9.3 - Persons Subject to State Registration

If Somerville Discount Securities has its principal office in New Jersey and recently registered a branch office in Minnesota, which of the following statements is TRUE? A) Each agent must be registered in the appropriate state before soliciting or taking orders. B) Agents working in the principal office that are licensed only in New Jersey may take unsolicited orders from Minnesota residents. C) Agents working in the branch office that are licensed only in Minnesota may take unsolicited orders from New Jersey residents. D) Each agent is automatically registered in both states.

Answer: A Agents must be registered in every state in which they do business. An agent is not automatically registered in a state just because his employer is registered in that state. Reference: 9.3.2.3 in the License Exam Manual.

A broker/dealer registered in multiple states must meet the record retention requirements of: A) the SEC. B) the state with the most stringent requirement. C) the state where the b/d is incorporated. D) the state where the principal office of the broker/dealer is located.

Answer: A One of the effects of the NSMIA was to establish the pre-emption of federal law over state law. A broker/dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1) which reads as follows: "No law, rule, regulation, or 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 brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title." However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.

Sarah has passed her Series 6 qualification exam but not the Series 63. 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: A) not in violation of any applicable statutes. B) in violation of the Securities Act of 1933. C) in violation of the Securities Exchange Act of 1934. D) in violation of the Uniform Securities Act.

Answer: A Provided Sarah does not solicit business, offer advice to customers, or accept orders, she has not committed a violation of any act. Reference: 9.3.2.1 in the License Exam Manual.

Under the National Securities Markets Improvement Act of 1996 (NSMIA), states are prevented from: registering securities. establishing capital and custody requirements that exceed those provided for in the Securities Exchange Act of 1934. establishing recordkeeping requirements for broker/dealers or investment advisers that exceed those required under federal securities law. registering investment advisers. A) II and III. B) I and III. C) I and IV. D) III and IV.

Answer: A The NSMIA streamlined much of federal and state securities law and specifically prevented dual regulation. As a result, states may not impose capital, custody, and recordkeeping requirements that exceed requirements under federal securities law. States can register securities and investment advisers that are not covered by the registration requirements of federal legislation. Reference: 9.3.1.3 in the License Exam Manual.

Under the Uniform Securities Act, a person whose business model is selling reports concerning specific securities to investors on a subscription basis will be defined as: A) a broker/dealer. B) a journalist. C) an investment adviser. D) an agent.

Answer: C 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.

Which of the following statements is NOT true? A broker/dealer must be a firm or corporation (legal person) as opposed to a natural person (human being). An investment adviser must be a firm or a corporation as opposed to a natural person. An investment adviser representative (IAR) cannot, under any circumstances, be employed by a registered broker/dealer. A) II and III. B) I, II and III. C) I and II. D) I and III.

Answer: B A broker/dealer or investment adviser can be either a natural person (i.e., organized as a sole proprietorship) or a legal person (i.e., a corporation or partnership). There is no prohibition against an investment adviser representative also being licensed as an agent with a broker/dealer. Reference: 9.3.3 in the License Exam Manual.

Under the Uniform Securities Act, the term broker/dealer would include: A) a trust company. B) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period. C) an agent registered under the act who from time to time sells stock from personal inventory. D) an issuer distributing its own common stock offering.

Answer: B Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker/dealer. There is no de minimis exemption for broker/dealers. A person is exempt from the definition of broker/dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker/dealer. Reference: 9.3.1.1.1 in the License Exam Manual.

Broker/dealer A wants to promote and reward teamwork. The firm plans to pay out a small percentage of the firm's profits to the clerical staff as a bonus for their hard work. Under NASAA rules, is this permitted? A) No, this cannot be done. B) Yes, no registration is necessary. C) Yes, if all of the agents agree to it. D) Yes, if the entire clerical staff is registered as agents for the firm.

Answer: B Bonuses based on a broker/dealer's profits may be payable to nonregistered clerical help as long as there is no direct relationship to any specific sales. Reference: 9.3.2.4 in the License Exam Manual.

Which of the following persons are included in the definition of an agent under the Uniform Securities Act? An individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange listed company. An individual who, as part of the job description, represents the City of Chicago in selling its bonds to the public. An individual who represents a corporation traded on the New York Stock Exchange in selling securities to the public. An individual who is employed by the Federal Reserve Board to sell Treasury Bills to retail investors A) III and IV. B) I and III. C) I and II. D) II and IV.

Answer: B 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 exempt securities or exempt transactions are not defined as agents. An individual who represents an issuer selling nonexempt securities is an agent and must be registered. Reference: 9.3.2 in the License Exam Manual.

