Series 63
The Administrator examines the books and records of an investment adviser and notices that there appears to be an excessive level of trading in customer accounts. To determine if there is a violation of the Uniform Securities Act, the Administrator would: A. compare the transactions to the customers' stated investment objective(s) B. see if the adviser has taken custody of customer funds or securities C. review whether the adviser acted as the executing broker in these transactions D. ascertain the compensation received for the trades effected in these customers' accounts
The best answer is A. Any trades that are effected in a customer account must be suitable based on the customer's investment objective, investment experience, financial situation and financial needs. Matching the trading level in a customer's account to that customer's investment objective would be the primary determinant of whether the investment adviser has been "churning" the account (for example, a customer account that has an investment objective of "speculation and growth" would be expected to have a greater level of trading activity). Another factor would be whether the adviser acted as the executing broker in these transactions (this is not prohibited, but it must be disclosed to the customer). This would give the adviser the incentive to overtrade an account, since commissions are earned on each trade (in addition to the advisory fees earned). However, this would be a secondary consideration in the Administrator's examination.
An investment adviser, age 33 and married, needs cash for the down payment to buy her first house. She asks her father if he can "help out" with the down payment. Her father is one of her advisory clients. Which statement is TRUE about this situation? A. The investment adviser can accept the money from her father if he gives it as a gift B. The investment adviser can accept the money from her father if he gives it as a loan C. The investment adviser cannot accept the money from the father, whether given as a loan or a gift D. The investment adviser can only accept the money from her father if there is a written agreement that details the terms and conditions
The best answer is A. Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser. Note that an investment adviser can accept a gift!
A Registered Investment Adviser is a director of a private corporation. The corporation goes public, and the adviser wants to recommend the purchase of the stock to his clients. All of the following statements regarding this action are true EXCEPT this action is: A. permitted without restriction since the company is trading publicly B. permitted as long as the existence of the control relationship is disclosed in writing in the RIA's disclosure document C. a potential violation of the insider trading rules D. a potential violation of the conflict of interest rules
The best answer is A. Since the RIA is a director of this publicly-held company, he or she is an insider; and he or she has a control relationship with the company. While it is not prohibited for the RIA to recommend to purchase of the company's stock to his or her customers, the RIA would be obligated to disclose the existence of the control relationship to customers that were recommended the company's securities by the RIA; and the RIA would have to ensure that insider trading rules were not being violated by making such recommendations (e.g., the basis for the recommendation must come from publicly available information). In the real world, this is such a compliance nightmare that the simple solution for the RIA would be to just not recommend that company's stock. However, the RIA can do so with the appropriate disclosures.
An agent is soliciting customer orders for a new non-exempt issue that has been registered. The top officers of this company were previously associated with XYZ Company, a highly successful firm in the same industry. That firm's success was attributed to these individuals. Under the Uniform Securities Act, which statements by the agent are permitted? I "The top officers of this new firm were previously at XYZ Company" II "These top officers were responsible for the rapid growth of XYZ Company over the past 3 years" III "The top officers are experts in the field who made XYZ Company, their previous firm, into a gold mine" A. I and II B. II and III C. I, II, III D. None of the above
The best answer is A. The use of flamboyant or exaggerated language to induce a sale is prohibited. It is perfectly acceptable to state that the officers were associated with the other company and were responsible for its growth, as long as the statements are true.
A Registered Investment Adviser enters into an agreement with a Certified Public Accountant, where the CPA will refer clients that need the services of an investment adviser. For each client referral, the CPA will be paid a fee. The CPA is: A. required to register in the State as an agent B. required to register in the State as an investment adviser representative C. not required to register in the State because he already has an independently conferred professional designation D. not required to register in the State because he is regulated by the AICPA
The best answer is B. Any person retained by an investment adviser to "find" new clients, if he or she is paid for doing so, is defined as an IAR who must be registered in the State. Choice C gets at the exemption provided under the Investment Advisers Act of 1940, where professionals such as lawyers or CPAs that do not separately charge for advice are excluded from the definition of an adviser. However, this does not apply here because the CPA is getting separate compensation for each referral made to the investment adviser.
