of a person's resistance, the Administrator must apply to a court of competent jurisdiction for an injunction. If the court issues a temporary or permanent injunction, upon the request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The injunction merely forces the investment adviser (or whomever is the subject) to cease the specified activity. It does not cancel any registrations. That could happen if the defendant refuses to obey the injunction and further legal action is taken. The 15-day hearing rule applies to summary orders, not cease and desist.
- The Uniform Securities Act invests the office of the Administrator with a number of powers. However, the act does not permit the Administrator to
- Issue a cease and desist order without prior notice
- Issue an injunction when there is evidence of wrongdoing
- Insist that specific forms be used to register securities
- Inspect offices of registered broker-dealers during normal business hours without prior notice
Correct answer: Issue an injunction when there is evidence of wrongdoing
Injunctions may be issued by a court of competent jurisdiction only.
- 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?
- Suspending an agent’s registration without an opportunity for a hearing
- Issuing subpoenas to persons residing outside the Administrator’s state
- Issuing cease and desist orders without a hearing
- Conducting investigations of broker-dealers domiciled outside the Administrator’s state
Correct answer: Suspending an agent’s registration without an opportunity for a hearing
Under the USA, no suspension or revocation may take place before a hearing. If an agent is registered in a specific state, the Administrator of that state has jurisdiction over that agent's activities in that state, regardless of the agent's state of residence. The same applies to broker-dealers.
- Which of the following statements relating to termination of registration of a securities professional registered under the Uniform Securities Act is true?
- An Administrator may revoke the registration of a securities professional who is declared mentally incompetent.
- Once the withdrawal is effective, the Administrator retains the right to commence an action for a period of one year.
- An Administrator may deny a registration of a securities professional based solely on a lack of experience.
- A registration, once in effect, may be withdrawn only under duress.
Correct answer: Once the withdrawal is effective, the Administrator retains the right to commence an action for a period of one year.
A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. However, there remains a one-year period during which the Administrator may commence an action for activity that occurred when the professional was registered.
- Under the Uniform Securities Act, the state Administrator may, by order, deny, suspend, or revoke an investment adviser's registration for
- Conviction of a nonsecurities-related felony more than 15 years ago
- Conviction of a securities-related misdemeanor more than 15 years ago
- Lack of experience as an investment adviser
- Violation of another state's securities laws within the last 5 years
Correct answer: Violation of another state's securities laws within the last 5 years
A violation of any state or federal securities or commodities law within the last 10 years is grounds for denial, suspension, or revocation of registration by order. This means that no hearing is required. Convictions are grounds for administrative action only if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration.
- Under the Uniform Securities Act, violations of the act may result in all of the following except
- A court order requiring the violator to make restitution to others
- An arrest being made by the Administrator
- A receiver being appointed over the violator’s assets
- A bar from employment in the securities business
Correct answer: An arrest being made by the Administrator
The Administrator has the power to impose or ask a court to impose any of the items shown but does not have the authority to arrest anyone.
- 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 IV
- II and III
- II and IV
- I and III
Correct answer: I and IV
Cancellation and withdrawal are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment.
- In conducting investigations, the Administrator may not
- Publish information of any violation over the vigorous objections of a violator
- Require a person to file a statement in writing and under oath
- Make investigations outside the state to determine whether violations of the Uniform Securities Act have occurred in that other state
- Make investigations both inside the state and in other states to determine whether violations of the Uniform Securities Act have occurred in his state
Correct answer: Make investigations outside the state to determine whether violations of the Uniform Securities Act have occurred in that other state
The Administrator may require written statements under oath, publicize violations, and investigate anywhere necessary to determine whether or not a violation of the act took place in his state. However, he is not authorized to conduct investigations in other states to determine whether a violation of the USA has occurred in those states. Those investigations are under the jurisdiction of their Administrator.
- Under the Uniform Securities Act, the Administrator may designate another official in the department to
- Issue a cease and desist order
- Set recordkeeping requirements
- Grant registration exemptions
- Serve subpoenas
Correct answer: Serve subpoenas
An official designated by the Administrator may serve subpoenas because that is basically an administrative function. However, an Administrator may not designate another official to grant registration exemptions or issue cease and desist orders. The recordkeeping requirements are set by law and cannot be altered by the Administrator.
- Which of the following statements is not true regarding criminal penalties under the Uniform Securities Act?
- The Administrator does not have the power to pursue criminal prosecution, only to refer evidence to the attorney general or appropriate district attorney.
- The statute of limitations on criminal indictments is five years.
- Criminal penalties may not be imposed if someone damaged by the violation has already recovered damages under the civil liabilities provisions.
- Criminal penalties may be incurred by willfully violating any provision of the act.
Correct answer: Criminal penalties may not be imposed if someone damaged by the violation has already recovered damages under the civil liabilities provisions.
Criminal penalties may be imposed in addition to any other penalties assessed or damages recovered under the act.
- The Uniform Securities Act provides for all of the following except
- Criminal penalties for violations of the act
- Specific civil penalties for up to three times the amount of money invested for willful violation of the act
- Exemption from registration for federal covered securities
- Subpoena power for the state Administrator
Correct answer: Specific civil penalties for up to three times the amount of money invested for willful violation of the act
The Uniform Securities Act (USA) provides for criminal penalties of up to three years in prison and/or $5,000 in fines. The act describes civil liability, not specific civil penalties. Civil liability includes interest costs, rescission of trade, payment of attorney's fees, and return of principal invested. The act makes no reference to penalties of three times the amount of money invested (treble damages). The USA does provide the state Administrator with the power to issue subpoenas.
- In order for a surety bond to meet the requirements of the Uniform Securities Act, it must provide that
- The bond must remain in force no less than two years after the withdrawal of registration
- It is in the form of cash or marketable securities
- Any customer who can prove a violation is entitled to collect against the bond
- Because bonds are transferable, any agent’s bond may be used to meet the obligation of another agent
Correct answer: Any customer who can prove a violation is entitled to collect against the bond
Under the USA, every bond shall provide for suit thereon by any person who has a cause of action under the provisions of the Act. The Administrator must accept cash or securities in lieu of the surety bond, but cash is not a requirement—the bond will do just fine.
- A client sues an agent for selling an unregistered nonexempt security. Shortly before the case comes to trial, the client dies.
- The suit will only be continued if acted upon by the beneficiaries of the client.
- The suit survives the death of either party to the suit.
- The suit is canceled.
- Judgment is immediately rendered in favor of the deceased client.
Correct answer: The suit survives the death of either party to the suit.
You can't get out of a suit by dying. To quote the act itself, "Every cause of action under this statute survives the death of any person who might have been a plaintiff or defendant."
- A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true?
- Material changes to wrap fee programs must be filed promptly with the Administrator.
- Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end.
- Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.
- Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents.
Correct answer: Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.
As a state-registered investment adviser (IA), all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV Part 2A. Every IA, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, an amended Form ADV needs to be filed promptly with the Administrator only if there are material changes.
- 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
- Prohibited because agents and their broker-dealers cannot offer a guarantee against loss
- Permitted, as long as the customer’s account is approved for margin trading
- Sure to make this customer less anxious
- Likely to make this customer recommend Keshawn and EIR
Correct answer: Prohibited because agents and their broker-dealers cannot offer a guarantee against loss
Agents, or any other securities professionals, are prohibited from guaranteeing against a loss in the account of a customer. We would imagine this would make the customer less anxious and likely to recommend Keshawn to others, but that does not change the important fact that this practice is not permitted. You must always choose the answer that NASAA wants.
- 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?
- Presenting a chart with all of the fees
- Discussing the fees on a 30-second radio commercial
- Displaying the fees in tabular form
- Preparing a list of all of the fees
Correct answer: Discussing the fees on a 30-second radio commercial
It would be highly unusual for a broker-dealer to broadcast its fees on a radio commercial. Even one longer than 30 seconds does not give the average prospective client the opportunity to remember the details.
- 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 ethically because she has not guaranteed a profit to the client
- Has committed the unethical business practice of guaranteeing against loss
- Has acted ethically because her actions are in the client’s best interest, not her own
- Has committed the unethical business practice of recommending a wash sale
Correct answer: Has committed the unethical business practice of guaranteeing against loss
The unethical business practice of guaranteeing against loss can take several forms. This is one of them—offering to buy back a security at the purchase price. A wash sale involves an investor repurchasing a security sold at a loss and has no relevance to this question—it is a tax issue and is not relevant to the exam. The prohibition against guarantees does not require that the client be assured a profit, only that there is no loss. Even when an agent is confident that an investment is in the client's best interest, a guarantee may not be offered.
- A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means
- The broker-dealer has committed an unethical business practice because use of the word approved is prohibited
- The broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning
- An agent for the broker-dealer can place these in clients’ IRAs, knowing that the suitability requirements have been met
- The broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs
Correct answer: The broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning
Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer (BD) creating an approved list of securities is not unethical or prohibited, as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.
- 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 U.S. government guarantees that principal and interest payments will keep pace with inflation.”
- “The bonds are guaranteed as to principal and interest payments by the U.S. government.”
- “There is no way to lose money on the safest security on earth.”
- “The full faith and credit backing of the U.S. government means virtually no chance of loss.”
Correct answer: “The bonds are guaranteed as to principal and interest payments by the U.S. government.”
Stating that the bonds are guaranteed as to principal and interest payments by the U.S. government is an accurate statement of fact. A client can lose money on government bonds should interest rates rise after he purchases the bonds. The government does not guarantee that the principal and interest will keep up with inflation.
- 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 and IV
- II and IV
- II and III
- I and III
Correct answer: II and IV
The initial delivery requirement is no later than the date of entry into the advisory contract. The 48-hour rule deals with an advance delivery to avoid having to honor a five-day penalty-free withdrawal. The annual delivery date is within 120 days of the end of the adviser's year. The 90-day requirement is for the annual updating amendment to the Administrator.
- 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
- Registration
- Qualification
- Material information
- Authorization
Correct answer: Registration
Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. Material information deals with information about the issuer, not the fact that the securities are registered.
- 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 prohibited guarantee against loss
- An offer that could only be made to accredited investors
- A violation of the antifraud provisions of the Uniform Securities Act
- A right of rescission
Correct answer: A prohibited guarantee against loss
Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud, and in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.
- 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 to prospective and new advisory clients at the time of entering into any such contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
- Annual delivery of the brochure to prospective clients must be made within 120 days of the end of the adviser’s fiscal year.
- The brochure may be delivered to prospective and new advisory clients no later than 48 hours after entering into the advisory contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
- The brochure may be delivered to prospective and new advisory clients at least 48 hours prior to entering into the advisory contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
Correct answer: The brochure may be delivered to prospective and new advisory clients at the time of entering into any such contract if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract.
The latest time for delivery of the initial brochure is at the time of entry into the advisory contract. The Model Rule permits that as long as there is a provision for the client to have a penalty-free withdrawal right within five business days of entering the contract. That right can be abrogated if the brochure is delivered at least 48 hours in advance. However, the rule does not mandate the early delivery. By doing so, the adviser is relieved of providing the penalty-free withdrawal. The annual delivery is within 120 days of the end of the adviser's fiscal year, but that is only to existing, not prospective, clients (read carefully).
- 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 1B.
- Form ADV Part 1A.
- Form ADV Part 2B.
- Form ADV Part 2A.
Correct answer: Form ADV Part 2B.
A brochure supplement, Form ADV Part 2B, must be prepared listing (1) any supervised person who formulates investment advice for a client and has direct client contact and (2) any supervised person who has discretionary authority over a client's assets, even if the supervised person has no direct client contact. The supplement discloses the supervised person's name, age (or year of birth), formal education after high school, and business background (including an identification of the specific positions held) for the preceding five years. If the supervised person has no high school education, no formal education after high school, or no business background, disclose this fact.
- An agent is discussing a guaranteed security with a customer. That means
- There is absolutely no way the customer can lose money
- A profit on the security is guaranteed by a third party other than the issuer
- The broker-dealer will make up any loss suffered by the client
- The security has a guarantee from a third party other than the issuer covering the payment of principal and interest or dividends
Correct answer: The security has a guarantee from a third party other than the issuer covering the payment of principal and interest or dividends
A guaranteed security is one that has a third party other than the issuer (such as an insurance company or a parent company) that has guaranteed the payment of principal, interest, or dividends (but not capital gains). A guarantee does not refer to the agent (or broker-dealer) buying back a security at the same price or higher. Because the guarantee is only as strong as the guarantor, there is no way to claim an impossibility of a loss.
