Series 66 part 1; section 3/4/5/6

Under the Uniform Securities Act, the Administrator is empowered to do all of the following except A) file a civil suit against a broker-dealer who has sold an unregistered nonexempt security to a resident of this state. B) publish information relating to violations committed in the state. C) issue a cease and desist order. D) require an agent to submit a written statement relating to an investigation.

A Explanation A civil suit may only be filed by an aggrieved purchaser. The Administrator could take administrative action against the broker-dealer (issuing a cease and desist order, for example) but has no civil powers.

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state B) Bonds issued by the Province of Alberta C) Equipment trust certificates issued by a regulated common carrier D) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state

A Explanation Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.

Under the Uniform Securities Act, the definition of sale includes bona fide gifts of securities giving a security as a bonus with any purchase exercising a right to convert one security into another preliminary agreements between issuers and underwriters. A) II and III B) II, III, and IV only C) III and IV D) I and II

A Explanation Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale.

Which of the following financial instruments are considered securities under the USA? Collateral trust certificates Investment contracts, including interests in oil and gas drilling partnerships Options listed on the Chicago Board Options Exchange Foreign currency options contracts traded on the Philadelphia Stock Exchange A) I, II, III, and IV B) II, III, and IV C) I and II D) II and III

A Explanation Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are. The key to questions like this is to remember those things that are not securities.

Before taking any disciplinary action with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following? Obtain the approval of the appropriate state court Find that the action is in the public interest Cite a cause listed in the act A) II and III B) I and III C) I, II, and III D) I and II

A Explanation Disciplinary actions with respect to registration may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets.

Superb Wealth Opportunities (SWO) is a broker-dealer registered with the SEC and 10 states. Recently, the SEC has completed an investigation of SWO's recordkeeping practices and has determined that they are not in accordance with SEC Rule 17a-4. If, as a result of a hearing, SWO is fined, A) the Administrator of the state where SWO maintains its principal office could investigate SWO to determine if their recordkeeping requirements were violated B) no state could take action under the "double jeopardy" provisions of the law C) it is likely that at least one of the states would revoke SWO's registration D) no state could take action, because only the SEC would have jurisdiction

A Explanation Even though no state can enforce more stringent recordkeeping rules than those of the SEC, a broker-dealer can still be subject to state action if the rules of the state in which the broker-dealer maintains its principal office are broken. It is the usual case that when the SEC suspends or revokes the registration of a BD, the states in which that BD are registered follow suit, but it would be highly unlikely to revoke the registration when the SEC only levied a fine.

Under the National Securities Markets Improvement Act of 1996, the federal covered security exemption from state registration includes securities issued by investment companies registered under the Investment Company Act of 1940 securities traded on the Nasdaq Stock Market securities traded on the New York Stock Exchange securities traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) A) I, II, III, and IV B) I and II C) III and IV D) II and III

A Explanation Federal covered securities refer to securities exempt from registration because they are regulated, or covered by federal legislation. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminated dual regulation of securities by both federal and state securities legislation. The term "federal covered security" also refers to any security listed on a national securities exchange, any security equal to or senior in standing to one listed on a national securities exchange, or a right or warrant to purchase a security listed on a national securities exchange.

In which of the following situations did an agent commit fraud? A) An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved. B) An agent sold an excellent growth company to a client by omitting immaterial information​ during the discussion, so as not to distract the client from purchasing a suitable security. C) On review of his files, an agent discovered he had sold a nonexempt, unregistered security​ to a retail client​. D) A client claims an agent sold him unsuitable securities.

A Explanation Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or noninstitutional clients.

Which of the following must register as a broker-dealer under the USA? A) A broker-dealer with a place of business in the state that effects transactions exclusively with broker-dealers registered in other states B) 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 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 no place of business in the state that deals exclusively with broker-dealers with offices in that state

A Explanation 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.

An individual wishing to register as an agent with a broker-dealer may have to pass an examination post a bond maintain minimum net capital meet minimum state educational requirements A) I and II B) I and III C) II and III D) III and IV

A Explanation In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser A) shall obtain client consent before completion of the transaction B) shall disclose the agency capacity before the transaction C) shall notify the Administrator of its capacity in the proposed transaction D) may not charge a commission on the transaction

A Explanation In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: The client receives full written disclosure as to the capacity in which the adviser proposes to act Consent of the client Both of these are required before the completion of the transaction.

