Practice exam Q's #1

Investors open margin accounts to A) leverage their investment dollars B) save on taxes C) obtain reduced commissions D) increase the reliability of returns

A) Margin accounts employ the use of leverage—borrowed money. If the investment is successful, the leverage magnifies returns. However, if unsuccessful, the losses are magnified and can even be greater than the amount invested.

Under the Uniform Securities Act, which of the following is an investment adviser? A) A firm with no office in the state that provides specific investment advice to ten noninstitutional clients within the state B) An investment adviser representative C) A broker-dealer who receives no compensation for investment recommendations D) An individual who provides financial advice over the Internet with no recommendations based on specific investment situations of individual clients

A) A firm with no office in the state that provides specific investment advice to ten noninstitutional clients within the state

Which of the following must register as an agent? A) An individual representing a broker-dealer who sells commercial paper B) An individual who is paid a commission to sell FDIC insured certificates of deposit for ABC National Bank C) An employee of the Fed whose job is selling Treasury bonds to the public D) An individual who sells commercial paper for ABC National Bank

A) 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 broker-dealer. 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 exempt issuer. 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 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 disclosing which of the following fees? A) Markups and markdowns B) Account closing fees C) Advisory fees D) Commissions

B) act closing fees It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 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 Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption? A) Bank holding company stock B) Canadian government bond C) A debt issue of the District of Columbia D) 6-month commercial paper with a top rating and sold in minimum denominations of $100,000

D) 6-month commercial paper with a top rating and sold in minimum denominations of $100,000 The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less that is in the top 3 grades and has a minimum denomination of $50,000 is also included in the list of exempted securities. State and local issues are exempt and D.C. is considered a "state" under the USA.

According to the USA, which of the following is NOT considered a person? A) Custodian B) Municipality C) Corporation D) Minor

D) Minor

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IV. fees for providing advisory services to high net worth individuals

I and III If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 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 first that are also registered as investment advisers.

As defined in the Uniform Securities Act, the term exempt security would apply to which of the following? I. The sale of a municipal bond to an insurance company authorized to do business in this state II. Bonds issued by the local electric power company III. The purchase of a US Treasury bill by an investment company registered under the Investment Company Act of 1940 IV. Equipment trust certificates issued by a railroad engaged in interstate commerce

II and IV Securities issued by regulated public utilities and common carriers are exempt under the Uniform Securities Act. The sale of a security to an insurance company and the purchase of a Treasury bill by an investment company are exempt transactions involving exempt securities. You must be able to differentiate between an exempt security and an exempt transaction. The key word is transaction. In order for it to be an exempt transaction, there has to be an action—either a purchase or a sale.

Which of the following are securities under the Uniform Securities Act? 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

II, III, and IV

Which of the following statements concerning transactions exempt from registration under the Uniform Securities Act is TRUE? A) The antifraud provisions of the Uniform Securities Act apply to exempt transactions. B) A security sold under an exempt transaction must be registered. C) An unregistered, nonexempt security may be lawfully sold in a nonexempt transaction. D) The Administrator may require that a security be registered and a prospectus delivered in an exempt transaction.

A) The antifraud provisions of the Uniform Securities Act apply to exempt transactions.

Under the Uniform Securities Act, the term investment adviser does not exclude a A) lawyer B) person who is paid a fee for advising customers on securities C) person who is paid a commission for selling securities D) publisher of a magazine

B) An investment adviser is any person who is in the business of selling investment advice and is paid a fee for doing so.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is permissible for an agent to do all of the following EXCEPT A) split commissions with another agent at an affiliated broker-dealer B) solicit transactions in unregistered exempt securities C) open a joint account with a customer with written consent of the employing broker-dealer D) charge larger commissions because of a larger array of services the agent's firm offers

C) open a joint account with a customer with written consent of the employing broker-dealer

A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in I. a $10,000 fine per violation II. a receiver being appointed over the adviser's assets III. a prison term of 5 years per violation IV. the requirement that the investment adviser make restitution to the victims

A) II and IV

State securities law generally limits agents to employment with a single broker-dealer unless A) the Administrator, by rule or order, authorizes employment with more than one broker-dealer B) permission is received from both broker-dealers regardless of Administrator approval C) multiple employment is widespread and does not require specific Administrator approval D) permission has been granted by the SEC

A) the Administrator, by rule or order, authorizes employment with more than one broker-dealer

All of the following actions must be completed by the time customers enter their first option trade EXCEPT: A) receipt of a completed options agreement. B) completion of the new account form. C) approval by a designated options supervisor. D) delivery of the options disclosure document (ODD).