- According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of
- Institutional clients
- Each member of the investment committee or group that determines general investment advice to be given to clients
- Affiliated broker-dealers
- All employees of the adviser
Correct answer: Each member of the investment committee or group that determines general investment advice to be given to clients
The business backgrounds of these key individuals must be included in Part 2 of Form ADV and in the disclosure brochure. The business backgrounds of other employees, affiliated broker-dealers, and institutional clients need not be included in the brochure.
- A state-registered investment adviser would be permitted to
- Use Part 2 of the Form ADV to satisfy the brochure requirement
- Make annual delivery of the brochure within 150 days of the end of the fiscal year
- Deliver the brochure to a new client within 48 hours of entering into the contract
- Use Part 1 of the Form ADV to satisfy the brochure requirement
Correct answer: Use Part 2 of the Form ADV to satisfy the brochure requirement
Part 2 of the Form ADV may be used in lieu of a fancy brochure. The brochure must be delivered to a new client no later than the entry of the contract—the 48 hours is a "prior to" entry requirement in order to avoid having to offer a penalty-free withdrawal. The annual delivery must be made within 120 days, not 150.
- 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
- If he uses a system based on objective evaluation of data, can document consistent gains using the system, and discloses to clients all of the limitations and difficulties of using the system
- Under no circumstances
- Provided the basis for making guarantees is fully and accurately described in the application for registration filed with the Administrator
- If the guarantees are reasonable based on the results other clients have obtained by following his recommendations
Correct answer: Under no circumstances
Under no circumstances may an adviser guarantee that a client will achieve an investment result—either that a gain will be realized or that no loss will occur.
- 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 fees and charge schedule used by the broker-dealer
- The annual income of the broker-dealer
- The capacity in which the broker-dealer acts in a securities transaction
- Conflicts of interest faced by the broker-dealer
Correct answer: The annual income of the broker-dealer
There is no requirement to disclose a broker-dealer's income to its customers. Sometimes, the best way to get a question like this correct is to know that three of these choices must be disclosed, so the other one must be the exception.
- 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
- Help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client
- Build in a hidden markup
- Keep commissions low while making up the difference with fees
- Increase the broker-dealer’s net income
Correct answer: Help reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client
Executing a transaction for clients frequently incurs expenses that commissions don't cover, such as clearing fees and execution facility fees. There are services performed for clients, such as postage and handling, for which expenses are incurred. Although charging these fees does have a positive effect on the firm's bottom line, they are designed for reimbursement purposes, not as an additional source of income.
- Under the Uniform Securities Act, which of the following may an agent lawfully tell a customer?
- “This security is such a safe investment, it doesn’t have to be registered; it’s exempt.”
- “I am registered with both the SEC and the state, meaning that I have received the approval of all the proper authorities.”
- “This security is not registered, but it doesn’t have to be. It is an exempt security.”
- “If this security hasn’t increased in value in six months, I’ll buy it back from you for what you paid for it.”
Correct answer: “This security is not registered, but it doesn’t have to be. It is an exempt security.”
Exempt securities are exempt from registration, so there is nothing misleading or fraudulent in making that statement. Statements that include unlawful representations regarding registration or exemption and guarantees against loss are prohibited.
- When a broker-dealer is acting as a principal in a securities transaction
- Earning a commission
- Acting in an agency capacity
- Acting in the capacity of a broker
- A contra party to the trade
Correct answer: A contra party to the trade
A securities transaction is, in essence, a contract. One side is selling and the other is buying. Those are the two principals—the buyer and the seller. When a broker-dealer is acting as a principal in the trade, it is taking one of those roles. That means acting as a contra party (part of the contract). Acting as an agent or broker is two ways of saying the same capacity. In an agency capacity, the broker-dealer is representing someone else in the trade. Commissions are the form of compensation when acting in an agency capacity.
- 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 offer violates the provision of the regulations prohibiting performance guarantees.”
- “Be sure to get Niesha’s offer in writing before you make the investment into Afinet.”
- “Niesha’s offer sounds like a ‘can’t lose’ proposition for the customer.”
- “Be sure to get Niesha’s offer in writing from the broker-dealer before you make the investment into Afinet.”
Correct answer: “Niesha’s offer violates the provision of the regulations prohibiting performance guarantees.”
This exam wants you to know that it is prohibited for any securities professional to offer a performance guarantee for a security.
- Which of the following clients of a registered investment adviser is exempt from the requirement to receive annual delivery of the adviser's brochure?
- KAPCO Growth Fund, a mutual fund registered with the SEC
- First National Bank of Bigville, a bank whose deposits are insured by the FDIC
- An individual receiving impersonal advisory services billed at a rate of $150 per quarter
- Valued Life Insurance Company, authorized to do business in the state
Correct answer: KAPCO Growth Fund, a mutual fund registered with the SEC
The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. Four quarterly payments of $120 equals $480, and that meets the exemption. The other is when the advisory contract is with a registered investment company such as a mutual fund. Hedge funds are not registered investment companies.
- 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 II
- II and III
- I, II, and III
- I and III
Correct answer: II and III
Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. The NASAA Model Rule requires that 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. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.
- 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, II, III, and IV
- I and IV
- III and IV
- I and III
Correct answer: I and III
The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as a mutual fund.
- As an agent of a registered broker-dealer, one of the benefits of selling a security registered with the Administrator is
- Being able to deliver a prospectus containing the information an investor needs to make the investment decision
- The protection it gives the agent against a civil suit by a customer
- Removal of the need for the agent to register in that Administrator’s state
- "D) the confidence it gives the investor that a regulatory body has approved of the sale of the issue.
Correct answer: Being able to deliver a prospectus containing the information an investor needs to make the investment decision
When a security is registered with the Administrator, the customer is supplied with a prospectus containing the material information. It would be like taking this exam open-book, where the answer to almost every question that comes up is right there. The Administrator never approves or disapproves of a registration statement. There are many reasons why a customer might file a civil suit that have nothing to do with the registration of a security. Registration of a security in a state, or lack thereof, has nothing to do with the requirement for an agent to register in that state.
- Under the Uniform Securities Act, an agent may tell a customer that the registration of a particular security indicates approval by the Administrator
- Under no circumstances
- As long as the security has been registered by qualification
- As long as the Administrator has, in fact, approved the security
- As long as the issuer is solvent
Correct answer: Under no circumstances
It is unlawful to state or imply that registration indicates approval or qualification of a security or a person or that the information in the registration statement has been verified as true or accurate by the Administrator.
- 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 new account form
- On the trade confirmation
- As part of the broker-dealer’s fee disclosure statement
- At or before the time of the transaction
Correct answer: On the trade confirmation
State and federal laws require the disclosure of a broker-dealer's (BD's) capacity on the trade confirmation. The trade confirmation is sent after the transaction, not earlier. Items missing from the BD's fee disclosure statement are its commission schedule and markup policy.
- 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.
- II and III
- III and IV
- I and IV
- I and III
Correct answer: I and III
If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
- When an agent has competing interests or loyalties between his customers and an issuer of securities, it is considered
- A potential conflict of interest
- An unethical and dishonest act
- A normal business practice
- An obligation to recuse himself from the transaction
Correct answer: A potential conflict of interest
The Cambridge dictionary defines a conflict of interest as "a situation in which someone cannot make a fair decision because they will be affected by the result." An agent can have a potential conflict of interest in many different ways. The only requirement is to disclose that conflict. One does not have to remove himself from the transaction. The only time this is unethical is when disclosure is not made.
- 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,
- Agents should always recommend securities that are familiar to the investor
- The agent is possibly committing fraud
- A guaranteed security only guarantees payment of interest or dividends
- The agent is describing a guaranteed security
Correct answer: The agent is describing a guaranteed security
A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that a client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if 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
- Probably purchased the stock for its own account
- Acted in an agency capacity
- Acted in a principal capacity
- Acted in an unethical manner
Correct answer: Acted in an agency capacity
Commissions are charged when acting in an agency capacity. If the trade confirmation indicates a markup or markdown, the broker-dealer acted in a principal capacity. If the broker-dealer purchase the customer's stock for its own account, it would be acting as a principal and would charge a markdown, not a commission.
- 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.
- II and III
- I and IV
- I and III
- III and IV
Correct answer: I and III
If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
- All of the following statements regarding the disclosure investment adviser brochure rule of the Uniform Securities Act are true except
- The disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a five-day refund right
- The disclosure brochure must contain essentially the same information as is contained in Form ADV Part 2A and, if applicable, Part 2B
- The disclosure brochure must be signed by an officer or partner of the firm
- The brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within five business days
Correct answer: The disclosure brochure must be signed by an officer or partner of the firm
An officer or partner of the firm need not sign the disclosure brochure. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within five business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.
- Under the Uniform Securities Act, it is legal for an agent to tell a customer that
- A registered security has been approved for sale in the state by the Administrator
- An exempt security is not required to be registered because it is generally regarded as being safer than nonexempt securities
- Her qualifications have been found satisfactory by the Administrator
- A registered security may lawfully be sold in the state
Correct answer: A registered security may lawfully be sold in the state
The fact that a security is either registered or exempt from registration has no bearing on the quality, safety, or merits of that security, and it is illegal to make any statement or implication to the contrary. A similar principle applies to persons who are registered or exempt from registration. Also, remember that registration does not involve verification by the Administrator of any information included in a registration statement or application. When a registration becomes effective, it means only that certain legal requirements have been met in regard to that security or person.
- 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 advisory firm must cancel the contract but may keep all fees collected.
- The advisory firm must cancel the contract and return all fees collected.
- The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date.
- The contract is binding, and XYZ has no obligation to return any fees collected.
Correct answer: The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date.
Because the brochure was delivered at the time of the signing of the contract, the client may cancel without penalty within five business days. The firm must return all the up-front fees collected except for an amount that is proportionate to the time advisory services were rendered. This is commonly known as the 48-hour rule because anytime the client does not receive the adviser's brochure at least 48 hours prior to entering into the contract, this refund right is in effect.
- In the securities industry, the term contra party refers to
- A securities regulator who begins an investigation against a securities professional
- The person identified on the trade confirmation as a broker
- The person on the other side of a civil suit
- The person on the other side of the trade
Correct answer: The person on the other side of the trade
Contra party is defined as the broker-dealer or customer to whom a person has sold securities or from whom a person has purchased securities—they are on the other side of the trade.
- 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.
- I, III, and IV
- I and II
- II and III
- II, III, and IV
Correct answer: II and III
A disclosure brochure is not required to be delivered if the client is a registered investment company or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service. The client's net worth has no bearing on brochure delivery requirements.
- 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 III
- I and IV
- I and III
- II and IV
Correct answer: II and IV
When a security registers with the Administrator, the date that sales are allowed is known as the effective date. The Administrator neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.
- 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?
- Conviction of a misdemeanor involving an investment-related business
- SEC or other federal regulatory agency proceedings in which the person was found in violation of an investment-related statute
- Conviction of a misdemeanor in a civil action regarding payment of motor vehicle violations
- A proceeding before FINRA in which the person was barred or suspended from membership
Correct answer: Conviction of a misdemeanor in a civil action regarding payment of motor vehicle violations
An investment adviser must disclose, in its brochure, all adverse regulatory events to clients and prospective clients if they occurred within the past 10 years. Examples would include a conviction relating to a misdemeanor involving an investment-related business, SEC or other federal regulatory agency proceedings in which the person was found to have violated an investment-related statute, or proceedings before FINRA in which the person was barred or suspended from membership. Misdemeanors regarding non-investment-related actions are not considered material and need not be disclosed (e.g., a motor vehicle violation).
- 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?
- “As a new agent, I have a small book of business and try to devote more of my time to my clients than might be the case with established agents.”
- “Integrity Asset Management is registered with the SEC, a member of FINRA, and registered in more than a dozen states.”
- “Because I passed the qualification exam one month ago, the regulatory bodies were able to grant effectiveness to my registration.”
- “Because I passed the qualification exam one month ago, you can be sure that I am up to date on the stock market.”
Correct answer: “Because I passed the qualification exam one month ago, you can be sure that I am up to date on the stock market.”
Although the final step in the registration process for most agents is passing the qualification exams, stating that having done so recently means you are current on the stock market is a misstatement of fact. The exam has nothing to do with current stock market conditions. Stating the registrations of the broker-dealer is stating the facts and not implying any special recognition. An agent stating that he will work hard for his clients is a reasonable sales pitch.