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent? A) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. B) The employee is not paid any commission or salary. C) The securities are federal covered securities. D) The transaction is exempt.

A Explanation It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) Sharon must be registered in State X in order to accept the order B) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them C) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X D) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X

A Explanation Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative's registration? A) The investment adviser representative is judged to be mentally incompetent. B) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients. C) The investment adviser representative is the subject of an insider trading lawsuit. D) The Administrator determines it would be in the public interest.

A Explanation Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

All of the following are exempt securities under the Uniform Securities Act EXCEPT A) securities issued by a bank holding company B) securities issued by a federal savings and loan association C) securities issued by the Canadian government D) securities issued by a Canadian province

A Explanation Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt.

Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following? A security issued by a nonprofit organization Investment contracts of employee benefit plans An exempt transaction not involving a federal covered security A) I, II, and III B) I only C) I and III D) II and III

A Explanation The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by nonprofit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.

An issuer is planning to offer securities for sale in State A and several other states. Which of the following statements regarding registration in State A under the Uniform Securities Act is NOT true? A) The Administrator may not, as a condition of registration by qualification or coordination, require the security be deposited in escrow and the proceeds be impounded until the issuer receives a specified amount. B) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator. C) Every registration must specify the total amount of securities to be offered in State A, the states in which offering is to be made, and any adverse order or judgment by a regulatory authority. D) The Administrator may by order permit omission of items of information or documents from a registration statement.

A Explanation The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may by order permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities may only be sold on a specified form of subscription and that a signed copy be filed with the Administrator.

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A) it is filed through the IARD system B) if requested by a client, it must be sent within 5 days of the request C) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client D) it must be delivered to all new clients

A Explanation The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.

With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is required in each state in which the employing broker-dealer has a place of business 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 when they limit their activity to the sale of exempt securities

A Explanation 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.

Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if more than 2 years ago, the client realized the advice rendered was improper the adviser has died the client willingly signed a statement waiving the adviser's compliance with the provision of the act on which the suit is based A) I only B) I and II C) II and III D) I, II, and III

A Explanation The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.

Under the Investment Adviser's Act of 1940, which of the following is NOT true with regard to advertising? A) The advertisement may not make offers of free service. B) The advertisement may not refer to any formula, charting device, or graphing method without disclosing the difficulties or limitations in their use. C) The advertisement may not use testimonials from clients. D) The advertisement may not refer to specific past recommendations.

A Explanation There is no prohibition against offers of free service, except that such offers must have absolutely no strings attached. Advertisements used by investment advisers may not use testimonials, specific past recommendations (though it may refer to all recommendations within a given period of time, provided a disclaimer is included stating there is no assurance that the same results will be obtained), or any formula, charting, or graphing device without disclosing the difficulties or limitations in their use; make offers of free service unless there is no obligation imposed on those who request it; or make false or misleading statements.

Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. B) changes to the fee schedule must be announced in advance. C) changes to the fee schedule may be shown on the firm's website. D) it must be up-to-date.

A Explanation There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm's website is one of them.

Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) When the trade that is made is unrelated to the advisory relationship B) Never C) When the client has given ABC blanket permission to engage in this type of transaction D) Only if the client terminates the advisory relationship

A Explanation Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary.

Which of the following would be an agent as the term is defined in the Uniform Securities Act? An individual representing a registered broker-dealer in the sale of securities to the general public An assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public An issuer of nonexempt securities registered in the state and sold to the general public A) I and II B) III and IV C) I, II and III D) I, II, III and IV

A Explanation Under the USA, only individuals can be agents. A person who sells securities for a broker-dealer is an agent. An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if he takes securities orders from clients. Corporate entities are excluded from the definition of an agent. Broker-dealers and issuers are not agents.

Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security for sale to the public. According to the USA, which of the following is NOT an issuer? The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering The United States government, which proposes to offer Treasury bonds A) II only B) I only C) I, II, and III D) I, II, and IV

A Explanation Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer, even though those certificates are included in the definition of "security." Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public, even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds.

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state A) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator B) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly C) only the agent and the state-registered broker-dealer must notify the Administrator D) only the agent must notify the Administrator promptly

A Explanation When an agent transfers employment from any broker-dealer to any other broker-dealer, both the agent and the broker-dealers must notify the state securities Administrator.

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) Only the third intern would have to register. B) The second and third interns would be required to register. C) All of the interns would need to register. D) Because they are not being compensated, none of the interns need to register.