Which person would be required to register as a broker-dealer in a State? A. A person with no place of business in the State who conducts securities transactions with the issuer of non-exempt securities B. A person with no place of business in the State who represents an issuer in the sale of exempt securities to non-institutional customers for compensation C. A person with no place of business in the State who represents an issuer in the sale of non-exempt securities to the issuer's employees without receiving compensation D. A person with no place of business in a State who conducts securities transactions with financial institutions in the State for compensation
The best answer is B. Choice A is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with issuers - it is not dealing with the general public. Choice B is defined as a broker-dealer because the firm is selling securities to retail customers in the State for compensation. It makes no difference whether the securities involved are exempt or non-exempt. Choice C is excluded from the definition because this is an employee of an issuer that represents the issuer, selling its securities to the issuer's employees (for example, selling that issuer's securities to the employees that choose that investment option in the company's 401(k) plan). Choice D is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with financial institutions - it is not dealing with the general public.
A market maker in ABCD stock is currently quoting the stock in the OTCBB at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to sell 800 shares of ABCD at $42.50, the market maker: A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C. must send the order to a stock exchange floor for execution D. is not required to take any action
The best answer is B. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently offering the stock at $43.00 - this is the price at which he is willing to sell up to 1,000 shares. Since this customer is willing to accept less to sell - $42.50 for up to 800 shares, the customer's offer must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.
A customer overhears a telephone conversation between her close friend and the friend's spouse, where the close friend mentions to her husband (who is the president of a large bank) how worried she is that she will have to move to California if her husband is successful in the takeover attempt of CalTrust Bank. The customer calls her sales representative at the broker-dealer where she maintains an account and places a market order to buy 1,000 shares of CalTrust Bank, which is immediately filled at $32.50 and then is reported by the agent to the customer. Who has violated the insider trading rules? A. The close friend B. The customer C. The agent D. All of the above
The best answer is B. The "tipper-tippee" doctrine is only applied to cases where the tipper "intentionally" gives the information to the "tippee," who then trades on it. In this case, the "tippee" overheard the information - she was not told the information. The tipper is not liable, but the customer is liable because she traded that stock based on that inside information. The agent has no liability because the agent did not know that the trade placed by the customer was based on inside information.
Misstatements of material fact in a securities registration are violations of the Act for which of the following persons? I Broker-dealer underwriting the securities II Agents of the broker-dealer underwriting the securities III Issuer of the securities IV Directors of the issuer of the securities A. I and III only B. II and IV only C. I, III, and IV D. I, II, III, IV
The best answer is C. Agents are not involved in the filing of registration statements for securities; therefore, they are not responsible for the contents of the registration statement. However, issuers, directors of issuers, and underwriters are all involved in preparing a securities registration statement and have liability for material omissions under the Act.
The directors of a company decide to offer shares of the company from the company's unissued stock directly to company employees. The proceeds of the sale go to the company, but the directors take a commission from the employees on these sales. Which of the following statements are TRUE? I This is a non-issuer transaction II The directors are defined as agents of the issuer III The directors must be registered IV The securities must be registered A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. Because the company is issuing these shares and the proceeds are going to the issuer, this is an issuer transaction. Because an agent is defined as an individual who effects securities transactions for either a broker-dealer OR an issuer, the directors are considered to be agents of the issuer and must be registered. Since common stock is a non-exempt security, it also must be registered to be sold in the State.
The Administrator can deny a registration as an investment adviser representative if the individual: I is currently under suspension by FINRA II has been expelled by FINRA III was convicted of a disorderly conduct misdemeanor 8 years ago IV was convicted of theft 8 years ago A. I and III only B. II and IV only C. I, II and IV D. I, II, III, IV
The best answer is C. The Administrator is empowered to deny, suspend or revoke a registration if the applicant has filed a materially incomplete, false or misleading registration application; has willfully violated the Act's provisions; has been enjoined by court order from engaging in the securities business; is the subject of an order by the Administrator denying, suspending, or revoking registration as a broker-dealer, agent, investment adviser or investment adviser representative; has been convicted of a misdemeanor involving any aspect of the securities business; or any felony; (e.g., embezzlement, fraud, misappropriation of funds, theft, larceny) within the past 10 years; is the subject of a determination that the person has willfully violated the securities laws (after notice and an opportunity for a hearing is given) by an Administrator of another State or the SEC, within the past 10 years; has engaged in unethical or dishonest business practices; is insolvent, which is defined as the inability to meet obligations as they come due; is unqualified based on lack of experience, training and knowledge; has failed to pay required fees to the State within 30 days after being notified by the Administrator; and has failed to properly supervise employees. Note that the disorderly conduct misdemeanor does not come under the reasons for denial of registration - to be a reason for denial, the misdemeanor would have to involve monies or securities.