- 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 on trades done as a principal
- Interest on debit balances in margin accounts
- The cost of overnight delivery services
- Safekeeping of customer funds and securities
Correct answer: Markups and markdowns on trades done as a principal
There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
- 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 potential client in electronic form
- Of an initial delivery to a potential client in paper form
- When the investment adviser will be maintaining custody of customer funds and securities
- Of an annual delivery to an existing client in electronic form
Correct answer: Of an initial delivery to a potential client in electronic form
Delivery of the brochure and related supplements may be made electronically if the investment adviser, in the case of an initial delivery to a potential client, obtains a verification that a readable copy of the brochure and supplements was received by the client.
- Under the Uniform Securities Act, a guaranteed security is protected by someone other than the issuer against loss of all of these except
- Dividends on equity securities
- Principal on equity issues
- Principal repayment at maturity on debt securities
- Interest on debt securities
Correct answer: Principal on equity issues
These guarantees apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.
- 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 the end of its fiscal year
- To all nonexempt clients within 60 days of the end of its fiscal year
- To all nonexempt clients within 90 days of the end of its fiscal year
- Within 7 days of receiving a request from a client
Correct answer: To all nonexempt clients within 120 days of the end of its fiscal year
Whether the firm is a state or federal covered investment adviser (IA), if there have been material changes, a copy of the IA's brochure or a summary of the changes must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Most material changes must be sent to the Administrator by filing an amended Form ADV promptly, but this question's responses are limited to customers.
- Which of the following statements regarding Form ADV Part 2 is true?
- It must be delivered no later than 48 hours prior to entering into an investment advisory contract.
- Unless there are no material changes, it must be delivered to clients annually.
- It must always accompany the investment adviser’s brochure.
- It must be delivered no later than receipt of the client’s funds.
Correct answer: Unless there are no material changes, it must be delivered to clients annually.
Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients within 120 days of the end of the adviser's fiscal year. If it is not delivered 48 hours in advance of the initial contract, the client has a five-day penalty-free termination clause. It does not accompany the brochure—it is the brochure.
- 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?
- This is prohibited if the customer loses money but not if he at least breaks even.
- This is ethical if the Treasury bonds mature in less than one year.
- This is prohibited because it constitutes a guarantee of making a profit.
- This is ethical because U.S. Treasury bonds carry no risk.
Correct answer: This is prohibited because it constitutes a guarantee of making a profit.
Whether the firm is a state or federal covered investment adviser (IA), if there have been material changes, a copy of the IA's brochure or a summary of the changes must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Most material changes must be sent to the Administrator by filing an amended Form ADV promptly, but this question's responses are limited to customers.
- 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
- Misstated the facts because Treasury bonds do fluctuate in value
- Made an unsuitable recommendation because she will have to wait 15 years to receive the return of her invested capital
- Made a highly suitable recommendations because the repayment of principal is guaranteed by the Treasury
- Made an unsuitable recommendation because an investment in common stock will likely provide a greater return
Correct answer: Misstated the facts because Treasury bonds do fluctuate in value
Although the U.S. government stands behind the bond, unless the bond is held to maturity, there is no guarantee that the price will not fluctuate due to changes in market conditions. If the customer should need the money before the maturity date, it is possible the bonds could be sold at a loss (or a gain).
- 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 court of competent jurisdiction levied a civil fine of $100,000 against the firm resulting from a lawsuit filed by a newsletter publisher claiming the adviser used the publisher’s intellectual property without permission
- Court proceedings, such as a permanent or temporary injunction, against the firm or management person pertaining to an investment-related activity or any felony
- State or regulatory proceedings in which the adviser or a management person was found to have violated rules or statutes that led to the denial, suspension, or revocation of the firm’s or the individual management person’s registration
- Self-regulatory organization proceedings in which the adviser or management person caused the business to lose its registration; the firm or individual was barred, suspended, or expelled; or a fine in excess of $2,500 or a limitation was placed on the adviser or management person’s activities
Correct answer: A court of competent jurisdiction levied a civil fine of $100,000 against the firm resulting from a lawsuit filed by a newsletter publisher claiming the adviser used the publisher’s intellectual property without permission
Unless the civil case was in relation to an investment activity, disclosure is not required. Plagiarism is not investment-related and there is nothing in the Uniform Securities Act or NASAA's Model Rules where the topic is discussed.
- 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?
- This is unethical if the customer loses money but not if he at least breaks even.
- This is ethical if the Treasury bonds mature in less than one year.
- This is unethical because it constitutes a guarantee against market risk.
- This is ethical because U.S. Treasury bonds carry no risk.
Correct answer: This is unethical because it constitutes a guarantee against market risk.
U.S. Treasury bonds are guaranteed to pay interest and principal, but they do carry market risk. It is unethical to indicate to a client that he is guaranteed against loss.
- 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 result
- Is doing a great service for these investors by protecting their investment with the escrow deposit
- Must obtain the approval of a designated supervisor in order to make this claim
- Has committed the prohibited act of introducing an unregistered lawyer to customers
Correct answer: Has committed the prohibited act of guaranteeing a result
No matter how it is phrased, a securities professional is prohibited from guaranteeing a specific result. The exam may try to tempt you with fancy terminology such as a lawyer's escrow account, but just remember there are no performance guarantees permitted.
- 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
- Account inactivity fees
- Charges for late payments
- Advisory fees
- Fees for issuance of a stock certificate
Correct answer: Advisory fees
There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
- 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
- Acted as a principal in the trade
- Acted in an agency capacity in the trade
- Was not familiar with the party on the other side of the trade."
- Acted contrary to the best interest of the customer
Correct answer: Acted as a principal in the trade
A securities transaction is nothing more than a contract between a buyer and a seller. If you are the buyer, the seller is the contra party. If you are the seller, the buyer is the contra party. When a BD is acting as a principal in a trade, it is the buyer or the seller. Therefore, the firm is a contra party to the trade.
- According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts,
- As long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers
- The schedule should be made available on the broker-dealer’s public website without requiring any login or password
- Fee schedules should only be delivered by hand or postal mail to reduce cyber security threats
- The schedule should be made available on the broker-dealer’s public website and should be password protected
Correct answer: The schedule should be made available on the broker-dealer’s public website without requiring any login or password
Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available, and cyber security is not a threat because there is no confidential information included.
- When a security is registered with the Administrator, it means that
- The Administrator has approved of the issue
- It is probably a federal covered security
- The security may be legally sold in the state
- It is now exempt from the advertising filing requirements of the Uniform Securities Act
Correct answer: The security may be legally sold in the state
We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements. Federal covered securities don't register with the Administrator; they notice file.
- 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
- Indicate to prospects that you are approved by the state
- State that you have passed the required licensing exams
- Begin to accept orders from clients resident in the state
- Begin to prospect for new clients in the state
Correct answer: Indicate to prospects that you are approved by the state
Becoming a registered securities agent with the state does not infer or imply any sort of approval of you or your credentials. Once the firm tells you that you have an effective registration, you can commence doing those things that are permitted to licensed agents.
- In reviewing prospectuses and registration statements, the Administrator
- Guarantees the adequacy of the disclosures made in a prospectus
- Passes on the merits of a particular security covered by a registration statement
- Certifies the accuracy of the disclosures made in a prospectus
- Does not approve or disapprove of the issue
Correct answer: Does not approve or disapprove of the issue
The Administrator requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The Administrator does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue. That is the purpose of the disclaimer found on the front page of any prospectus.
- 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.
- I and III
- II and III
- I and IV
- II and IV
Correct answer: II and III
The rule calls for delivery of the current brochure and current summary of material changes at or before entering into the advisory contract. There is no offer to provide a copy of updated materials because the current brochure and summary have just been delivered. On an annual basis, the brochure or supplement describing material changes is delivered within 120 days of the end of the investment adviser's fiscal year.
- In the securities industry, when a person is acting in an agency capacity, the form of compensation received is
- Markups or markdowns
- Commissions
- Fees
- Account maintenance charges
Correct answer: Commissions
Broker-dealers act in the capacity of brokers (agency); they earn commissions. When acting in the capacity of a dealer (principal), the compensation comes from markups or markdowns. Compensation in the form of fees is most common for investment advisers.
- 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
- Sell as much of that security as possible to maximize the firm’s earnings
- Refuse to recommend that security
- Disclose the potential conflict of interest
- Only accept unsolicited orders for that security
Correct answer: Disclose the potential conflict of interest
Certain products carry higher compensation rewards to the broker-dealer than do others of a similar nature. This presents a potential conflict of interest, should the firm recommend these over others. There is nothing illegal about doing so, as long as disclosure of the conflict is made to the client.
- In general, a broker-dealer will disclose its fee schedule
- When requested by the client
- At the time of the account opening
- To its agents who are then responsible for sharing with client
- Within 30 days following any changes in fees or charges
Correct answer: At the time of the account opening
Although there are no specific industry requirements, typically, a broker-dealer's fee schedule is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.
- In general, a broker-dealer will disclose any changes to its fee schedule
- When requested by the client
- Within 30 days following the change
- To the Administrator and then to the clients
- By notifying clients of the change in advance
Correct answer: By notifying clients of the change in advance
Most broker-dealers disclose fee changes at least 30 days in advance; there is no requirement whatsoever to notify the Administrator.
- 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, II, and III
- I and II
- I and III
- II and III
Correct answer: I, II, and III
The template allows for three acceptable methods of disclosure of the fee information. Charts, tables, or lists are fine as long as they are presented in the proper 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
- Your firm acted as a principal in the trade and charged a markup
- Your firm has a policy of not charging for the initial trade in a new account
- The firm’s cashiering department forgot to include the commission on the confirmation
- The commission was built into the purchase price
Correct answer: Your firm acted as a principal in the trade and charged a markup
Broker-dealers can act either as brokers (in an agency capacity) or as dealers (in a principal capacity) when executing transactions for their customers. The capacity must always be disclosed on the trade confirmation. When a commission appears, the BD has acted in an agency capacity. When there is no commission, the firm has acted as a principal. In most cases (not tested), the markup (or markdown) is disclosed as well.
- Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except
- Changes to the fee schedule may be shown on the firm’s website
- Changes to the fee schedule must be announced in advance
- It must be up to date
- It must be filed with the Administrator of the state in which the broker-dealer’s principal office is located
Correct answer: It must be filed with the Administrator of the state in which the broker-dealer’s principal office is located
There is no requirement that the fee schedule be filed with the Administrator. It must be up to date, and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees—the firm's website is one of them.
- Which of the following pairs are correctly matched? I. Broker = dealer II. Broker = agency III. Dealer = agency IV. Dealer = principal
- I and IV
- II and IV
- II and III
- I and III
Correct answer: II and IV
Securities firms are called broker-dealers because they can act either as brokers (agency capacity) or as dealers (principal capacity).
- 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 must indicate that past performance is no guarantee of future success
- It is possible that the agent could receive a prison term of as long as three years
- The agent must be certain to deposit sufficient funds in escrow to guarantee the promise
- The agent has violated the prohibition against performance guarantees
Correct answer: The agent must indicate that past performance is no guarantee of future success
There is just no way a securities professional can offer a guarantee like this. It is true that any statement about past performance must have the disclaimer that the past is no guarantee of the future, but that is not relevant here because the agent has promised a minimum future return; no reference has been made to past performance. Although a violation, it is a civil one, not criminal; therefore, the agent is not eligible for a prison sentence.
- Trade confirmations sent by broker-dealers to their customers must always include
- The current market price of the security traded
- The amount of commission charged
- The amount of markup or markdown charged
- The tax identification number of the customer
Correct answer: The amount of commission charged
Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.
- 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
- Those providing investment advice and having direct contact with retail clients in the state
- Those exercising discretion over assets of clients in this state, even if no direct contact is involved
- Those providing investment advice and having direct contact with institutional clients in the state
- Members of AT’s board of directors who are active in the firm’s business
Correct answer: Members of AT’s board of directors who are active in the firm’s business
Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals have direct client contact or exercise discretion, a supplement for them would need to be prepared.
- Under the Uniform Securities Act, an investment adviser's current clients must be delivered a brochure
- Annually, but only if the adviser has neither custody nor discretion
- Within 48 hours of renewal
- Quarterly if the adviser has both discretion and custody
- Annually, whether or not the adviser has custody or discretion
Correct answer: Annually, whether or not the adviser has custody or discretion
Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients (except those who are exempt from the brochure delivery requirements [impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940]) within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant for this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.