A Explanation When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task.

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) Sell fixed annuities B) Limit his sales activity to immediate family members only C) Conduct seminars on asset allocation D) Use a preliminary prospectus to obtain indications of interest for a new issue but wait until he is registered before accepting any orders

A Explanation 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, we know that an insurance license would be required, but apparently NASAA doesn't care about that.

The statute of limitations for criminal offenses under the USA is A) 10 years B) 5 years C) 2 years D) 3 years

B Explanation Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.

Which of the following securities are exempt from registration at the state level? Bonds issued by the American Red Cross United States Treasury bonds American Advisers Unit Investment Trust Common Stock in AAA Commercial Bank, member of the FDIC A) II and III B) I, II, III, and IV C) I, II, and III D) I and II

B Explanation Securities offered by nonprofit organizations, the United States government, or investment companies registered under the Investment Company Act of 1940, as well as securities issued by commercial banks, are exempt from registration with the states under the Uniform Securities Act and the NSMIA.

Which of the following constitutes a sale of stock? Solicitation of a tender offer by a corporation Gift of assessable stock Purchase of shares through the exercise of a warrant Exchange of shares in a corporate reorganization, such as a merger A) I, II, and IV B) II and III C) III and IV D) I and II

B Explanation A gift of assessable stock constitutes a sale under the USA because the corporation that issues assessable stock can bill shareholders for cash representing the par value shortfall at a future date. Upon the exercise of a warrant, the holder of the warrant purchases stock and the issuing corporation sells the stock. Under the Uniform Securities Act, the solicitation of tender offers by corporations and exchange of shares in corporate reorganizations are not sales.

Which of the following would be included in the Uniform Securities Act definition of "sale"? An offer of common stock in a new issue properly registered or exempt from registration in the state A gift of assessable stock An investor exercising warrants attached to a convertible bond purchased 5 years ago An investor pledging stock she owns to a bank as collateral for a loan A) III and IV B) II and III C) I and II D) I and IV

B Explanation A gift of assessable stock is always considered a sale. Exercise of warrants is a sale of the underlying stock. Pledging stock as collateral is never a sale.

When a security registers by using coordination, under normal circumstances, the effective date is determined by A) the issuer B) the SEC C) the Administrator D) the underwriter

B Explanation A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an investment advisory contract? The formula used to determine the investment adviser's compensation A statement of the discretionary authority, if any, given to the investment adviser A statement that the investment adviser may assign the contract without the consent of the client A) II and III B) I and II C) I and III D) I, II, and III

B Explanation Advisory contracts must contain the services to be provided; the term of the contract; the amount of the advisory fee or the formula used to compute it; the amount of fee to be refunded if the advisory fee is prepaid; whether the adviser has discretionary authority and to what extent; and a provision explaining that the consent of the client is required to assign the contract.

Under the Uniform Securities Act, unless renewed, the registration of which of the following securities professionals expires on December 31? Agents Broker-dealers Investment advisers Investment adviser representatives A) I and II B) I, II, III, and IV C) III and IV D) II and III

B Explanation State registration of any securities professional expires on December 31, unless renewed.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly to the Administrator of the state where the IA maintains its principal office B) disclosed promptly only to those customers who will be affected by the change through an amended brochure C) disclosed promptly to all customers by amending the brochure D) disclosed in the summary of material changes in the annual updating amendment to the SEC

B Explanation Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.

Violations of the Investment Advisers Act of 1940 are punishable by a fine of up to $10,000 a prison term of up to 20 years suspension of registration A) I, II, and III B) I and III C) I and II D) II and III

B Explanation Criminal penalties for violations of the Advisers Act include a $10,000 fine and 5 (not 20) years in prison. Administrative penalties, such as revocation or suspension of registration, may also be imposed.

Which one of the following is NOT among the powers granted to the Administrator under the Uniform Securities Act (USA)? A) The power to audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior. B) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state. C) The power to permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000. D) The power to require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes.

B Explanation IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business. Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC.