It would not be a violation of the Uniform Securities Act for an applicant for registration as an agent to do which of the following while the application is pending? A) Conduct seminars on asset allocation. B) Sell fixed annuities. C) Use a preliminary prospectus to obtain indications of interest for a new issue, but wait until he is registered before accepting any orders. D) Limit his sales activity to immediate family members only.

Answer: B While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, because fixed annuities are not securities, registration as an agent is not required. Yes, I know that an insurance license would be required, but, apparently, NASAA doesn't care about that.

Under the USA, an individual would not be considered an agent while representing the issuer in any of the following transactions EXCEPT: A) investment contracts issued in connection with an employee's stock purchases, savings, pension, profit-sharing, or similar employee benefit plan. B) issuers in exempt transactions. C) nonexempt, initial public offerings. D) promissory notes, such as commercial paper, with a maturity of nine months or less.

Answer: C Persons who represent nonexempt issuers of new securities, are agents under the USA unless it is stated that the transaction is exempt. Representing issuers in exempt transactions excludes the person from the definition of agent.

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? An existing client visiting the state for a 2-week period. An existing client who moved to the state 6 months ago. An existing client who moved to the state less than 30 days prior. An acquaintance from another state who requests that the agent execute transactions on his behalf A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: C 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 has moved to the state within the past 30 days. Reference: 9.3.2.3 in the License Exam Manual.

Which of the following persons are 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 trust company with an office in the state that deals with the general public. A broker/dealer with no office in the state that has no more than 5 retail clients resident in the state within the past year. A broker/dealer with no office in the state that effects securities trades exclusively with trust companies or other broker/dealers A) III and IV. B) I, II, III and IV. C) I, II and IV. D) I and II.

Answer: C 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 broker/dealer confines trading to financial institutions or other broker/dealers. Unlike with investment advisers, there is no de minimis exemption for broker/dealers. Trust companies are excluded from the definition of broker/dealer. Reference: 9.3.1.1.1 in the License Exam Manual.

When a broker/dealer registers with the state Administrator, which of the following persons are automatically registered as agents of the broker/dealer in the state? A) Agents registered in another state who are employed by the broker/dealer. B) Those persons employed at the broker/dealer prior to its registration in the state. C) Partners, directors, and officers of the broker/dealer. D) Persons employed by the broker/dealer who are residents of the state but employed in a state other than that of the Administrator.

Answer: C When a broker/dealer registers with the state securities Administrator, those persons who are partners, directors, or officers are automatically considered agents in the state. Reference: 9.3.1.2 in the License Exam Manual.

The Uniform Securities Act requires which of the following to be registered as agents of a broker/dealer? A senior partner of a broker/dealer who actively manages the firm's day-to-day operations. A silent partner who has contributed most of the capital of the broker/dealer but takes no part in the firm's activities. An associated person of a broker/dealer whose primary function is to take orders from the public. An employee of a broker/dealer who only trades securities for the firm's proprietary account.

Answer: D Employees who take orders from the public and who trade securities for the accounts of broker/dealers must register as agents. The USA requires any person who represents a broker/dealer in effecting securities transactions to register as an agent of their employing broker/dealer. Partners (officers, directors) who play an active role in the securities business of a broker/dealer must register as agents; those who don't, are exempt from registration. Reference: 9.3.2.3 in the License Exam Manual.

An agent lives in Montana and is registered in Montana and Idaho. His broker/dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may: A) only accept unsolicited orders. B) not conduct any business with the client. C) not deal with the client until the broker/dealer registers in Pennsylvania. D) conduct business with the client as usual.

Answer: D Even though the college program is referred to as a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.

Your friend is a licensed life insurance agent whose client wants to purchase a variable annuity. You are a licensed securities and insurance agent, and your friend wants you to sell the policy and split commissions with him. Splitting commissions: A) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain securities licenses with broker/dealers registered with the Administrator. B) is an unethical trade practice. C) would be allowable if the securities representative receives at least 60% of the commission and the insurance agent receives no more than 40%. D) in variable annuities is allowable only if the agents involved are both licensed to sell life insurance and maintain their securities licenses at the same or affiliated broker/dealers.

Answer: D You must be licensed in both insurance and securities to sell variable annuities or to split commissions. Commissions on securities transactions may only be split with registered agents of the same or affiliated broker/dealers.