- It would not be a prohibited practice under the Uniform Securities Act for an agent to tell a client that
- Registered nonexempt securities may properly be sold in the state
- Her commissions are structured so she makes money only if the client makes money
- Registration of securities implies tacit approval of the Administrator
- The fact that she passed her licensing exams is ample proof of her qualifications
Correct answer: Registered nonexempt securities may properly be sold in the state
Nonexempt securities are those that must register. The Administrator never approves of any security, passing a licensing exam does not give one the right to assert one's qualifications, and performance-based compensation is never permitted for agents.
- 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
- $1,000 per year in fees.
- $1,200 per year in fees.
- $200 per year in fees.
- $500 per year in fees.
Correct answer: $500 per year in fees.
The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as an open-end or closed-end fund.
- The Uniform Securities Act defines a guaranteed security as one
- Where the payment of interest and principal (bond) or dividends (stock) is guaranteed by a party other than the issuer
- That may only be sold to institutional investors
- Involving a guarantee of a minimum profit by a party other than the issuer
- Where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment
Correct answer: Where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment
This is simply the definition of a guaranteed security. The one thing not guaranteed is a profit (capital gain).
- Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it
- Filed a brochure with the Administrator, noting that it was available to clients upon request
- Sent a brochure within 150 days of the end of AT’s fiscal year
- Sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT’s fiscal year
- Did not send an annual brochure to its clients because there was no material change from the previous year
Correct answer: Did not send an annual brochure to its clients because there was no material change from the previous year
The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Parts 2A and 2B.
- 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
- Acted in a principal capacity
- Acted in an unethical manner
- Acted in an agency capacity
- Probably represented the seller of the shares
Correct answer: Acted in a principal capacity
Securities firms are called broker-dealers (BDs) because they can act either as brokers (agency capacity) or as dealers (principal capacity). Trade confirmations must always indicate the capacity in which the BD acted in the transaction. When there is a markup (or markdown), the firm is acting in a principal capacity. In our question, the BD is not representing the seller; it is the seller. That is why dealers are contra parties to a trade.
- 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
- The broker-dealer’s new account form
- The Administrator’s guide to broker-dealer fees and charges
- NASAA’s fee disclosure document.
- The broker-dealer’s fee disclosure document
Correct answer: The broker-dealer’s fee disclosure document
NASAA has prepared a standard template to be used to disclose the broker-dealer's fees and charges to a prospective or existing customer. It is not part of the new account form, although if the prospect does open an account, it may be delivered at or about the same time. NASAA designed the template, but each firm discloses its fees on its disclosure document.
- 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
- No later than December 31 each year
- Within 120 days of the end of the investment adviser’s fiscal year
- Within 90 days of the end of the investment adviser’s fiscal year
- No later than the time of entering into the advisory contract
Correct answer: Within 120 days of the end of the investment adviser’s fiscal year
The delivery requirement is 120 days after the end of the adviser's fiscal year. Because state-registered investment advisers renew their registration each December 31, for exam purposes, their fiscal year is always the calendar year. Within 90 days after the end of the fiscal year, the adviser must submit its annual updating amendment and other information to the Administrator. Although the brochure must be delivered no later than the time of entering the contract, this question is referring to an existing customer, so that initial delivery requirement is past history.
- 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 commission schedule
- The way the firm charges markups and markdowns
- Account maintenance fees
- Advisory fees if the broker-dealer is also an investment adviser
Correct answer: Account maintenance fees
Account maintenance fees are one of the many charges disclosed by broker-dealers. The other three charges are not part of the fee disclosure document and are disclosed elsewhere.
- For larger accounts, a broker-dealer is least likely to waive its normal fee for
- Safekeeping of funds or securities in the account
- Wiring funds to the client’s bank
- Transferring the account to another broker-dealer
- The annual account maintenance charge
Correct answer: Transferring the account to another broker-dealer
Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.
- 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 made when a customer transfers the account to another broker-dealer
- Advisory fees
- Charges for wiring funds
- Interest charged on borrowed money in margin accounts
Correct answer: Advisory fees
There are three items that are not part of the broker-dealer (BD) fee disclosure document. Those are commissions; markups and markdowns; and advisory fees (for those BDs that are also investment advisers).
- 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 III
- I and III
- II and IV
- I and IV
Correct answer: I and III
Securities professionals are not permitted to misrepresent their qualifications by stating or insinuating that their registration implies any kind of approval of their qualifications by any regulatory body. The same holds true when it comes to the registration status of any security.
- 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 and IV
- I and III
- I and IV
- II and III
Correct answer: II and III
The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividends.
- A person registered in State C as an agent with Approved Retirement Investments (ARI), a registered broker-dealer, would be violating ethical standards
- If she opened a joint account with one of her customers
- By including the annual fee when renewing her registration
- By stating that her application for registration as an agent in State C is currently effective
- By stating that her registration means she has been approved by the Administrator to sell to residents of that state
Correct answer: By stating that her registration means she has been approved by the Administrator to sell to residents of that state
Just as the Administrator (or any other regulatory body) does not approve the registration of a security, it does not approve the applications of securities professionals. Sure, if there was something the Administrator did not like, your application might be denied, but you cannot use the term approved when speaking about registrations. If you are currently registered, you can say so. There is no problem with opening a joint account, and you'd better include the annual registration fee or your renewal will not be accepted.
- Under the Uniform Securities Act, the investment adviser brochure rule requires
- Delivery no later than 5 business days after the formalizing of the advisory contract
- A brochure, or summary of material changes, if any, to be delivered to all clients within 120 days of the end of the adviser’s fiscal year
- Delivery no later than 48 hours before entering into an investment advisory contract
- Delivery of the Form ADV Part 1 prior to entering into the advisory contract
Correct answer: A brochure, or summary of material changes, if any, to be delivered to all clients within 120 days of the end of the adviser’s fiscal year
The NASAA Model Rule requires that 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. If there are no material changes, a brochure does not have to be sent. The 48-hour rule deals with avoiding an early cancellation penalty. When entering into a new contract, the brochure must be delivered no later than the signing of the agreement. Form ADV Parts 2A and 2B may be used as the brochure.
- 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
- Allowed if the agent does not use the word guarantee in the presentation
- Allowed if the agent explains to the customer that reinvested dividends are still subject to federal income tax
- Allowed if the agent does not put the statement in writing
- Prohibited and may result in proceedings against the agent
Correct answer: Prohibited and may result in proceedings against the agent
Guaranteeing a profit (or ensuring there will be no loss) is always a prohibited action. Even if you are not familiar with the rules regarding reinvestment of mutual fund distributions, it should be clear that a securities professional can never ensure a profit.
- 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 year of the firm’s founding
- Its fees and charges
- The number and location of branch offices
- The identity of the firm’s executive officers
Correct answer: Its fees and charges
A schedule of fees and charges should be made available not later than at the time of the account opening. None of the other choices represent information that has an impact on the customer's business relationship with the broker-dealer.
- 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
- An unethical business practice
- A violation of the Uniform Securities Act
- A potential conflict of interest that must be disclosed
- Using material nonpublic inside information
Correct answer: A potential conflict of interest that must be disclosed
As long as the agent discloses the relationship and that it can lead to a potential conflict of interest, there is no problem. The customers can decide how much weight to give to that relationship. It is only when the relationship is not disclosed that it becomes an unethical business practice. Nothing in the question indicates that the agent is receiving inside information.
- Under the Uniform Securities Act, the Administrator has the authority to I. issue stop orders. II. approve new issues. III. review standard registration forms.
- II and III
- I, II, and III
- I and III
- I and II
Correct answer: I and III
During the cooling-off period, the Administrator reviews registration statements and may issue stop orders. The Administrator does not approve securities; she only clears them for distribution to the public.
- 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
- The security is legal for sale
- Acme’s stock will most likely be listed for trading on the New York Stock Exchange.
- Registration with multiple regulators means a greater likelihood that the investment has been thoroughly vetted
- The investor will receive both a state and federal prospectus
Correct answer: The security is legal for sale
Registration of a security makes its sale legal. Stating approval by the regulators is a misrepresentation. There is one prospectus, used to satisfy both the SEC and the states. There is nothing here to indicate that the stock will be listed on the NYSE.
- 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.
- I, II, and III
- I and II
- I and III
- II and III
Correct answer: I, II, and III
Whether using a table, a chart, or a list, broker-dealers must make sure that it is easy for customers to determine what the fees and charges are and how they are computed.
- 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
- “The president of this company used to run LJB Corporation.”
- “The president of this company was largely responsible for LJB Corporation’s success.”
- “There is no doubt that the officers will repeat the success they enjoyed with LJB Corporation.”
- “Time will tell whether the officers can repeat the success they enjoyed with LJB Corporation.”
Correct answer: “There is no doubt that the officers will repeat the success they enjoyed with LJB Corporation.”
This statement implies guaranteed performance and is not permitted. The other statements are not making claims that can be understood to be offering some kind of guarantee.
- 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
- Brochure, which may be a copy of Form ADV Part 2A of its Form ADV or written documents containing the information required by Part 2A of Form ADV
- Form ADV Part 1B.
- Fee disclosure document as set forth in the NASAA fee disclosure template as its brochure
- Form ADV Part 2A Appendix 1 wrap fee brochure prior to or concurrently with the initial entry into an advisory agreement.
Correct answer: Form ADV Part 2A Appendix 1 wrap fee brochure prior to or concurrently with the initial entry into an advisory agreement.
When an investment adviser's (IA's) only activity is sponsoring or participating in wrap fee accounts, its brochure is Form ADV Part 2A, Appendix 1. If PFRS offered other advisory services, then, in addition to Appendix 1, the normal brochure delivery requirements are in effect. Form ADV Part 1B is used only by state-registered IAs (as PFRS is), but that has nothing to do with the brochure rule. Likewise, the NASAA fee disclosure template is for use by broker-dealers and is not a substitute for an IA'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 and III
- II and IV
- II and III
- I and IV
Correct answer: I and IV
Securities professionals are not permitted to misrepresent their qualifications by stating or insinuating that their registration implies any kind of approval of their qualifications by any regulatory body. The same holds true when it comes to the registration status of any 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 Hedge Fund with assets of over $500 million
- Fortune Investment Advisers, a registered investment adviser
- Fortune Income Fund, a closed-end investment company traded on the NYSE
- Fortune Investment Securities, a registered broker-dealer
Correct answer: Fortune Income Fund, a closed-end investment company traded on the NYSE
The brochure rule creates exemptions from the delivery requirement in two cases. The first is when the service rendered meets the definition of impersonal advisory services and the annual fee is less than $500. The other is when the advisory contract is with a registered investment company such as an open-end or closed-end fund.
- What does the term guaranteed mean when used to describe a security?
- The security has been cleared and is backed by the state Administrator.
- The security has a third party other than the issuer that guarantees the payment of principal and interest or dividends.
- The broker-dealer will buy the security back at the same price or higher.
- The security is an annuity product that guarantees a retirement income.
Correct answer: The security has a third party other than the issuer that guarantees the payment of principal and interest or dividends.
A guaranteed security is one that has a third party other than the issuer (such as an insurance company or a parent company) that has guaranteed the payment of principal, interest, or dividends (but not capital gains). A guarantee does not refer to a broker-dealer buying back a security at the same price or higher or to the retirement income offered by a fixed annuity. In addition, the Administrator does not back or guarantee securities.
- 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 is generally correct
- Violated the prohibition of comparing mutual fund performance to the overall market
- Violated the prohibition of guaranteeing results
- Made a suitable recommendation
Correct answer: Violated the prohibition of guaranteeing results
The truth of the matter is that most mutual funds do not outperform the market. That is not an indictment of the fund industry (the market does not have expenses; mutual funds do). This is another example of an agent making a claim that would be considered a guarantee of performance. However, isn't it true that this is likely a suitable recommendation? It might be; we are not given the description of the funds chosen. They might be too risky or too conservative. What we do know for sure is that Gray has made a statement guaranteeing performance, and that is never permitted. When you have to choose between two that could be correct, always go for the one that does not require you to overthink the question.
- 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 III
- II only
- I, II, and III
- I and II
Correct answer: I, II, and III
The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.
