2- State Regulation Under USA
Under the Uniform Securities Act, an offer to sell would NOT include: stock acquired through a merger. the issuance of warrants or convertible securities. the issuance of stock rights to existing shareholders. A) I only. B) I, II and III. C) II and III. D) I and III.
A) I only. An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.
**Under the USA, what are the maximum penalties for a securities-related felony? A) $5,000 and five years' imprisonment. B) $5,000 and three years' imprisonment. C) $3,000 and five years' imprisonment. D) $3,000 and three years' imprisonment.
B) $5,000 and three years' imprisonment. Under the USA, the maximum penalty is $5,000 and/or three years' imprisonment for a securities-related felony.
A consent to service of process must be filed for registration of: investment adviser representatives. broker/dealers. investment advisers. agents. A) II and III. B) I and II. C) I, II, III and IV. D) II and IV.
C) I, II, III and IV. The consent to service of process is required for all initial registrations with the Administrator. It appoints the state Administrator as attorney for the registrant so that legal papers may be properly served. On the exam, the consent to service of process is considered to be a permanent document not subject to annual renewal.
All of the following practices are prohibited by the Uniform Securities Act EXCEPT: borrowing money from a customer without the customer's written permission. failing to determine the suitability of an investment for a customer. offering rescission. telling a customer that past history of an investment is not indicative of future results. A) II and IV. B) II and III. C) III and IV. D) I and II.
C) III and IV. Offering rescission and explaining that past performance is not necessarily a predictor of the future are permissible actions under the USA.
**The Uniform Securities Act is designed to protect the general public and not restrict investment activities of institutional or professional investors. Transactions with all of the following would be considered exempt from the registration and advertising filing requirements of the USA EXCEPT: A) broker/dealers. B) chief executive officers of companies listed on the NYSE. C) savings institutions. D) banks.
***Your answer, savings institutions., was incorrect. The correct answer was: chief executive officers of companies listed on the NYSE. Corporate chief executive officers are individual investors under the USA. Transactions in their personal investment accounts are therefore not exempt from the provisions of the act.
**Which of the following are exempt securities under the Uniform Securities Act? A security issued by a bank. A Canadian government bond. A security listed on the American Stock Exchange. A security issued by a charitable or other nonprofit organization. A) I and III. B) I, II, III and IV. C) I only. D) II and IV.
B) I, II, III and IV. The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the US or Canadian government or any state, province, or political subdivision; securities issued by any foreign government with which the US has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, AMEX, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations.
According to NASAA's Statement of Policy on Unethical and Dishonest Business Practices of Broker/Dealers and Agents, in which of the following situations has an agent acted improperly in placing a client's order? A) A client sends a letter about an extended business trip stating that in her absence, she wants the agent to accept orders from her husband, which the agent does. B) After a client's death, an agent receives instruction from a court-appointed administrator to liquidate the account; the agent sells all securities in the account at a loss. C) A client asks the agent to buy 1,000 shares of a specific high-quality technology stock this week for her nondiscretionary account. The agent places an order promptly for 1,500 shares because the market has begun to take off. By the end of the day, the stock is 5 points higher than the purchase price. D) An elderly client with an individual account is in the hospital and her daughter calls the agent to request a liquidation of assets to provide $10,000 for the payment of medical expenses. The agent refuses to place the order.
Your answer, A client asks the agent to buy 1,000 shares of a specific high-quality technology stock this week for her nondiscretionary account. The agent places an order promptly for 1,500 shares because the market has begun to take off. By the end of the day, the stock is 5 points higher than the purchase price., was correct!. ***AGENT DECIDING THE AMOUNT (1500 shares) MAKES THIS A DISCRETIONARY ORDER The agent exercised unauthorized discretion by changing the client's order for 1,000 shares without having trading authorization or power of attorney. This is a violation of ethical practice. Regarding the other choices, the client authorized in writing, a third party, the husband, to make decisions in her account and the administrator has been properly authorized, by the court, to manage the assets and make decisions. Finally, the agent acted correctly in refusing the order from someone other than the owner. The daughter had neither been legally authorized by the client to act in the account, nor had a court appointed her as guardian. This is a common problem when an account owner becomes incapacitated.
Which of the following statements regarding unsolicited orders is TRUE? A) A client may purchase, at his own initiative, securities trading in the secondary market through an agent who otherwise is prohibited from soliciting the order. B) Unsolicited orders are nonexempt transactions under the USA. C) The state Administrator may not require the client to sign an acknowledgment that the order was unsolicited. D) The state Administrator may not prohibit the solicitation of specific securities in the state.