A sales agent who is only registered in Nebraska works for a broker/dealer that is registered in all 50 states. A customer who is a resident of North Dakota calls the representative in Nebraska and offers to purchase securities. Under the Uniform Securities Act, the agent should: A) accept the order because it is unsolicited. B) reject the order because she is not registered in North Dakota. C) accept the order because her broker/dealer is registered in all 50 states. D) accept the order because she received it in Nebraska.

Answer: B Both the broker/dealer and the agent must be registered in each state where they plan to do business. Although the broker/dealer is properly registered, in order for the agent to accept the order, she must be registered in North Dakota. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident. Reference: 9.3.2.3 in the License Exam Manual.

Which of the following statements are TRUE? An agent must register in the state in which he advertises and solicits a security. To make sales, an agent need not register in a state in which the broker/dealer is already registered. Under no circumstances may an agent register with two unrelated broker/dealers. A secretary for a broker/dealer who, as a courtesy, takes orders for the broker/dealer's clients must be registered. A) I and IV. B) I and II. C) II and III. D) III and IV.

Answer: A An agent must be registered in the state in which a security is advertised and solicited. A secretary who takes orders for the broker/dealer's clients must be registered. If the state Administrator specifically grants an exception, an agent may be registered with two unrelated broker/dealers. The fact that a broker/dealer is registered in a state does not qualify the agent for sales unless he is also properly licensed in that state.

Under the Uniform Securities Act, which of the following is (are) investment advisers? Jane advises customers regarding the value of gold and silver coins. The Trust Department of ABC Bank provides investment advice to its clients. Tom writes a newspaper column that analyzes and recommends securities. Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee. A) IV only. B) I and III. C) I and IV. D) II, III and IV.

Answer: A Jane's advice does not concern securities; banks are exempt from the definition; Tom's advice is not specific on the basis of the situation of each client (impersonal advice). While an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice.

Under the Uniform Securities Act, the Administrator can require which of the following from broker/dealers and investment advisers? Filing of sales literature. Maintaining of records. Filing of financial statements. Filing of amendments to registrations. A) I, II, III and IV. B) I and II. C) II and III. D) II, III and IV.

Answer: A The act requires the filing of sales literature and advertising (as well as a prospectus) addressed or intended for clients or prospective clients, unless exempt under the act. In addition, it requires that books and records be kept for a minimum of three years for broker/dealers and five years for investment advisers and provides that an Administrator may require the filing of financial reports regarding the net worth of the firm. The act also requires broker/dealers and investment advisers to update any information filed with the state regarding any material change that takes place. Even federal covered investment advisers may be required to file copies of their SEC registration and amendments with state Administrators, along with filing fees. Reference: 9.3.1 in the License Exam Manual.

The Uniform Securities Act authorizes the Administrator to make certain demands of broker/dealers. In general, the Administrator would not require a broker/dealer to A) promptly file a correcting amendment to any document on file with the Administrator which becomes inaccurate or incomplete in any material respect. B) post a surety bond if it does not have investment discretion over client accounts or do not maintain custody of customer funds and/or securities. C) publish an announcement of the application for registration in a newspaper published in the state. D) file various financial reports.

Answer: B The question asks for something that cannot be required by the Administrator. The other choices are requirements you should memorize. In general, the Administrator can require a bond only if registrants have custody or discretion. Reference: 9.3.1.3 in the License Exam Manual.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee: A) may receive commissions without registration. B) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales. C) must register as an agent of the issuer. D) need not register as an agent of the issuer under any circumstances.

Answer: B Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required. Reference: 9.3.2.2.1 in the License Exam Manual.

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? Agents. Broker/dealers. Investment Advisers. A) I and III. B) I, II and III. C) II and III. D) I and II.

Answer: C Only broker/dealers and investment advisers are required to maintain financial records. Agents must maintain sales records, but there are no financial inspections of agents or investment adviser representatives as there are with broker/dealers and advisers. Reference: 9.3.2.4 in the License Exam Manual.

Under the NSMIA, state securities Administrators retain authority to: A) forward all filing fees received from issuers, broker/dealers, and agents to the SEC. B) impose state registration requirements on all investment advisers. C) enforce antifraud provisions. D) regulate the securities registration and offering process for registered investment companies.

Answer: C Under the NSMIA, state Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration but they may be required to pay state filing fees.

Which of the following must register as a broker/dealer under the USA? A) A broker/dealer with no place of business in the state that has directed offers to clients who have more than 30 days' temporary residency in the state. B) A broker/dealer with no place of business in the state that deals exclusively with broker/dealers with offices in that state. C) A broker/dealer with no place of business in the state that effects transactions exclusively with issuers of securities in that state. D) A broker/dealer with a place of business in the state that effects transactions exclusively with broker/dealers registered in other states.