- 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
- Indicate to prospects that you are approved by the state
- State that you have passed the required licensing exam
- Begin to prospect for new clients in the state
- Begin to accept orders from clients resident in the state
Correct answer: Indicate to prospects that you are approved by the state
Becoming a registered securities agent with the state does not infer or imply any sort of approval of you or your credentials. Once the firm has told you that you have an effective registration, you can commence doing those things that are permitted to licensed agents.
- Under securities industry regulations, all of the following are prohibited when attempting to make a sale except
- A statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so
- Telling a client that he is trading commission free when, in actuality, the firm is acting as a principal and placing a markup on his trades
- Telling a client that her stock is a sure candidate for a takeover bid
- An agreement by the agent to repurchase the security from the customer for the same price at a future date
Correct answer: A statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so
An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a markup, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.
- Which of the following practices could be considered fraudulent under the Uniform Securities Act?
- Altering the customer’s order at the request of a customer, which subsequently results in a substantial loss
- Failing to inform the firm’s principal of frequent verbal customer complaints
- Promising services that an agent cannot realistically perform because of his broker-dealer’s limitations
- Participating in active trading of a security in which an unusually high trading volume has occurred
Correct answer: Promising services that an agent cannot realistically perform because of his broker-dealer’s limitations
An agent may not promise services that he cannot perform. An agent may participate actively in trading a security in which an unusually high trading volume has occurred, provided the trading is not designed to create a false appearance of high volume. An agent is only required to report written complaints to his employing principal, although it would be wise to report repeated oral complaints if they are serious.
- Which of the following is defined as fraud under the Uniform Securities Act?
- An agent unknowingly offers for sale a security that enhances the wealth of his clients in a transaction prohibited by the state Administrator.
- An agent unknowingly sells an unregistered nonexempt security in which the client loses a large portion of his net worth.
- An agent sold securities that were discovered to be fraudulent four years after the sale.
- An agent engages in transactions that his state legislature has declared fraudulent, but no judicial body or case law has found such transactions to be fraudulent.
Correct answer: An agent engages in transactions that his state legislature has declared fraudulent, but no judicial body or case law has found such transactions to be fraudulent.
Fraud is a result of a deliberate action, not unknowingly. Fraud under the USA is not limited to judicial or case law definitions of deceit but is subject to definition by legislation. The act itself contains the statement "fraud is not limited to common law deceit."
- 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
- Ethically because he did not profit from selling Technotalk common stock short in his own account
- Unlawfully because he failed to report nonpublic information to the SEC
- Ethically because he did not make use of material nonpublic information
- Unlawfully because he failed to inform his customers of the negative news immediately
Correct answer: Ethically because he did not make use of material nonpublic information
Having material nonpublic information puts the agent (sales representative) in a difficult position. If the information is used so that a trade takes place, a criminal violation has occurred. If the information is passed on to others, even if not used, NASAA would consider that unethical conduct. The only proper action is to pass the information on to your supervisor or the firm's compliance officer.
- 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, execution price, time of order entry, and time of execution or cancellation
- Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order
- Account number, customer address, time of order entry, and terms and conditions of the order
- Customer name, customer address, execution price, and time of execution or cancellation
Correct answer: Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order
This is one of those questions where the best way to find the answer is by determining what is not correct. Customer name and/or address would never be on an order ticket, knocking out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed), and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.
- Deliberately failing to disclose sufficient information pertinent and relevant to a client making an informed investment decision is
- Churning an account without discretion
- Effecting transactions without specific authority
- A fraudulent business practice because a client must have sufficient information to make a rational decision
- An example of guaranteeing returns
Correct answer: A fraudulent business practice because a client must have sufficient information to make a rational decision
Failure to disclose sufficient information for a client to make an informed investment decision is a fraudulent practice. The other choices are prohibited practices but not necessarily fraudulent.
- 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?
- Enter the order.
- Point out that the company has the lawsuit pending.
- Refuse the order.
- Point out that the price has dropped and that the client can purchase almost three times the number of shares as on the original date he was first contacted.
Correct answer: Point out that the company has the lawsuit pending.
Agents and broker-dealers must state all material information about a security.
- Under the Uniform Securities Act, an agent may not make which of the following statements to a customer?
- “This security is approved for sale by the Administrator.”
- “This security is registered with the state.”
- “This security is exempt from registration.”
- “This security has been registered with the Administrator.”
Correct answer: “This security is approved for sale by the Administrator.”
The state Administrator does not approve securities.
- 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
- Not committed a prohibited business practice
- Not violated the Uniform Securities Act because no untrue statements were made
- Failed to disclose material information
- Committed a prohibited business practice by selling an unsuitable investment
Correct answer: Failed to disclose material information
The agent has violated the Uniform Securities Act by fraudulently omitting material information in the sale of a security.
- 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
- Is probably an investment adviser or investment adviser representative
- Is not covered by the Uniform Securities Act
- Has not violated the Uniform Securities Act if the sale was made to an institutional account
- Has committed fraud in violation of the Uniform Securities Act
Correct answer: Has committed fraud in violation of the Uniform Securities Act
The Uniform Securities Act makes it illegal for any person to commit a fraudulent act in connection with the sale or offer for sale of a security, not just agents and broker-dealers. Misstating material facts is fraudulent.
- 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?
- It is a violation even if material facts were unknowingly omitted.
- It is not a violation if the security is exempt from registration under the Uniform Securities Act.
- It is a violation even if the client failed to make a transaction.
- It is a violation because it is an unethical or fraudulent practice.
Correct answer: It is not a violation if the security is exempt from registration under the Uniform Securities Act.
Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is an unethical business practice (fraud requires deliberate action) and is still a violation.
- The antifraud provisions of the Uniform Securities Act apply to I. registered securities. II. exempt securities. III. federal covered securities. IV. exempt transactions.
- I, II, III, and IV
- II only
- I only
- I, III, and IV
Correct answer: I, II, III, and IV
The antifraud provisions of the Uniform Securities Act apply to every security and transaction — there are no exceptions. While the registration requirements do not apply to exempt securities, federal covered securities, or exempt transactions, the antifraud (fraud and prohibited-practice) provisions reach all of them. That is why the correct answer is all four.
- Which of the following statements regarding an agent is true?
- The agent is not subject to the antifraud provisions of the Uniform Securities Act when engaged in securities sales activities.
- The agent is exempt from the Uniform Securities Act’s antifraud provisions if her broker-dealer has fewer than three clients residing in the state.
- It is unlawful under the Uniform Securities Act for an agent to deceive another person when engaged in securities-related sales activities.
- It is unlawful under the Uniform Securities Act for an agent to deceive another person when engaged in non-securities-related activities.
Correct answer: It is unlawful under the Uniform Securities Act for an agent to deceive another person when engaged in securities-related sales activities.
It is unlawful under the USA for an agent to deceive another person when engaged in securities-related sales activities. The antifraud provisions of the USA apply to any person advising another person for compensation as to the value of securities. It may be unlawful to deceive another person when engaged in non-securities-related activities, but that would come under other legislation, not the USA.
- 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
- Ethically because he prevented the customer from losing a profit opportunity
- Unlawfully because accurate quotes must be provided to the customer at all times
- Unlawfully because the customer could easily discern that the price quoted by the agent did not match readily available quotes in the financial media
- Ethically because the interim price fluctuation did not impact the customer’s results
Correct answer: Unlawfully because accurate quotes must be provided to the customer at all times
The agent must provide customers with accurate market quotes at all times.
- 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?
- Discuss the matter with other more experienced agents of the firm to evaluate the validity of the information.
- Bring the information to the attention of the state securities Administrator.
- Bring the information to the attention of the firm’s supervisory individual named to handle such matters in the Supervisory Procedures Manual.
- Accept the customer’s order and mark it solicited.
Correct answer: Bring the information to the attention of the firm’s supervisory individual named to handle such matters in the Supervisory Procedures Manual.
The customer seeks to place an order based on inside information or rumor. The agent should not accept the order before discussing it with her supervisor/principal. Under no circumstances should the agent repeat the information to fellow agents. There is no requirement that such information be reported to the state securities Administrator.
- 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
- Contact the SEC because you have inside information
- Tell your best customers to sell their holdings of the corporation immediately
- Promptly inform your supervisor
- Sell the company’s shares short for your discretionary customer accounts
Correct answer: Promptly inform your supervisor
If you receive inside information, you should inform your supervisor immediately so that she may take the appropriate steps to avoid any transaction that may be construed to violate the Uniform Securities Act. An agent cannot lawfully trade on inside information and is not obligated to inform the SEC.
- If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes
- A violation under both the Uniform Securities Act and federal law
- An offense punishable by three years in the county jail
- A violation of the Uniform Securities Act
- A perfectly acceptable market arbitrage
Correct answer: A perfectly acceptable market arbitrage
This common practice is perfectly acceptable. Arbitrage is the practice of buying on one exchange and selling on another to take advantage of market disparities.
- 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
- Never be permitted to contact your clients with this recommendation
- Be permitted to contact your clients with this recommendation right now
- Be required to send your clients to the firm’s website before making any comments regarding this security
- Not be permitted to contact your clients until it is determined that the report was officially released to the public
Correct answer: Not be permitted to contact your clients until it is determined that the report was officially released to the public
Material nonpublic information (MNPI) is anything that can impact the price movement of a security once it is released. If the brokerage or advisory firm is highly regarded, a positive or negative research report will generally influence the security's market price after it is made public. Therefore, the agent would not be able to communicate with clients about this security until the report is in the public sphere. Normally, the firm would send a communique to all concerned employees notifying them of clearance to discuss the report with clients.
- 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 purchases 1,000 shares of XYZ for her personal account.
- Baird takes Miller’s order and does not discuss the conversation she had with Miller regarding XYZ and Monolith with anyone.
- Within the trading day, Baird recommends XYZ to 20 of her customers who have indicated aggressive growth as their main trading objective.
- Baird tells her immediate supervisor (principal) of Miller’s intent to trade based upon material nonpublic (inside) information.
Correct answer: Baird tells her immediate supervisor (principal) of Miller’s intent to trade based upon material nonpublic (inside) information.
Because Miller's order may cause Baird's employer to violate securities law, Baird should inform the firm that a customer wishes to trade a security using material inside (nonpublic) information. Under no circumstances should Baird trade for her own account using inside information or use such information as the basis for recommendations to customers.
- 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
- Legal because Agent B did not actively seek out the information
- A smart thing to do to save Agent B’s clients’ money
- The fraudulent practice of acting on inside information
- A violation of Agent C’s confidentiality agreement
Correct answer: The fraudulent practice of acting on inside information
One must assume that a report stamped confidential contains material nonpublic information. As such, its use would be a violation of the antifraud provisions dealing with trading on inside information.
- Under the Uniform Securities Act, an agent may use material nonpublic inside information as a basis for recommendations only
- After the information is released to the public
- If the securities are exempt from registration
- If the agent reports the information as rumor and not fact
- Until the information is released to the public
Correct answer: After the information is released to the public
There are no circumstances under which anyone may use inside information—defined as material nonpublic information (MNPI) in a securities transaction. However, once the information is released to the public, it is no longer inside information, and restrictions no longer apply to its use. Using it before public release is likely to result in a charge of fraudulent activity.
- Which of the following practices is fraudulent?
- Marking up a security by 10% more than industry standards with the customer’s knowledge and consent
- Marking up a security by 5% but indicating to the client that the markup is only 2%
- Failing to state all the facts related to a security
- "D) Selling a security to a customer with a commission that exceeds industry standards"
Correct answer: Marking up a security by 5% but indicating to the client that the markup is only 2%
Fraud is the willful deception of a client. Stating that the markup will be 2% and then effecting a 5% markup is a fraudulent act. Marking up a security by more than industry practices is a prohibited practice but is not necessarily fraudulent. It is not necessary to state all of the facts; only those that are material are required.
- An agent omits certain details about an issue during a sales presentation. These omissions would be fraudulent if
- This were a solicited transaction
- The information was material and was necessary to make other statements not misleading
- Made to an individual client, but not to an institution
- The information was not available in the prospectus
Correct answer: The information was material and was necessary to make other statements not misleading
All material information must be disclosed. Omission or misstatement of material information would be fraudulent activity.
- 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
- Practice due diligence and call TechEd to verify that these earnings predictions are still current
- Refrain from making this statement because it is a misrepresentation
- Show his clients how he came to his calculations, sending them charts that have been approved by his principal
- Not say anything yet because this is inside information
Correct answer: Refrain from making this statement because it is a misrepresentation
This is a clear case of misrepresenting earnings projections, and the agent must immediately stop this activity.
