Series 63- Simulated Exam 1
Disclosure to customers of a control relationship between a broker-dealer and the issuer of the security recommended is required in agency transactions. principal transactions. exempt transactions. A) II only B) I, II, and III C) I and II D) I and III
B) I, II, and III The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made. LO 6.a
All of the following activities are considered forms of market manipulation except A) giving market quotes that can be easily misinterpreted. B) improper hypothecation. C) entering matched buy and sell orders to attract attention to the security. D) disseminating false information about a trade.
B) improper hypothecation. Improper hypothecation (pledging a client's securities as collateral for a loan without the proper documents) is a prohibited business practice, but it has nothing to do with manipulating prices in the market. Stating falsehoods about trading activity, misrepresenting prices, and matched orders are examples of market manipulation. LO 7.b
Under the Uniform Securities Act, an individual representing an issuer in the sale of its securities to the general public is defined as an agent if the issuer is A) a trust company organized and supervised under the laws of any state. B) any political subdivision of any Canadian province. C) a foreign government with which the United States currently maintains diplomatic relations. D) an insurance company authorized to do business in the state.
D) an insurance company authorized to do business in the state. Agents represent broker-dealers or issuers. However, an individual representing an issuer in the sale of certain exempt securities or in an exempt transaction is not an agent. Even when authorized to do business in the state, an insurance company is not one of the issuers of exempt securities qualifying for the exemption from agent registration for those selling the company's securities while representing the company. Banks and trust companies, yes, but not insurance companies. Please see the list in your LEM. LO 2.f
Among the many exempt transactions under the Uniform Securities Act are the private placement and the preorganization certificate or subscription. While these two exemptions have several requirements in common, they have which of the following differences? I. The private placement exemption places a limit on the number of sales to retail investors while the preorganization certificate places a limit on the number of offers to all investors. II. Payment for the purchase may be made in the case of a private placement, while no money changes hands in a preorganization subscription. III. It is expected that noninstitutional buyers of the private placement are purchasing for investment only, while no such requirement exists for the investors in a preorganization certificate. IV. Commissions may be paid on the sale of a private placement to noninstitutional clients, while no remuneration is payable on the sale of a preorganization subscription. A) II and IV B) I and IV C) I and III D) II and III
A) II and IV No money changes hands in the sale of a preorganization certificate or subscription, while the seller receives payment in the case of a private placement. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale. No holding period restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, Choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offers (10), while in the preorganization certificate, the number of sales (subscribers) is limited to 10, regardless of whether they are retail or institutional.
In which of the following situations is an agent committing a prohibited practice? A) Using discretion to purchase a security in a discretionary account while awaiting a written receipt of trading authority B) Allowing the customer to place an order to sell 100 shares of ABC from the client's discretionary account C) Buying a security on behalf of a customer and then reselling it before the customer has paid for it D) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity
A) Using discretion to purchase a security in a discretionary account while awaiting a written receipt of trading authority Written receipt of trading authority is required before agents may conduct any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits customers from making their own trades.
A discussion referring to blue-sky laws would include all of the following except A) federal laws such as the Securities Act of 1933 and Securities Exchange Act of 1934. B) forms requiring issuers selling securities in the state to comply with state securities laws. C) a state securities law that grants state securities Administrators the power to deny or revoke a broker-dealer's or an agent's registration within its state. D) state laws that are designed to protect the public against fraud in securities sales within a state.
A) federal laws such as the Securities Act of 1933 and Securities Exchange Act of 1934. Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.
A customer has a financial commitment of $200,000 that will come due in two years. In the interim, the customer wishes to invest the $200,000 to maximize income and have the money available for the obligation in two years. You should recommend investments in A) government securities with 2-year maturities. B) municipal bonds purchased at par with 20-year maturities. C) preferred stock purchased in a private placement. D) large-cap stocks.
A) government securities with 2-year maturities. The Uniform Securities Act requires that all recommendations to a customer be consistent with that customer's investment objectives and financial situation. This particular customer needs to have principal available in two years and wants to invest for income in the interim. Of the choices listed, only government securities with two-year maturities meet both criteria.
This morning's financial section of your newspaper has an article discussing several significant material facts relating to a stock held in the portfolio of several of your clients. You would be able to share these facts with your clients A) with or without the issuer's permission. B) only if the statement without this fact would make your previous statements misleading. C) only if the customer did not work for the issuer and did not know this information. D) under no circumstances until the clients have had a chance to read the article themselves.