Answer: D If a broker/dealer has an office in the state, it must register with the state, regardless of what types of clientele it serves. The term "broker/dealer" excludes anyone without a place of business in the state who effects transactions exclusively with issuers, other broker/dealers, or institutions, or who directs an offer in the state to an existing customer who temporarily resides in the state where the offer is received, regardless of the length of time. As long as the broker/dealer is properly registered in the vacationer's state of permanent residence and does not maintain an office in the state being visited, it is not defined as a broker/dealer. Reference: 9.3.1 in the License Exam Manual.

Agents A and B work for the same firm and wish to share commissions. Agent A is licensed in states X, Y, and Z. Agent B is licensed in states X, Y, and C. Which of the following statements is TRUE in regard to their sharing commissions? A) Only the commissions from states Z and C could be shared. B) Commissions cannot be shared. C) All commissions from agents A and B can be shared. D) Only the commissions from states X and Y could be shared.

Answer: D In order to share commissions, agents must be registered as an agent for the same broker/dealer or for an affiliated broker/dealer. Additionally, in order to receive a commission, an agent must be registered in the state where the transaction is made.

Which of the following statements regarding financial requirements that may be imposed by the Administrator are TRUE? Agents may be required to be bonded. Investment adviser representatives may have to meet certain net worth standards. Broker/dealers may have to meet certain net capital levels. Investment advisers may post a bond instead of meeting certain net worth levels. A) I, II and III. B) III and IV. C) I, II, III and IV. D) I, III and IV.

Answer: D Individuals registered as agents may be required to be bonded, but these individuals, as well as those registered as investment adviser representatives, never have to meet net worth or net capital standards; those are for broker/dealers and investment advisers only. The USA does allow a broker/dealer or investment adviser to post a bond instead of demonstrating a certain net capital or net worth. Reference: 9.3.1.3; 9.3.2.4 in the License Exam Manual.

Andrew voluntarily leaves his position as an agent with Gibraltar Securities. Which of the following best describes the reporting requirements relative to this termination? A) Only the firm must notify the Administrator, and must do so within 30 days of Andrew's resignation. B) Only Andrew must notify the Administrator, and must do so within 30 days of his resignation. C) Notification to the Administrator is not required, presuming that Andrew was not terminated for cause. D) Both Andrew and the firm must notify the Administrator of Andrew's resignation promptly.

Answer: D On termination of an agent from a firm with which he is registered, both the agent and the firm must notify the Administrator of such termination promptly. Reference: 9.3.2.3 in the License Exam Manual.

First Growth Securities, Inc., a member of the Financial Industry Regulatory Authority (FINRA), has its main office in Illinois and is therefore: A) a registered investment adviser licensed to sell securities in Illinois. B) registered by FINRA to sell securities in Illinois. C) automatically registered as a securities agent in Illinois. D) required to register as a broker/dealer in the state of Illinois.

Answer: D Securities firms that are members of FINRA must register as broker/dealers in the states in which they conduct business. Under the USA, broker/dealers are firms engaged in the business of effecting security transactions in customer or proprietary accounts. A broker/dealer is not a registered investment adviser, although many broker/dealers own separate legal subsidiaries that are investment advisers. FINRA does not license its members to conduct business in the states; the state securities licensing agent is the state securities Administrator. Also, a broker/dealer is not an agent; an agent is a person who is employed by a broker/dealer to conduct securities transactions as a representative of the broker/dealer. Reference: 9.3.1.2 in the License Exam Manual.

All of the following statements about an agent's need to be registered in a state are correct EXCEPT: A) registration is required when they limit their activity to the sale of exempt securities. B) registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state. C) registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state. D) registration is required in each state in which the employing broker/dealer has a place of business.

Answer: D The fact that the broker/dealer does business in a state has nothing to do with a specific agent. Many broker/dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption.

Which of the following statements regarding an agent's registration is most accurate? A) Registration of a broker/dealer in a specific state automatically registers all of the firm's agents in that state as well. B) If the broker/dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker/dealer. C) If the broker/dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker/dealer within 30 days. D) Revocation of the registration of that agent's broker/dealer will result in cancellation of that agent's effective registration.

Answer: D The registration of an agent is not effective during any period when he is not associated with a particular broker/dealer registered under the Uniform Securities Act. Therefore, when the broker/dealer's registration is revoked, the agent's license is no longer in effect. The Administrator does not "hold" licenses. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers and partners when the firm first registers.