- 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
- Discuss the matter with the broker-dealer’s compliance officer
- Ignore the order
- Tell the customer the inside information and let him decide what to do
- Enter a sell order on the customer’s behalf along with the buy order in order to cover the customer’s losses
Correct answer: Discuss the matter with the broker-dealer’s compliance officer
None of the other alternatives is satisfactory. The agent may not ignore the order, enter an unauthorized order for the account, or pass on inside information. When in doubt, check with your broker-dealer's compliance officer.
- Which of the following would not be considered a fraudulent practice under the Uniform Securities Act?
- An investment adviser omits a material fact to a client during the sales presentation, but the client ends up making money.
- An investment adviser correctly advises a client, but the client ends up losing money.
- An investment adviser tells a client that registered securities are approved by the SEC.
- An investment adviser omits a material fact, but the investor makes the purchase anyway.
Correct answer: An investment adviser correctly advises a client, but the client ends up losing money.
There is no fraud in the case of an investment adviser whose client loses money in the absence of any willful violations. Examples of fraud under the Uniform Securities Act include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, markups, markdowns, or other charges; implying approval by the SEC or Administrator; using rumors or inside information to induce transactions; indicating approval of a security by a regulatory body; and failure to describe important (material) facts or risks.
- If an agent misrepresents the price of a customer's stock by $10 per share to encourage the client to sell, this activity is
- A misrepresentation and a fraudulent act
- Allowed if the customer ultimately makes a profit in the account
- Allowed if the agent views the difference as a service charge
- A misrepresentation but not a fraudulent act
Correct answer: A misrepresentation and a fraudulent act
The agent has committed a fraudulent act by willfully misrepresenting the value of the stock to encourage the customer to sell a security.
- 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.
- III and IV
- I and II
- II and III
- I and IV
Correct answer: III and IV
Richards has acquired material nonpublic information that may not be used until it becomes known to the public.
- According to the Uniform Securities Act, which of the following is an example of market manipulation?
- Creating the illusion of active trading
- Omitting material facts in a presentation
- Transactions in excess of a customer’s financial capability
- Guaranteeing performance of a security
Correct answer: Creating the illusion of active trading
Creating the illusion of trading activity is market manipulation. While guaranteeing performance of a security and omitting material facts are prohibited practices, they do not constitute market manipulation. Trades too large for a customer are also prohibited because they are not suitable.
- 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 and III
- I, II, III, and IV
- II and IV
- II, III, and IV
Correct answer: II, III, and IV
Although not foolproof, the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags.
- 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
- A violation of the prohibition against using inside information
- Doing a good job in finding undervalued companies like ABC
- Being a well-informed agent
- Using all the resources an agent has available in developing good investment ideas
Correct answer: A violation of the prohibition against using inside information
This is a very clear example of the illegal action of using material nonpublic (MNPI) information.
- Which of the following sales would be exempt from the antifraud provisions of the Uniform Securities Act?
- Sale of an exempt security
- Sale of an exempt security in an exempt transaction
- Sale of a nonexempt security
- Sale of a term life insurance policy
Correct answer: Sale of a term life insurance policy
As long as it is a security, the USA's antifraud provisions apply. But a modified endowment insurance policy is not a security.
- 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
- No violation
- A misdemeanor
- A civil violation punishable by a fine up to $5,000
- A criminal violation punishable by up to three years in prison
Correct answer: No violation
No violation occurred because the Uniform Securities Act requires the disclosure of only material facts. Material facts are those that could influence the price of a security. Changing investment managers on a pension plan would not affect the price of a stock and is not material to the investment decision.
- According to the Uniform Securities Act, market manipulation includes all of the following except
- Buying and selling intentionally to show market activity
- Giving a false quote
- Buying on one exchange and selling on another
- Pegging
Correct answer: Buying on one exchange and selling on another
Buying on one exchange and selling on another is called arbitrage, not market manipulation, and it is an accepted business practice.
- 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 because he is giving misleading information to his clients
- Not fraudulent because the policy does not deal with braggarts
- Not fraudulent because no sale based on inside information actually took place
- Fraudulent because he is acting on inside information
Correct answer: Fraudulent because he is giving misleading information to his clients
This is not an insider trading situation; it is a case of an agent lying to clients. That is a fraudulent practice. One of the ways to identify fraudulent activity is to remember that the willful act of telling a lie or making a misleading statement in connection with the offer or sale of a security is considered fraudulent activity.
- 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 if the statement without this fact would make your previous statements misleading
- Only if the customer did not work for the issuer and did not know this information
- Under no circumstances until the clients have had a chance to read the article themselves
- With or without the issuer’s permission
Correct answer: With or without the issuer’s permission
Public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.
- Under the Uniform Securities Act, an agent who has inside information that ABC Company stock is about to fall
- May recommend that customers sell ABC but may not tell them why
- Must pass this information on to customers or face charges of withholding information
- May not trade for his own account or base recommendations to customers on the information
- May trade on the information for his own account but may not pass on the information
Correct answer: May not trade for his own account or base recommendations to customers on the information
It is illegal to use inside information in any securities transaction or recommendation. Passing inside information on to others is also prohibited.
- 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.
- I only
- III only
- I and III
- I, III, and IV
Correct answer: I and III
Whenever an agent has concerns about matters involving the broker-dealer's customers, such concerns should be shared with the agent's supervising principal. It is appropriate that the agent stop recommending XYZ stock to customers and prospects.
- 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 and III
- I and II
- I, II, and III
- I only
Correct answer: I, II, and III
The antifraud provisions apply to anyone involved in a securities transaction or anyone who receives compensation for providing investment advice. It does not matter whether the person receives the compensation directly or indirectly, whether the person is registered or exempt from registration, or even whether an exclusion from a definition applies to the person.
- An agent receives inside information concerning an impending merger. Under the Uniform Securities Act, the agent may divulge the information to
- Anyone after public notice
- No one other than the Administrator until there is a public announcement
- Her best customers three days before a public announcement
- Anyone three days before a public announcement
Correct answer: Anyone after public notice
After the inside information has become public, it may be disseminated to anyone. If an agent acquires MNPI, she should report it to her supervisor. Reporting inside information to the Administrator is neither required nor appropriate.
- 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
- Not permitted because the agent must not deceive the customer by misstating a material fact
- Permitted because the agent was not recommending a transaction
- Not permitted because the agent must not attempt to influence the market value of a security
- Permitted because the agent determined that selling the securities was not suitable
Correct answer: Not permitted because the agent must not deceive the customer by misstating a material fact
An agent must not deceive a customer by misstating a material fact. Furthermore, ethical behavior is not limited to the recommendation of actual trades. Misinforming the customer does not constitute market manipulation.
- Under the Uniform Securities Act, all of the following are improper actions except
- An agreement by the agent to repurchase the security from the customer for the same price at a future date
- Excessive transaction costs
- A statement by the agent that the security will be listed on an exchange once the company announces its intention to do so
- A two-month delay in delivering the security to the customer
Correct answer: A statement by the agent that the security will be listed on an exchange once the company announces its intention to do so
An agent cannot guarantee to buy back the securities at the same price, cannot delay delivery for an excessive period of time, and cannot hide unusual transaction costs from a customer. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.
- 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
- Considered a fraudulent act
- Permitted if the recommendation pertains to an exempt security
- Permitted if the second agent was unaware of the omission
- Permitted if the second agent receives no compensation for presenting the recommendation
Correct answer: Considered a fraudulent act
The agent making a recommendation to a customer is responsible for presenting all of the material facts. To do otherwise is committing fraud. Material facts must be presented to a customer, regardless of the type of security sold or whether a commission is to be earned or not. Remember, a material fact is one that is critical to the investment decision-making of a client.
- Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of the following except
- Engaging in any fraudulent or deceitful practice in the normal course of business
- Employing any device, scheme, or artifice to defraud
- Omitting nonmaterial information from a sales presentation
- Engaging in any practice that the Administrator defines by rule as unethical
Correct answer: Omitting nonmaterial information from a sales presentation
Only the omission of a MATERIAL fact is prohibited — omitting nonmaterial (immaterial) information is not a violation, so that is the exception. Employing any device, scheme, or artifice to defraud, engaging in fraudulent or deceitful practices, and engaging in any practice the Administrator defines by rule as unethical are all expressly prohibited under the antifraud provisions of the Uniform Securities Act.
- Which of the following is not a fraudulent practice?
- Entering a buy order for a stock at the same time another agent enters a sale order for the purpose of creating the appearance of market activity in the stock
- Protecting a nervous client by inflating the value of her account
- Buying shares of stock on one exchange and simultaneously selling the same shares on another exchange to take advantage of a price differential
- Quoting a lower-than-market price to get an order, then telling the customer that the price jumped after the order was taken
Correct answer: Buying shares of stock on one exchange and simultaneously selling the same shares on another exchange to take advantage of a price differential
This is a legitimate arbitrage transaction. The other choices are fraudulent.
- 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.
- III and IV
- I and II
- II and IV
- III only
Correct answer: II and IV
State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. There are no exemptions from the Uniform Securities Act for fraud involving securities.
- 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?
- “Your account has a value of $711,500.”
- “Your account value cannot be determined until the market closes.”
- “Your account was down to $699,700 earlier today but is up to $711,500.”
- “Your account is valued at $710,000 at this time.”
Correct answer: “Your account is valued at $710,000 at this time.”
All other choices are clearly a misrepresentation of account status.
- Under the Uniform Securities Act, which of the following statements regarding the use of material facts is true?
- Restrictions apply only to sales with regard to the use of material facts, not to the purchases of securities.
- The agent must not use material facts unless they are the only ones available.
- The client is the final arbiter on what is material and what is not.
- Omitting material facts when selling securities is a fraudulent practice.
Correct answer: Omitting material facts when selling securities is a fraudulent practice.
Material facts are essential to making informed investment decisions; to omit them is fraudulent. The agent must ensure that all relevant material facts are presented.
- 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?
- Discussing the information at a seminar but not making an investment recommendation
- Soliciting orders based on this information
- Discussing the situation with a superior or compliance officer in the agent’s firm
- Trading for the agent’s personal account based on this information
Correct answer: Discussing the situation with a superior or compliance officer in the agent’s firm
Discussing the situation with a superior or compliance officer is the appropriate action. An agent may not solicit or trade on the basis of material inside information. Discussing material inside information in a public forum is prohibited, regardless of investment recommendations.
- Which of the following is an example of a fraudulent practice?
- A broker-dealer selling a security to a client at the offer price
- Refusing to guarantee a customer’s account against loss
- Furnishing fictitious quotations
- Recommending U.S. Treasury bonds to a conservative investor
Correct answer: Furnishing fictitious quotations
Furnishing fictitious quotations is deceptive and, therefore, prohibited. Agents are prohibited from guaranteeing investment results. Treasury bonds would be suitable for a conservative investor, and broker-dealers sell at their offer (ask) price and buy at their bid.
- John, a newly registered agent with a broker-dealer in Illinois, violated the Uniform Securities Act if he
- Deliberately omitted the number of employees at a corporation making its first issue of securities to the public because he did not consider that fact relevant to the investor’s decision-making process
- Told his clients, against his better judgment, that past performance is no guarantee of future performance
- Knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk
- Mistakenly told a client that the dividend yield on a common stock selling at $75 per share was 5%, though he accurately indicated that the dividend payment was $0.75 per quarter
Correct answer: Knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk
Knowingly selling revenue bonds as general obligation bonds is a misstatement of material fact and, therefore, fraudulent. An agent, when making a sale to a client, need not include all facts, such as the number of employees. The agent must not deliberately fail to mention the material facts regarding the nature of the investment. For example, it is not fraud to make a mathematical mistake, such as inadvertently misquoting the dividend yield on a common stock as 5% when, in fact, it is 4% ($3 annual dividend divided by the $75 share price) while accurately indicating that the actual dividend payment is $0.75 per quarter. An agent may never state that past performance is expected to be replicated.
- If a customer reveals material nonpublic information to an agent, that agent should
- Notify the firm’s trading desk
- Confirm the rumor by checking with other agents
- Alert other customers who hold stock in that company
- Immediately report it to the supervisor and await further instructions
Correct answer: Immediately report it to the supervisor and await further instructions
An agent who learns of material nonpublic information (MNPI) from a customer should inform the supervisor, await instructions, and not pass on the information to other customers.
- When does a deliberate omission of a fact in a securities sale constitute fraud?