All of the following information is required for an investment adviser representative to register in a State EXCEPT: A. work history B. residential history C. legal actions taken against the employee D. misdemeanor convictions involving securities occurring within the past 10 years
The best answer is C. The registration application for an agent includes the agent's work history (past 10 years) and residence history (last 5 years). A listing of any convictions during the past 10 years for securities or money related misdemeanors, or any felony, is also required, since these will cause the State to deny registration. Legal actions taken against the employee are not part of the registration application - only convictions within the past 10 years are included.
Which of the following statements are TRUE regarding registration requirements under the Uniform Securities Act? I Minimum net capital can be required for broker-dealers II Minimum net capital can be required for agents III Surety bond coverage can be required for broker-dealers IV Surety bond coverage can be required for agents A. I and III only B. II and IV only C. I, III, IV D. I, II, III, IV
The best answer is C. There is no minimum net capital requirement for agents associated with investment advisers and broker-dealers. This is a requirement only for the broker-dealer firm or the investment adviser firm. Broker-dealers and investment advisers can be required to maintain a minimum net capital requirement; post a surety bond; and the officers of these firms can be required to pass an examination to register in that State. Only agents of broker-dealers can be required to post a surety bond; this is not a requirement for investment adviser representatives. Both agents of broker-dealers and investment adviser representatives can be required to pass an examination.
The Administrator may deny or revoke an agent's license for which of the following reasons? I The agent has filed an application that is materially incomplete II The agent has made material misrepresentations to the Administrator III The agent has failed to post a surety bond IV The agent has failed to maintain minimum net capital A. I and II only B. III and IV only C. I, II, III D. I, II, IV
The best answer is C. There is no minimum net capital standard for agents - only for broker-dealers and investment advisers. The Administrator can deny or revoke an agent's license if the registration application is materially incomplete or if it contains material misrepresentations. The Administrator can also require the posting of a surety bond and the passing of an examination.
A brokerage firm was founded 5 years ago by 3 partners - John, Joe and Mary. John and Joe supervise sales and trading; while Mary is responsible for the firm's back-office operations and financial reporting. The firm has been very successful and operates in all 50 States. John dies suddenly and Mary assumes his responsibilities. Which statement is TRUE? A. Mary is not required to register as an agent in each State because she was registered when the Form BD was filed B. Mary is not required to register as an agent in each State because the broker-dealer is federal covered C. Mary must register as an agent in each of the 50 States D. Mary is not required to register as an agent because she is only supervising sales and not actually selling securities herself
The best answer is C. This question gets at a "fine" point in the law. The partners that are named in a registration application in each State become automatically registered as agents (once they pass the appropriate exam, e.g., 63/65/66) - but these are only partners that have sales or trading responsibilities. While Mary is included in the registration application, because she does not deal with the investing public, she would have had her automatic registration "turned off" and was not required to take the 63/65/66 exam. (It would be nice if the question mentioned this, but it doesn't and this is typical of exam-type questions.) If she takes a sales supervision job, then she becomes an agent and now must be registered in each State and must pass the appropriate exam! So this is really a question about who must take the 63/65/66 exams! Also note that there is no such thing as a federal covered broker-dealer; there are only federal covered advisers and federal covered securities.
To be registered as an agent in a State, the Administrator can require which of the following? I Minimum Net Capital II Minimum Surety Bond Coverage III Minimum grade on a qualification examination IV Payment of filing fees A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. To register as an agent in a State, the Administrator can require the passing of a qualification examination; the payment of filing fees; and the posting of a surety bond. The minimum Net Capital (or Net Worth) requirements are only imposed for registration as a broker-dealer or investment adviser.