Your answer, A client may purchase, at his own initiative, securities trading in the secondary market through an agent who otherwise is prohibited from soliciting the order., was correct!. If a client requests the purchase of a security that an agent is prohibited from soliciting, the agent can accept the order and mark the order unsolicited. This is the MOST COMMON of the exempt transactions.
Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940? A) All material facts. B) All facts needed to assess the risks of an investment. C) All facts in the prospectus. D) All facts.
Your answer, All material facts., was correct!. It is a violation of the act for any person willfully or knowingly to make untrue statements of a material fact or omit to state a material fact in connection with a securities recommendation by an adviser. A material misstatement is one that may have an effect on an issuer's future financial prospects or the market value of its securities or may influence the decision of a customer
Which of the following would be considered fraud under the Uniform Securities Act? A) An agent has a large number of clients in a security in which she trades frequently for her own account with no attempt to create an inaccurate impression of trading volume. B) An agent knowingly sold a nonregistered security because he thought it would eventually become registered. C) Using a private subscription to an online Internet legal records service, an agent discovers that a company is about to file for bankruptcy and immediately calls her clients recommending they liquidate their holdings. D) An agent knowingly sells securities in a publicly traded company in which his family has a beneficial ownership.
Your answer, An agent knowingly sold a nonregistered security because he thought it would eventually become registered., was correct!. Fraud occurs when a person covered under the USA knowingly violates a provision of the law; the agent knew the security was not registered and fraudulently sold it.
A registration statement may be amended after its effective date so as to change which of the following? A) The number of shares to be offered. B) The underwriter's discounts and commissions. C) The public offering price. D) Changes may not be made by amendment; filing of a new registration statement is required.
Your answer, Changes may not be made by amendment; filing of a new registration statement is required., was incorrect. The correct answer was: The number of shares to be offered. The Uniform Securities Act permits filing an amendment to an existing registration increasing the number of shares to be offered and sold if the public offering price and underwriter's discounts and commissions are unchanged.
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) An equipment trust certificate for the Great American Railroad's newest locomotives. B) Common stock issued by The First National Bank of Largeville. C) A rights offering by ABC Corporation whose common stock is listed on the NYSE. D) First mortgage bonds issued by XYZ Computers, a company whose IPO was issued under SEC Rule 147.
Your answer, First mortgage bonds issued by XYZ Computers, a company whose IPO was issued under SEC Rule 147., was correct!. SEC Rule 147 is the intrastate exemption meaning that the security registers in the state rather than the SEC. Bank stock and equipment trust certificates are exempt securities. Rights offered by a company whose stock is listed are considered federal covered securities.
**Which of the following transactions are exempt? I. XYZ Corp., a local manufacturing firm, offers its common stock to Investment Company Advisers, Inc., on an infrequent or isolated basis. II. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's 5-year fixed income securities, rated AAA by Standard & Poor's, on a daily basis. III. Joe Smith, an agent with ABC Securities, Inc., sells XYZ Corporation's securities to a client on an unsolicited basis. IV. Joe Smith had his sizable portfolio of stocks and bonds sold by the administrator of his estate upon his death. A) I and II. B) III and IV. C) II and III. D) I and IV.
Your answer, I and IV., was incorrect. The correct answer was: III and IV. Unsolicited secondary market transactions and those made by an estate's executor are exempt transactions. While the AAA bonds may be an exempt security, soliciting daily transactions (unless with institutional buyers) is not an exempt transaction. XYZ Corp., a local manufacturing firm, is an issuer of the common stock. Had it been a non-issuer transaction on an isolated basis, the transaction would have been exempt.
Which of the following are nonissuer transactions? An investment manager purchases 100,000 shares of XYZ on the NYSE. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. Dot.com purchases its own shares on the open market in order to place them in treasury. A) I, II, III and IV. B) III and IV. C) I and II. D) I only.
Your answer, I, II, III and IV., was correct!. A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer as in a secondary transaction.
**Which of the following actions would constitute a violation of the Uniform Securities Act? Purchasing a convertible security and simultaneously selling short the underlying common stock for profit. Purchasing a security on an exchange and simultaneously selling it on another exchange to improve trading volume. Executing a trade for a customer at a price that is unrelated to the current market. Executing a trade for a customer at the best available price without the customer's knowledge. A) III and IV. B) II, III and IV. C) I, II, III and IV. D) I and II.
Your answer, I, II, III and IV., was incorrect. The correct answer was: II, III and IV. The practice of buying a security on one exchange and simultaneously selling it on another exchange to create an appearance of trading activity is manipulative, not arbitrage. Purchasing a convertible security and simultaneously selling short the underlying common for profit is another form of arbitrage and is perfectly legal. Executing a trade for a customer at a price that is unrelated to the current market, and executing a trade without the knowledge of the customer are prohibited.