- Only when a new issue of securities is being offered
- If a reasonable person would base an investment decision on the omitted information
- Any time the information is known by more than 15 people
- Only if the information was known to be true
Correct answer: If a reasonable person would base an investment decision on the omitted information
Deliberate omission of a fact constitutes fraud if the omitted information is material in nature (i.e., if a reasonable investor would use the information when making an investment decision). This is true whether the information is made in connection with a primary offering or a secondary market transaction.
- 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?
- Options traded on a listed exchange
- Unit investment trusts registered with the SEC under the Investment Company Act of 1940
- Bonds issued or guaranteed by the United States government
- Fixed annuities
Correct answer: Fixed annuities
Although there are no exemptions from the antifraud statutes for securities or investment advice, because fixed annuities are not securities, fraud committed in their sale is exempt from the Uniform Securities Act. However, this sale would be subject to the antifraud provisions of the state's insurance commissioner.
- 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 of the Uniform Securities Act do not apply to Jones because he is not suitably trained, nor does he have a securities license.
- As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act.
- Jones’s failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration.
- The antifraud provisions of the Uniform Securities Act apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
Correct answer: The antifraud provisions of the Uniform Securities Act apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.
- 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
- Sell any holdings you have in ABC stock
- Advise your customers to sell ABC stock immediately
- Buy put options on ABC stock
- Keep this information confidential and not make any use of it that could lead to insider trading abuses
Correct answer: Keep this information confidential and not make any use of it that could lead to insider trading abuses
This information is considered material nonpublic information (MNPI) because it is not yet available to the general public. It is illegal to conduct securities transactions either for your own account or the accounts of customers based upon MNPI or to advise your customers of the information.
- All of the following are fraudulent sales practices except
- Buying and selling intentionally to create market activity
- Buying on one exchange and selling on another
- Falsifying a quote
- Withholding a material fact from the buyer
Correct answer: Buying on one exchange and selling on another
Buying on one exchange and selling on another is the perfectly acceptable market practice known as arbitrage. Withholding material facts, buying and selling to show market activity, and falsifying quotes are all fraudulent practices.
- 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?
- The antifraud provisions apply to exempt transactions.
- The antifraud provisions apply to both exempt and nonexempt securities.
- If the sale is made by an agent registered in another state but not in this state, the antifraud provisions still apply.
- If the sale is made by someone not in the securities business, the antifraud provisions do not apply.
Correct answer: If the sale is made by someone not in the securities business, the antifraud provisions do not apply.
The USA states that it is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly, to engage in any act, practice, or course of business that operates or would operate as fraud or deceit upon any person. This means that even those who are not in the securities business can be charged with fraud if the activity involves a security. However, if a security is not involved (real estate, fixed annuity, commodity, etc.), then the USA's antifraud provisions do not apply. It isn't the person; it is the product that we're looking at.
- 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
- Permitted because an investment adviser may recommend listed stocks
- Not permitted because it is misleading to imply that meeting listing requirements reduces market risk
- Permitted because the NYSE sets stringent earnings requirements for listed stocks
- Not permitted because the transaction is not suitable for the customer
Correct answer: Not permitted because it is misleading to imply that meeting listing requirements reduces market risk
Meeting the listing requirements of the New York Stock Exchange does not reduce the risk of loss to the client, so the agent's statement is misleading and, therefore, prohibited. NYSE listing requirements are numerical standards and do not imply that the exchange has passed on the quality of the issue.
- An agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is
- Not fraudulent if there was willful intent to omit the information
- Fraudulent for both exempt and nonexempt securities
- Fraudulent for exempt securities only
- Fraudulent for nonexempt securities only
Correct answer: Fraudulent for both exempt and nonexempt securities
An investor relies on material facts to make investment decisions. The omission of a material fact in the sale, purchase, or offer of a security is fraudulent, whether the security offered is exempt or nonexempt.
- 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 would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar disclosed the $100 commission prior to the transaction and Watson chose to proceed with the trade.
- Gibraltar Securities is not required to disclose the amount of the commission in advance to Watson. However, it must receive clearance from the Administrator before charging a commission in an amount exceeding 10% of the value of the securities traded under the transaction.
- A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive.
- It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction.
Correct answer: It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar disclosed the $100 commission prior to the transaction and Watson chose to proceed with the trade.
It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson proceeded with the trade. However, charging higher-than-normal commissions without informing the customer of such intent in advance is a fraudulent practice under the Uniform Securities Act. There is no requirement for administrative clearance prior to charging higher-than-normal commissions.
- An agent engaging in which of the following would not be considered to be acting fraudulently?
- Providing customers with all the material facts about an investment
- Misrepresenting the status of a customer’s account
- Making use of material nonpublic inside information
- Participating in a series of trades where there is no change to beneficial ownership
Correct answer: Providing customers with all the material facts about an investment
One of the specified fraudulent acts is failure to state the material facts. Providing them is complying with the law, not acting fraudulently. The other three choices are all examples of actions that are generally considered to be fraudulent.
- Which of the following would not be an example of market manipulation?
- Three broker-dealers begin trading shares of ABC common stock between themselves at successively higher prices with no effective change of ownership.
- A principal of an SEC-registered broker-dealer leaks a rumor that ABC is going to acquire LMN. After a few days, the broker-dealer sells short LMN for its own account.
- A market maker in an over-the-counter stock buys and sells stock for its own account.
- Matched orders
Correct answer: A market maker in an over-the-counter stock buys and sells stock for its own account.
A specialist that buys or sells for its own account is not engaged in market manipulation. The function of a specialist is to act as a broker for orders that other members left with them and to act as a dealer in buying and selling for their own account. Broker-dealers (BDs) (or anyone else) who trade the same security between each other with no change in beneficial ownership, but with an increase to the market price, are manipulating the market by artificially raising the price and creating false trading volume. A principal of any BD, regardless of where registered, that trades on a rumor that he leaked is manipulating the market for personal gain. Matched orders is the fraudulent practice of simultaneously buying and selling of a security to give a falsely high appearance of its trading volume.
- Which of the following may not be used as the basis for a recommendation to customers?
- Information obtained while acting in a fiduciary capacity for a corporation that indicates the strong possibility of future mergers
- Recommendations of private firms charging special fees for their research
- The best estimate of the agent’s firm regarding the potential movement of a stock
- Recommendations of major financial publications generally available through newsstand purchases
Correct answer: Information obtained while acting in a fiduciary capacity for a corporation that indicates the strong possibility of future mergers
State and federal regulations prohibit actions based on inside information, particularly the use of information obtained while acting in a fiduciary capacity. Recommendations can be based on the best estimates of the agent's firm, provided there is an adequate and factual basis for such recommendations. Recommendations can also be based on major recognized financial publications and by private firms that charge fees for their research.
- All of the following statements regarding customer complaints sent by email are correct except
- Once received and reviewed, they may be discarded
- They are sometimes referred to as electronic communications
- They must be retained in the same fashion as any other record
- Customer complaints received by email are considered to be in writing
Correct answer: Once received and reviewed, they may be discarded
Emails are generally referred to as electronic communications on the exam and meet the requirement for customer complaints to be in writing. Just as with any other written record, these must be kept for the time periods specified in the Uniform Securities Act.
- 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
- I, II, III, and IV
- I and III
- I and II
- I and IV
Correct answer: I, II, III, and IV
Under the Uniform Securities Act, agents are prohibited from making performance guarantees or unsuitable recommendations, as well as making promises that cannot be kept.
- 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
- Lawfully because returns were not guaranteed
- Fraudulently because listing on the New York Stock Exchange does not reduce the client’s loss exposure; therefore, the agent misled his client
- Fraudulently because the NYSE listing requirements are not a matter of public knowledge
- Lawfully because the New York Stock Exchange requires that the companies it lists be substantially capitalized
Correct answer: Fraudulently because listing on the New York Stock Exchange does not reduce the client’s loss exposure; therefore, the agent misled his client
The New York Stock Exchange listing requirements are quantitative rather than qualitative. Exchange listing does not indicate the level of risk associated with owning a stock. The agent is acting fraudulently if he indicates NYSE listing is indicative of a security's quality. An agent may not indicate that a security graduated to the level of quality acceptable for trading on the New York Stock Exchange, even if the agent indicates that returns are not guaranteed. Information regarding listing requirements is widely disseminated.
- 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 has acted fraudulently, misleading Watson by stating that increased dividend distributions from Kansas Plains Gas and Electric Company are a sure thing.
- Baird has acted unethically because he made an unsuitable recommendation to Watson.
- Baird has acted ethically because he did not guarantee profits or the absence of potential loss to Watson.
- Baird has acted ethically in recommending the purchase of a stock with a long history of dividends.
Correct answer: Baird has acted fraudulently, misleading Watson by stating that increased dividend distributions from Kansas Plains Gas and Electric Company are a sure thing.
The agent has acted fraudulently, misleading the customer by stating that increased dividend distributions from the utility corporation are guaranteed. Given the customer's history of purchasing stock in other utilities, nothing in the question indicates that the trade is unsuitable for the customer.
- 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
- I, II, and III
- I and II
- I only
- I and III
Correct answer: I, II, and III
The antifraud provisions prohibit material misstatements, material omissions, and any deceptive or unethical business practice. Whether a sale was made or whether money was lost by a client as a result of the fraudulent act is irrelevant to the prohibition.
- A broker-dealer is not acting fraudulently if the firm is
- Engaging in trades between other broker-dealers to increase or decrease the price of securities
- Engaging in transactions that do not result in the transfer of ownership between buyers and sellers
- Acting as agent for both buyer and seller on a transaction
- Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security
Correct answer: Acting as agent for both buyer and seller on a transaction
A broker-dealer may act as agent for both buyer and seller in a transaction. All the other activities represent market manipulation and are, therefore, fraudulent practices.
- 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 legitimate sales tactic known as priming the pump
- A deliberate attempt to mislead and deceive investors
- Only problematic if someone invests in the product and loses money
- A dubious sales practice but not strictly prohibited
Correct answer: A deliberate attempt to mislead and deceive investors
This tactic is a deliberate attempt to mislead investors and get them to invest; it is expressly fraudulent.
- It would be considered fraud for an agent to intentionally do all of the following except
- Tell a client that a subordinated debenture is a prior lien mortgage bond
- Tell a client that a bond is yielding 10% when the actual yield is 1%
- Tell a client that you are so sure the client will not lose money that you have placed funds in escrow equal to the amount of the purchase to cover any possible loss
- Share commissions with another agent in your office without disclosing this fact to the client
Correct answer: Share commissions with another agent in your office without disclosing this fact to the client
There are no requirements for you to tell a client that you are splitting commissions with another agent in the office. Telling a lie (a misstatement of fact), such as overstating the yield of a bond or claiming that an unsecured debt obligation is really secured, is fraudulent behavior. Telling a client that you will guarantee against loss is considered both a fraudulent and unethical practice.
- Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer
- Is guilty of a felony and subject to criminal penalties
- Has committed a fraudulent act
- Is committed to selling or buying only 100 shares at that price
- Must execute at the price quoted, regardless of the market
Correct answer: Has committed a fraudulent act
Disseminating false or misleading quotes is a fraudulent practice under the USA but is not necessarily a felony. Trades must be executed at market prices, not fictitious or fabricated prices.
- Under the Uniform Securities Act, it is not considered unlawful if an agent
- Omitted a material fact because she knew she did not have time to cover everything in a short presentation
- Deliberately failed to follow a customer’s instructions
- Made an untrue statement of a material fact
- Actively solicited orders in unregistered exempt securities
Correct answer: Actively solicited orders in unregistered exempt securities
Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.
- In which of the following situations is an agent committing a prohibited practice?
- Accepting an order from the customer’s brother to purchase a security in the customer’s account while awaiting written receipt of trading authority
- Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity
- Accepting a customer’s order to purchase an unregistered nonexempt security
- Buying a security on behalf of a customer and then reselling it before the customer has paid for it
Correct answer: Accepting an order from the customer’s brother to purchase a security in the customer’s account while awaiting written receipt of trading authority
Written receipt of trading authority is required before conducting any trade on an order entered by someone other than the customer. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Even though the security is nonexempt and is unregistered, this is an unsolicited order, and that makes it an exempt transaction.
- Under the Uniform Securities Act, which of the following activities is an example of churning?