A) with or without the issuer's permission. Public information may be disseminated with or without the permission of the issuer, even if it is material information that casts the issuer in an unfavorable light.
Under the Uniform Securities Act, which of the following is not excluded from the definition of broker-dealer? A) A broker-dealer domiciled in another state, having no offices in this state, dealing exclusively with broker-dealers in this state B) A person with an office in this state whose securities business is limited to effecting transactions with institutional investors C) Issuers of securities D) Agents
B) A person with an office in this state whose securities business is limited to effecting transactions with institutional investors The definition of a broker-dealer is a person in the business of effecting transactions in his account or for the accounts of others. If the person has an office in this state, regardless of who the clients are, registration with this state is necessary. Under the USA, one is not defined as a BD if there is no office in the state and transactions are limited in this state to other BD.
Which of the following statements regarding an agent's registration is correct? A) Registration of a broker-dealer in a specific state automatically registers all of the firm's agents in that state as well. B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. C) 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. D) 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.
B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. An agent of a broker-dealer is active only when that BD's registration is in force. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers, directors and partners when the firm first registers in a state. LO 2.g
When a sale violates provisions of the Uniform Securities Act, all of the following statements regarding civil liabilities are true except A) the decision to accept or reject the offer must be made within 30 days. B) the rescission offer must be at the current market price. C) a buyer may not sue for compensation more than 3 years after the sale. D) the rescission offer must include interest.
B) the rescission offer must be at the current market price. The offer of rescission is based on the price originally paid for the security, plus interest at a rate determined by the Administrator (less any income received from that security). The claim must be made two years after the discovery of the violation or three years after the occurrence, whichever is sooner. A client rejecting the offer of rescission within the 30-day period retains the right to take the matter to court (sue). But, if the offer is not accepted or rejected within that 30-day period, it becomes null and void.
Different types of accounts have different times for receipt of customer information. Which of the following does not correctly state the required time for the specified account? A) Written discretionary account authorization must be received by a broker-dealer before exercising discretion. B) The options account agreement must be received within 15 days after the customer's account has been approved. C) Margin account agreements must be received before the first margin trade in the account. D) Written discretionary account authorization must be received by an investment adviser within 10 days after the initial discretionary trade.
C) Margin account agreements must be received before the first margin trade in the account. The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents requires that margin account agreements must be received promptly after the initial margin trade in the account. All of the other choices are correct regarding the relevant time of receipt.
A customer needs $10,000 to pay for a new house within the next year. His agent suggests that he invest in a stock that has been performing extremely well the past year and assures the customer that he cannot go wrong. According to the Uniform Securities Act, this is A) not permitted because agents may not lend money to clients. B) acceptable because of the stock's recent performance. C) an example of guaranteeing a profit. D) unacceptable because agents are not permitted to refer to past performance of a security.
C) an example of guaranteeing a profit. "He cannot go wrong" is an example of guaranteeing that the client will not lose—and, in fact, will make—money. Nothing in this question indicates that the agent is borrowing or lending money. Furthermore, when the client needs the funds in as short a time as one year, stock is usually not a suitable recommendation.
Under the Uniform Securities Act, which of the following is considered a place of business of a registered investment adviser representative? I. An office from which the representative regularly provides advisory services to clients II. A location published in a professional directory, indicated on business cards, or found in a telephone book that identifies it as a place where the representative will be available to meet or communicate with clients III. A hotel or auditorium at which the representative has advertised to the public that he will be available to conduct advisory business IV. A hotel meeting room identified only to current clients as a place the representative will be available to conduct advisory business
D) I, II, and III The Uniform Securities Act defines a place of business as one where the IAR regularly provides investment advisory services; solicits, meets with, or otherwise communicates with clients; or any other location held out to the public as a location where the representative will do any of these activities. The frequency of use is not a factor. Publicly advertising a hotel location only used once makes it a place of business that year and will probably subject the representative to regulation by the Administrator of the state in which the hotel is located. A hotel room is not included when it is not advertised and used only with existing clients, presumably when the adviser is traveling through their state.
The SEC's Marketing Rule for Investment Advisers requires that any advertisement containing an endorsement of the adviser's services must include disclosure of any compensation in the form of I. cash. II. directed brokerage. III. bonuses paid to an adviser's personnel for their investment advisory activities. IV. retainer fees.
I, II, IV: One of the elements in the SEC's definition of advertisement is the presence of compensation. The compensation can be direct (such as cash payments) or indirect (such as directing brokerage business to the promoter). The marketing rule's definition of compensation specifically excludes salary or bonuses paid to the adviser's personnel.