A) While other option account requirements must be met no later than the time customers enter their initial options trade, under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

Under the Uniform Securities Act, which of the following is an agent? A) Mr. Jones, while receiving his normal salary, represents XYZ Corporation in its transactions with underwriters with offices in XYZ's home state. B) Mr. Blodgett, an employee of XYZ Manufacturing Corporation, receives commissions when he represents XYZ in the issuance of securities exclusively to existing employees, partners, and directors of the corporation. C) Mr. Smith, an employee of the city of Albany, New York, represents the issuer in the issuance and sale of its new general revenue bonds to the public. D) Mr. Williams represents AAA National Bank, a member of the Federal Reserve System, in the issuance of AAA preferred stock to residents of his home state.

B) Mr. Blodgett acts in the capacity of an agent when he represents an issuer for compensation in transactions with existing employees, partners, and directors of the corporation. Had Blodgett not received compensation, he would not have been an agent. When Smith represents the city of Albany, he is representing an exempt issuer and, is not defined as an agent. When Jones represents the XYZ Corporation, an issuer, in transactions with underwriters, he is not considered an agent because this is an exempt transaction. When Williams represents the AAA National Bank, a member of the Federal Reserve System and an exempt issuer, he is not defined as an agent.

As defined in the Uniform Securities Act, which of the following persons is included in the term agent? A) An individual who represents an issuer in an exempt transaction B) An individual, employed by a broker-dealer who sells NYSE-listed securities exclusively to institutional clients C) 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 D) A broker-dealer who sells registered securities to the general public

B) An individual, employed by a broker-dealer who sells NYSE-listed securities exclusively to institutional clients The term agent specifically excludes broker-dealers.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following types of authority may NOT be given to an agent by a customer? A) Authority to accept an order for a customer's account from a third party B) Authority to borrow money or securities from a customer's account C) Authority to execute a trade for the account at the customer's order D) Authority to make trades in the customer's account at the agent's discretion

B) Authority to borrow money or securities from a customer's account

The Administrator may do all of the following with respect to federal covered securities EXCEPT A) require submission of a consent to service of process B) require that the issuer meet minimum financial standards C) initiate enforcement action in the case of fraud committed in the Administrator's state D) require the payment of a filing fee to the state

B) require that the issuer meet minimum financial standards

Under the USA, all of the following issues would be exempt from registration EXCEPT A) an investment contract issued in connection with an employee stock purchase plan B) stock issued by an insurance company not offering policies in this state C) stock issued by savings and loan association authorized to do business in this state D) bonds issued by the city of New Orleans

B) stock issued by an insurance company not offering policies in this state

An applicant for registration as an IAR in this state was convicted 4 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 A) censure the investment adviser for even thinking of employing this individual B) treat the crime as a nonfinancial misdemeanor C) treat the crime as any felony D) treat the crime as a nonfinancial felony

B) 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 and, therefore, this individual would not be subject to statutory disqualification.

An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2014. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2015, the client discovered that the agent's firm never licensed him in Michigan and therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out A) 9/1/2016 B) 8/1/2018 C) 8/1/2017 D) 9/1/2017

C) 8/1/2017

The term "agent", as defined in the Uniform Securities Act, would not include which of the following individuals? A) One who represents a registered broker-dealer selling securities listed on the NYSE to individual clients B) One who represents an issuer of any exempt security C) One who represents an issuer in effecting exempt transactions D) One who represents a registered broker-dealer selling unregistered exempt securities

C) 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 broker-dealer must be licensed as an agent of that broker-dealer. 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 5 different categories of exempt securities where this exclusion applies as well, but it doesn't apply to all exempt securities.

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 USA would consider which of the following a security? A) Purchase of jewelry for speculative purposes as opposed to personal use B) Investment in commodities futures C) 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 D) Investment in options to acquire a security

D) 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.

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. A) II and III B) I and II C) I and IV D) III and IV

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 investment advisers. A person who conducts business exclusively with banks and savings institutions is a broker-dealer 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 broker-dealer subject to the regulatory control of the state Administrator.