- Frequent purchases one day and sales of the same stock the next day to make changes in a client’s portfolio in order to align with a customer’s investment objectives
- Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter
- A client engaging in day trading
- A bond swap
Correct answer: Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter
Churning is defined as excessive activity in a customer's account for the purpose of generating commissions. Because Class A mutual funds carry a front-end load and are considered long-term investment vehicles, frequent trades constitute churning. Frequent purchases one day and sales of the same stock the next day in order to align with a customer's investment objectives is not necessarily churning if it is done for the benefit of the customer. A bond swap is not churning; it is generally done for tax purposes. If the client is initiating the day trades, the agent is not the one doing the trading, so no churning is taking place.
- Which of the following are allowable activities of an agent of a registered broker-dealer?
- Establishing a joint account with a customer without consent of the broker-dealer
- Borrowing money from a retail client at the broker-dealer
- Splitting commissions with an agent registered with another broker-dealer
- Borrowing money from a colleague at the agent’s broker-dealer
Correct answer: Borrowing money from a colleague at the agent’s broker-dealer
When it comes to borrowing money, you can borrow from someone else who works at the same firm you do, even if that individual is your client. Unless something indicates that the client is a lending institution (retail clients would not be), you cannot borrow from them. Splitting commissions with another agent is an allowable activity only when that agent is registered with the same or an affiliated broker-dealer (BD). An agent cannot establish a joint account with a client without the written consent of the BD and the client.
- 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
- Buy back the security at 85 and place another security in the account at a price high enough to cover the loss
- Offer to buy the security at 85 if the customer agrees to buy another security in its place
- Execute the trade at 78.80 but show the confirmation at 85
- Execute the sale at the current market price
Correct answer: Execute the sale at the current market price
Agents can never guarantee a client against loss. Whenever a client wishes to buy or sell, the agent's obligation is to get the best price available in the current market. The "78.80" is the ask, or offer price, and that is what would be used to determine the price if the security were being bought for the client rather than sold. Selling is based upon the bid, in this case, 78.
- 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
- Ethically because Treasury securities carry no default risk
- Unethically because allocating the customer’s entire $10,000 into bonds ignores the customer’s need for diversification
- Ethically because Treasury securities are the safest among all domestically available debt instruments
- Unethically because the term absolute safety implies that the customer cannot lose money
Correct answer: Unethically because the term absolute safety implies that the customer cannot lose money
Implying or stating to customers that they cannot lose money when investing in a marketable security is prohibited. Although Treasury securities carry no default risk, the customer faces potential interest rate risk, particularly in light of the bonds' 15-year maturity. As far as diversification, nothing implies that this is the only asset in the investor's portfolio.
- 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 normal range
- Improperly because a broker-dealer may not accept an order for a stock traded on an exchange on which it holds no membership
- Ethically because the higher-than-normal commissions were justified and disclosed to the customer in advance of entering the order
- Ethically because firms may charge according to the services provided
Correct answer: Ethically because the higher-than-normal commissions were justified and disclosed to the customer in advance of entering the order
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a higher-than-normal commission is permissible if justified and disclosed to the customer in advance.
- 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
- Accept the order because agents are obligated to follow instructions from their customers
- Advise the customer that the internet stocks are not suitable in light of that customer’s circumstances and execute the order only following written acknowledgement from the customer that the agent did not solicit that trade
- Refer the customer to a supervisory principal of the broker-dealer
- Refuse the trade because it is not suitable for a retiree
Correct answer: Advise the customer that the internet stocks are not suitable in light of that customer’s circumstances and execute the order only following written acknowledgement from the customer that the agent did not solicit that trade
It appears that pursuing this strategy would be a mistake for this client. However, if after being informed of the unsuitability of a particular trade a customer still insists that an order be entered, the agent must follow the customer's instructions as directed. Because the question asks for what the agent should do, best practices in the industry suggest that the trade be executed only after obtaining written acknowledgment that the trade was not solicited by the agent.
- Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is unlawful for an agent to
- Trade frequently in a customer’s account
- Acknowledge written third-party trading authority
- Make trades in a customer’s discretionary account in excess of what would be considered suitable for that client
- Solicit orders for unregistered securities in exempt transactions
Correct answer: Make trades in a customer’s discretionary account in excess of what would be considered suitable for that client
Securities need not be registered if the transaction is exempt. Agents may act on properly acknowledged third-party trading authority. But agents may not make trades in a customer's discretionary account in excess of the customer's suitability limitations. Trading frequently is not the same as trading excessively. If within the client's objectives and risk tolerance, frequent trading might be fine—excessive trading never is.
- 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
- Inquire as to why a $100,000 account generated only $6,000 in commissions in a six-month period
- Suggest that you contact the client about investing more money with the firm
- Congratulate you on helping your client beat the averages
- Discuss the possibility that you may have been churning the account
Correct answer: Discuss the possibility that you may have been churning the account
Churning can occur even when an account makes money. If the amount of commissions generated is out of line with the account's objectives and resources (and 12% annual charges in this case), churning will probably be suspected.
- If a customer is upset with his agent for not servicing his account properly and sends a complaint letter, the agent should
- Forward the complaint letter to the Administrator
- Call the customer and apologize, promising to do a better job
- Bring the customer complaint to her employer immediately
- Tell the customer she is willing to make restitution
Correct answer: Bring the customer complaint to her employer immediately
Agents must bring all customer written complaints to their employer immediately.
- 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, this is an example of commingling.
- Yes, it is permissible if it is disclosed as a joint proceeds transaction and has been approved in advance by the agent’s principal.
- No, this is unethical because an agent cannot share profits with a customer.
- No, this is unethical because the agent cannot guarantee trade prices.
Correct answer: No, this is unethical because the agent cannot guarantee trade prices.
This practice is not permissible under the USA because guaranteeing profits is unethical. Agents are allowed to share profits in a customer account under certain circumstances with the client's and firm's permission. Commingling is the act of combining customer assets with those of an agent.
- 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 investment adviser acted as a principal or an agent
- The investment adviser received compensation for the trades
- The transactions matched the investor’s objectives
- The customer approved the transactions in writing
Correct answer: The transactions matched the investor’s objectives
Trading in a customer's account must not be excessive in terms of size or frequency with respect to the customer's investment objectives and financial ability. For example, if the client's objective was speculative trading, a higher than normal volume would be expected. It could also be important to know whether the investment adviser was receiving trade-based compensation (which could be the reason for the possible churning), but that would be secondary to customer objectives.
- A customer wishes to open a new account but refuses to provide suitability information. Under NASAA rules, the agent
- May open the account but must limit recommendations to U.S. government securities.
- May open the account but must limit recommendations to investment-grade securities
- May open the account but may not make any recommendations
- Shall not open the account
Correct answer: May open the account but may not make any recommendations
If a customer fails to provide suitability information, the account may be opened but the member may not make any recommendations; the only trades permitted are those that are unsolicited. Please note that the rule is different for investment advisers and their IARs. Without suitability information, an advisory account may not be opened.
- A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to immediately
- Suspend the agent involved until the complaint is resolved
- Notify the Administrator
- Reply to the client in writing
- Notify NASAA
Correct answer: Reply to the client in writing
When a broker-dealer (BD) receives a written complaint from a customer, it must document that complaint and begin an investigation as to the complaint's merits. Part of that procedure would be sending a written acknowledgment to the client that the complaint has been received. This is an internal matter and the BD has no reason to notify the Administrator. There is no reason to immediately suspend an agent over a complaint—at least not until wrongdoing has been proven.
- 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.
- I only
- I and III
- II and III
- IV only
Correct answer: I and III
Municipal bonds provide a fixed income, but they are generally suitable only for high tax bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license.
- An agent may share in the profits and losses of a customer's account if
- Sharing is limited to the agent’s proportional contribution
- Prior written authorization is obtained from the customer and the employing broker-dealer
- The employing broker-dealer approves
- The customer approves
Correct answer: Prior written authorization is obtained from the customer and the employing broker-dealer
An agent may share in the profits and losses of a customer's account only if both the customer and employing broker-dealer give written authorization. Unlike FINRA rules, there is no requirement that the agent have a financial interest in the account.
- Which of these would be the most appropriate action for an agent who hears a sensational rumor about a stock to take?
- Report the rumor to the Administrator on the form specifically designated under the Uniform Securities Act for this purpose.
- Report the rumor to the proper supervisory person.
- Pass the rumor along to those clients who are in the best position to benefit from it.
- Investigate to determine if there is any basis to the rumor.
Correct answer: Report the rumor to the proper supervisory person.
Rumors must not be acted on. Any agent hearing a rumor is obligated to report it to the supervisory person named in the firm's compliance manual.
- 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
- Preferred stock purchased in a private placement
- Government securities with 2-year maturities
- Large-cap stocks
- Municipal bonds purchased at par with 20-year maturities
Correct answer: Government securities with 2-year maturities
The Uniform Securities Act requires that all recommendations to a customer be consistent with that customer's investment objectives and financial situation. This particular customer needs to have principal available in two years and wants to invest for income in the interim. Of the choices listed, only government securities with two-year maturities meet both criteria.
- A broker-dealer offering a security for sale must
- Be prepared to sell the security at the quoted price
- Base his quote on his actual cost for that security
- Be prepared to buy the security at the quoted price
- Have the security in inventory
Correct answer: Be prepared to sell the security at the quoted price
A dealer must honor his quotes. When the offer is to sell, the dealer must be ready to sell at his quoted price. If the quote was to buy, then the dealer must honor the quote to buy. The broker-dealer's cost is not a relevant factor—all quotes are based on the current market.
- Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is prohibited for an agent to
- Accept an unsolicited order from his client who lives in a neighboring state
- Sell an unregistered nonexempt security to an employee benefit plan with assets in excess of $10 billion
- Indicate to a client that a specific transaction will incur higher-than-normal commissions
- Borrow money or securities from a client who is a member of his immediate family
Correct answer: Borrow money or securities from a client who is a member of his immediate family
The only circumstance under which an agent may borrow from a client is if the client is in the lending business, and something to that effect would have to be stated in the choice. This means you can't borrow from clients who are family or friends. Although the unsolicited order from the client who lives in a neighboring state is an exempt transaction, the agent could not accept it if he was not licensed in that neighboring state. How do we know he is? If he was not, then he could not have a client there. Although unreasonable commissions present a problem, there are cases where the commission may be higher than normal. As long as properly disclosed in advance to the customer, this is not a problem.
- 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
- Permitted because suitability is not required for exempt transactions
- Permitted because wealthy investors are not required to provide suitability information
- Not permitted because an agent is required to make reasonable and suitable recommendations
- Permitted because suitability is not required for exempt securities
Correct answer: Not permitted because an agent is required to make reasonable and suitable recommendations
Agents are required to suggest investments that are suitable to an investor's objectives and financial resources. Investment recommendations must be suitable to the client, whether the client is a wealthy investor or not and whether the securities or transactions are exempt from registration or not.
- 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 marketing materials may not be used in the sale of securities
- Prohibited because omission of material information is not permitted
- Permitted if the marketing piece indicated that certain information was omitted and investors should read the prospectus before purchasing
- Permitted because the agent’s purpose is not to scare potential purchasers away
Correct answer: Prohibited because omission of material information is not permitted
This would be a deceptive advertising practice. All material information must be disclosed. Omission or misstatement of material information is prohibited.
- 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?
- In this instance, sharing of commissions could only be done with the approval of both firms.
- Only an agent who makes a sale is eligible to earn a commission.
- Sharing commissions that are a result of a joint seminar is never permitted.
- Sharing of commissions by agents of two unrelated firms is prohibited.
Correct answer: Sharing of commissions by agents of two unrelated firms is prohibited.
Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer.
- All of the following activities could result in being charged with a fraudulent or unethical practice except
- Making recommendations based on material nonpublic inside information
- Failing to state all known facts about an investment when presenting it to a client
- Borrowing from retail customers
- Excessively trading for the purpose of generating commissions
Correct answer: Failing to state all known facts about an investment when presenting it to a client
Failure to state all known facts about an investment is not a violation of the Uniform Securities Act; omitting material facts, however, would be a violation of the act. Excessive trading, making recommendations on material nonpublic information, and borrowing from retail customers are prohibited business practices that could result in 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?
- The antifraud provisions of the Uniform Securities Act do not apply to Jones because he is not suitably trained, nor does he have a securities license.
- As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act.
- Jones’s failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration.
- The antifraud provisions of the Uniform Securities Act apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
Correct answer: The antifraud provisions of the Uniform Securities Act apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.
The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.