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

B Explanation 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: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

The Uniform Securities Act grants the Administrator the power to deny or revoke a registration of a securities professional. However, the Administrator generally would not deny or revoke a registration A) if a registrant has engaged in dishonest or unethical (but not illegal) practices in the securities business B) if a person associated with a registered investment adviser has been convicted of any non-securities-related misdemeanor within the last 10 years C) if a registrant is temporarily enjoined by any court of competent jurisdiction from engaging in the securities business D) of a securities professional in the case of insolvency

B Explanation In most cases, conviction for a non-securities-related misdemeanor is not sufficient cause for revocation. An Administrator may revoke a registration if a person associated with an investment adviser has been convicted of any felony or any securities-related misdemeanor within the last 10 years. Insolvency of a securities professional is cause for termination of the registration.

Which of the following would be deemed to be an assignment of an investment adviser's contracts? All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. The Lucky Seven Partnership is an investment adviser with 7 partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan. A) II and III B) I, II and III C) I and III D) I and II

B Explanation It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment.

Dr. David Livingstone is registered as an agent in States H and M with Stanley Securities, a broker-dealer registered in every state. Livingstone would now like to register in State W. In order to do so, all of the following would be required except A) paying the appropriate fee to State W. B) passing State W's qualification exam. C) filing an application for registration with State W. D) filing a consent to service of process with State W.

B Explanation Many years ago, applicants for registration as an agent in a state had to pass that state's exam. Now, because the NASAA exams are uniform exams, they are accepted in every state that requires passage of an exam. A consent to service must be filed with every state in which the person intends to register and, of course, the application must be accompanied by the proper fee.

Which of the following is considered a sale of securities under the Uniform Securities Act? Redemption of mutual funds shares worth $10,000 Dividends of common stock for which no consideration was given for the dividends With the approval of the board of directors, an exchange of common stock for the stock in another company under a merger Disposition of stock for which cash consideration is received A) II and III B) I and IV C) II and IV D) I, II, and III

B Explanation Redemption of mutual fund shares is always treated as a sale by the redeeming shareholder. The exchange of securities in a merger is not considered a sale under the act. Any disposition (liquidation) of securities that involves cash consideration, or in which the shareholder has a choice of cash or securities, is a sale.

An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his clients, who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of North Dakota Idaho Wyoming Illinois A) I and IV B) I, II, and III C) I, II, III, and IV D) II and III

B Explanation The Administrator has jurisdiction from the state in which the offer was made (ND), received (WY), and accepted (ID). Mailing of the certificate is of no consequence.

Under the Uniform Securities Act, in order for the Administrator to summarily suspend an agent's registration, which of the following statements is not correct? A) The agent must be presented with an opportunity for a hearing B) No notice or hearing is required to issue a suspension C) Notice must be given of the proposed action and hearing D) Notification must be given to the employing broker-dealer of the final order

B Explanation The Administrator may by order summarily postpone or suspend registration pending final determination of any proceeding under the USA. Upon the entry of the order, the Administrator shall promptly notify the applicant or registrant, as well as the employer or prospective employer if the applicant or registrant is an agent or investment adviser representative, that it has been entered and of the reasons therefore and that within 15 days after the receipt of a written request, the matter will be set down for hearing. Because the law states that the employer will be notified once the action commences, it should be obvious that once the suspension order becomes final, the employer will be notified.

Which of the following transactions is exempt under provisions incorporated into the Uniform Securities Act? A) Transactions between an agent and an individual who meets the requirements under Rule 501 of the Securities Act of 1933 B) Transactions between the issuer and the underwriter C) Transactions involving investment clubs D) Transactions that do not result in a capital gain

B Explanation The Uniform Securities Act specifically exempts transactions between an issuer and an underwriter. There is no exemption for investment clubs or transactions that result in a loss. Rule 501 defines an accredited investor, but when an individual (as mentioned here), there is no exemption as there would be with an institution.

An Administrator can deny an investment adviser's registration for all of the following reasons EXCEPT A) failure to pass a written exam B) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000 C) filing an incomplete application D) claiming to be qualified as the result of experience as a broker-dealer

B Explanation The minimum net worth for an IA exercising discretion is $10,000, so this firm cannot be denied because of lack of capital. The Administrator must consider that an applicant for registration as an investment adviser is not necessarily qualified solely on the basis of experience as a broker-dealer.

Which of the following are prohibited practices? An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. An investment adviser organized as a partnership did not inform its clients of the departure of a partner who had only a very small interest in the firm. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner. A) I and IV B) I and II C) II and III D) III and IV

B Explanation Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly.