The term "sale" includes which of the following? A contract of sale. A contract to sell. The disposition for value of an interest in a security. A warrant (for common stock of the issuer) given with the purchase of a bond. A) II and III. B) I, II, III and IV. C) I, III and IV. D) I and III.
Your answer, I, III and IV., was incorrect. The correct answer was: I, II, III and IV. "Sale", used interchangeably with "sell", is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of the bond, the acquisition of the warrant is considered to be a sale.
A customer with liquid net worth of $25,000 tells an agent that she has $1,000 to invest. Explaining how diversification can reduce risk, the agent recommends that the customer purchase eight different over-the-counter stocks, each trading at approximately $1 per share. With regard to the above situation: the recommendation is suitable for the customer because the agent recommends a diversified stock portfolio. high-risk penny stocks are not suitable recommendations for this low net worth customer. the agent may be exhibiting a pattern of excessive commissions (churning) in his customer's account. once the customer agrees to the agent's recommendation, it is no longer considered an unsolicited transaction. A) II only. B) III and IV. C) II and III. D) I and IV.
Your answer, II and III., was incorrect. The correct answer was: II only. Regardless of diversification, low-priced stocks are not suitable for a low net worth customer. Risk is not necessarily diversified away by simply increasing the number of risky securities. Risk is only reduced by diversifying many securities whose patterns of returns are not correlated. Churning is not indicated here because there is no trading shown other than the initial purchases.
***Under the Uniform Securities Act, the term agent would include an individual who: I. sells securities on behalf of a broker/dealer in an exempt transaction without receiving compensation. II. sells securities on behalf of a broker/dealer in an exempt transaction and receives compensation. III. sells securities on behalf of an issuer in an exempt transaction without receiving compensation. IV. sells securities on behalf of an issuer in an exempt transaction and receives compensation. A) I and III. B) II and IV. C) I and II. D) I, II and IV.
Your answer, II and IV., was incorrect. The correct answer was: I, II and IV. Anyone who sells securities on behalf of a broker/dealer is defined as an agent. Those who sell on behalf of an issuer are excluded from the definition under certain circumstances, the most important of those being that the individual receives no sales-related compensation.
Which of the following actions by an investment adviser representative would be an unethical practice under the Uniform Securities Act? A) An IAR with discretionary authority enters a buy order for a security when its price is rising. B) Splitting commissions with a customer service representative who is not registered but works for the same firm. C) Telling a customer that the investment being recommended will be sold from the inventory of the investment adviser representative's firm. D) Recommending securities that result in major losses in the customer's account.
Your answer, Recommending securities that result in major losses in the customer's account., was incorrect. The correct answer was: Splitting commissions with a customer service representative who is not registered but works for the same firm. Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transactional-based compensation.
A broker/dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent a(n): A) Sale. B) Gift. C) Prohibited transaction. D) Offer.
Your answer, Sale., was correct!. 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 part of the subject of the purchase and to have been offered and sold for value."
According to the USA, under which of the following circumstances may an Administrator cancel an agent's registration? A) The agent has admitted to selling unregistered exempt securities to individual clients. B) The agent is judged to be mentally incompetent. C) The agent is the subject of an insider trading lawsuit. D) The Administrator determines it would be in the public interest.
Your answer, The Administrator determines it would be in the public interest., was incorrect. The correct answer was: The agent is judged to be mentally incompetent. Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.
In which of the following instances would an investment adviser representative be exempt from the anti-fraud rules of the Uniform Securities Act? A) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. B) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. C) The IAR is also an agent of a broker/dealer and, in that capacity, makes a recommendation to a nonadvisory client. D) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name.
Your answer, The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities., was correct!. Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the anti-fraud statutes of the USA.
A licensed agent with a registered broker/dealer in a state would be permitted to engage in which of the following transactions in unregistered nonexempt securities? A) The sale of commercial paper with a 12-month maturity. B) The sale of a preorganization certificate on which the agent receives no commission on the amount paid by the investor. C) A private placement. D) A solicited transaction in a small Canadian mining company.
Your answer, The sale of a preorganization certificate on which the agent receives no commission on the amount paid by the investor., was incorrect. The correct answer was: A private placement. Under the USA, it is unlawful for any person to offer or sell any security in this state unless (1) it is registered under the USA; or (2) the security or transaction is exempted under the USA; or (3) it is a federal covered security. In this case, a private placement is an exempt transaction so the agent is within the limits of the law. The sale of the preorganization certificate is not an exempt transaction because, although the agent received no commission, the investor paid for the shares and no payment is allowed.