Under the Uniform Securities Act, an investment adviser is prohibited from taking custody of a client's funds unless: A. the Administrator has issued a rule that permits such an action B. the investment adviser gives 10 days' advance notice to the Administrator of such an action C. in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody D. the investment adviser is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940
The best answer is C. Under Uniform Securities Law, an investment adviser is prohibited from taking custody of customer funds and securities if: the Administrator prohibits this by rule; or if there is no rule, the adviser fails to notify the Administrator that he has, or may take custody. Thus, the Administrator does not have to issue a rule permitting such action, making Choice A incorrect. Nor is there a requirement to give 10 days' advance notice of such action, making Choice B incorrect. Choice C is correct - that adviser is prohibited from taking custody unless, in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody. Whether the adviser is registered with the Securities and Exchange Commission (under the Investment Advisers Act of 1940 - Federal law) has no bearing on whether the adviser can take custody. Thus, Choice D is incorrect.
A broker-dealer headquartered in State X has an agent that is located in State Y. The agent accompanies a customer to State Z on a golf outing, where the agent makes an offer of securities to the customer. Which State(s) has (have) jurisdiction over the offer? A. State X only B. State Y only C. State Z only D. States X, Y and Z
The best answer is C. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: originates in the Administrator's State; is directed into the Administrator's State; or is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. In this scenario, the "vacationing" exclusion does not apply because it ONLY applies when an agent registered in another State makes an offer into a State where the customer is vacationing. It does NOT apply if both the agent and the customer are both in another State, where the offer is made. Both the agent and the customer are vacationing in State Z, where the offer of securities is made. Therefore, State Z has jurisdiction. The agent did not make an offer of securities from State Y and the offer was not accepted in State Y, so State Y does not have jurisdiction in this instance. The fact that the agent's broker-dealer is headquartered in State X has no bearing on the Administrator's jurisdiction.
An investment adviser has been experiencing a business decline due to a weak local economy and a weak investment outlook. To rebuild her business base, the investment adviser puts an advertisement in the local newspaper that says: "Because times are tough for all of us, we are offering, for a limited time only, a free investment consultation and free year-end tax preparation to anyone who signs a 1-year advisory contract for an introductory rate of only $25 per month." This is permitted: A. under no circumstances B. as long as the duration of the limited time offer is included in the advertisement C. as long as the adviser accepts all potential clients that respond to the offer made in the advertisement D. only if the word "free" is removed twice from the advertisement
The best answer is D. "Free" offers of services cannot be conditioned on buying something. They must be truly "free." So either the adviser must remove the words "free" from the offer of a consultation and "free" from the offer of year-end tax preparation, since they are conditioned on buying a $25 a month contract; or the adviser must get rid of the condition that a contract be purchased for $25 a month for these "free" services.
Which one of the following items would be included in the computation of an investment adviser's net capital? A. Copyright owned by the adviser B. Franchise right owned by the adviser C. Advance to an officer of the adviser D. Sofa and chair owned by the adviser
The best answer is D. Net capital is really a firm's "liquid net worth." It is liquid assets minus all liabilities. Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Also excluded are advances or loans to officers or owners of the adviser, since it is unlikely that these would be repaid if the adviser were liquidated. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business ARE included in the computation if the adviser is NOT an individual. The question does not state whether the adviser is an individual, so we cannot assume this. All intangibles are automatically excluded, so goodwill, marketing rights and copyrights are all deducted, However, conference room furniture is included for an adviser that is a corporation or a partnership, so this is the best choice. Finally, note that if the adviser were an individual, any "personal" assets that are not readily marketable such as home, home furnishings and automobiles, ARE excluded.
The instrument that permits aggrieved parties to serve legal documents to the Administrator in lieu of serving them directly to the party that is the object of the lawsuit is called a: A. writ of mandamus B. surety bond C. offer of rescission D. consent to service of process
The best answer is D. To register in the State, broker-dealers, investment advisers, and agents must give the Administrator consent to service of process. If anyone wants to sue, they do not have to locate the address of these persons. They can serve the legal papers to the Administrator; who in turn, will forward them to the party being sued (since he has the registrant's address on file). A writ of mandamus is an order from a superior court ordering a lower court to take some action. An offer of rescission can be made by a person who sold securities in violation of State law - he or she can offer to rescind the sale - that is, refund the money paid to the buyer (plus court costs and interest). A surety bond can be required to be posted by a registrant in the State as a condition of registration. The registrant posts a substantial sum of money (minimum of $10,000) to be registered in the State. If the registrant is found to have violated State law, this bond can be seized by the State.