An agent receives inside information concerning an impending merger. Under the Uniform Securities Act, the agent may divulge the information to: A) the broker/dealer three days after public notice. B) his best customers three days before a public announcement. C) anyone three days before a public announcement. D) anyone after public notice.
Your answer, anyone after public notice., was correct!. After the inside information has become public, it may be disseminated to anyone.
Registration statements for securities under the Uniform Securities Act are effective for: A) one year from the date of issue. B) one year from the effective date. C) one year from the previous December 31. D) a period of time determined by the Administrator for each issue.
Your answer, one year from the effective date., was correct!. Securities registration statements are generally effective for one year from the effective date.
A customer placed an order with an investment adviser to sell 100 shares of ABC to receive cash for an urgent purchase the next day, and he instructed the adviser to limit any losses. The adviser did not have discretionary authority over the account and waited to sell the shares, hoping to get a better price for the customer. The price of the shares went down, so the adviser sold 50 ABC shares to limit the customer's losses. According to the Uniform Securities Act, this is a: A) violation because the adviser is required to execute sell transactions immediately after the order is placed. B) permissible activity because the adviser is not permitted to guarantee a price to a customer. C) permissible activity because the adviser is obligated to get the best price for the customer. D) violation because the adviser acted without discretionary authority.
Your answer, permissible activity because the adviser is not permitted to guarantee a price to a customer., was incorrect. The correct answer was: violation because the adviser acted without discretionary authority. An investment adviser may determine the price and timing of a transaction without discretionary authority. As a result, the adviser is not necessarily required to execute a transaction immediately after an order is placed. In this situation, the adviser acted without authority when he changed the amount of the security sold.
If an investment adviser tells a client that a stock has doubled in the past year and, even though past performance is no assurance of future results, he is sure it will double, this statement is: A) prohibited because the investment is not suitable for the client. B) permissible due to the disclaimer of future performance. C) permissible if the adviser has performed due diligence on the stock. D) prohibited as a likely exaggeration.
Your answer, prohibited as a likely exaggeration., was correct!. Regardless of disclosure of the uncertainty of future performance of an investment, an investment adviser may not make potentially exaggerated claims.
The Administrator may require registered broker/dealers to comply with all of the following EXCEPT: A) filing of advertisements and sales literature. B) filing financial information periodically. C) renewal of registration semiannually. D) keeping records for 3 years.
Your answer, renewal of registration semiannually., was correct!. 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 broker/dealer be maintained for any period of time; 3 years is the most common requirement for registered broker/dealers.
***All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT: A) if the investment adviser is not an individual, an officer or general partner must take the state's examination requirement (e.g., the Uniform Investment Adviser State Law Exam). B) the adviser's registration expires on December 31 each year. C) the initial application must include a consent to service of process along with Form ADV and the appropriate fees. D) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process.
Your answer, the initial application must include a consent to service of process along with Form ADV and the appropriate fees., was incorrect. The correct answer was: 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 Form ADV and the appropriate fees. If the investment adviser is not an individual, an officer or general partner may be required to take the state's examination requirement (e.g., the Uniform Investment Adviser State Law Exam).
All of the following are exempt from state registration under the Uniform Securities Act EXCEPT: A) variable annuities or other variable insurance products offered by an insurance company. B) bonds issued by a bank that is a member of the Federal Reserve System. C) securities issued by a nonprofit organization. D) debt securities issued by or guaranteed by an insurance company licensed to do business in this state.
Your answer, variable annuities or other variable insurance products offered by an insurance company., was correct!. A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations.
One method of securities registration under the Uniform Securities Act is Qualification. The effective date of a security registered using this method is: A) when so ordered by the Administrator. B) when the offering is made effective by the SEC. C) within 2 business days of the filing of maximum and minimum proposed offering prices. D) by Noon of the 30th day following the filing of the application. Your answer, when so ordered by the Administrator., was correct!. Registration by Qualification becomes effective on the date set by the Administrator
Your answer, when so ordered by the Administrator., was correct!. Registration by Qualification becomes effective on the date set by the Administrator
ABC Securities is a 2-office broker/dealer in Idaho that intends to underwrite an initial public offering of one million shares of stock for Circular, Inc. If the issue will be offered exclusively to residents of Idaho, registration of this offering: A) will most likely occur by qualification. B) will most likely occur by coordination. C) will most likely occur by notice filing. D) is not required because of the de minimis test.
Your answer, will most likely occur by qualification., was correct!. An issue done solely within 1 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 level; neither of those 2 could possibly apply to the Circular offering.