As a result of an SEC hearing, an investment adviser's penalty is $5,000 and a 50-day suspension. If the IA wishes to appeal this verdict, a request for review must be filed with A) the U.S. Court of Appeals within 45 days of the order B) the U.S. Court of Appeals within 60 days of the order C) the Administrator within 60 days of the order D) the SEC within 45 days of the order

B Explanation Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.

If an agent chooses to appeal an Administrator's order, when must the agent file for review of the order with the appropriate court? A) Within 30 days after the entry of the order B) Within 60 days after the entry of the order C) Within 180 days after the entry of the order D) Immediately

B Explanation Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

Those persons meeting the Uniform Securities Act's definition of a broker-dealer in a state must, unless otherwise exempted, register in that state. Which of the following is correct regarding the initial registration and expiration of the registration of a broker-dealer? A) The effective date of an initial registration is when ordered by the Administrator and the same is true of the expiration date. B) The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is each December 31st. C) The effective date of an initial registration is when ordered by the Administrator and the expiration, unless renewed, is each December 31st. D) The effective date of an initial registration is at noon on the 30th day after receipt of a completed application; expiration, unless renewed, is on the anniversary date of the initial registration.

B Explanation Under the USA, it states, "If no denial order is in effect and no proceeding is pending under section 204, registration becomes effective at noon of the thirtieth day after an application is filed." Further, it states, "Every registration or notice filing under this section expires December 31st unless renewed."

Under the Uniform Securities Act, which of the following is responsible for notifying the Administrator when an agent changes his place of employment from one broker-dealer to another? A) Former broker-dealer B) New broker-dealer C) Agent D) The agent, the former employer, and the new employer

D Explanation All three parties must notify the Administrator.

One of the differences between broker-dealers and investment advisers is the disclosures that must be made when the IA is acting as a principal or agent in a transaction with an advisory client. In the case of a firm registered in both capacities, those disclosures would not be required when A) the transaction was in an exempt security B) there was a transaction with a client of both entities, but the trade was not based upon advisory services rendered C) approval was granted by an officer of the firm D) cleared with the Administrator

B Explanation Under those conditions—where a firm is registered as both a BD and an IA—the disclosure requirements incumbent upon IAs do not apply when the transaction is solely related to the firm's capacity as a BD.

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of A) $50,000.00 B) an amount not in excess of that set by the SEC C) $25,000.00 D) $10,000.00

B Explanation Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital.

A broker-dealer registered with State A created a website 2 years ago to promote its services. Recently, they hired a new media person who totally redesigned the site. Under the recordkeeping requirements of the Uniform Securities Act, A) there are no requirements for storage of electronic data B) a copy of the original website page must be maintained for 3 years from original use C) copies of both the original and the new website page must be maintained for 5 years after original use D) a copy of the new website page must be maintained for a period of 3 years from the first use of the original site

B Explanation Websites are treated as would be any other advertisement. So, the original site design is kept for 3 years and, whenever revised, the new copy is maintained and starts a new retention requirement for that copy. Therefore, you will likely have several different versions in your advertising file at the same time.

Broker-dealers, investment advisers, agents, and investment adviser representatives who use the internet to distribute information on available products and services that are directed generally to anyone having access to the internet and transmitted through postings on bulletin boards, displays on homepages, or similar methods are not deemed to be transacting business in this state for purposes of the Uniform Securities Act solely on the basis of that fact if which of the following conditions are observed? The internet communication contains a legend in which it is clearly stated that the broker-dealer, investment adviser, agent, or IAR in question may transact business in this state only if first registered, excluded, or exempted from state broker-dealer, investment adviser, agent, or IAR registration requirements, as may be the case. The internet communication contains a legend in which it is clearly stated that follow-up; individualized responses to persons in this state by the broker-dealer, investment adviser, agent, or IAR that involve either the effecting or attempting to effect transactions in securities; or the rendering of personalized investment advice for compensation, as may be, will not be made absent compliance with state broker-dealer, investment adviser, agent, or IAR registration requirements, or an applicable exemption or exclusion. The internet communication contains a mechanism, including and without limitation, technical firewalls or other implemented policies and procedures, designed reasonably to ensure that before any subsequent, direct communication with prospective customers or clients in this state, the broker-dealer, investment adviser, agent, or IAR is first registered in this state or qualifies for an exemption or exclusion from such requirement. The internet communication does not involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as may be, in this state over the internet, but is limited to the dissemination of general information on products and services being offered. A) I, II, and III B) I, II, III, and IV C) III and IV D) I and II

B Explanation With the growth of the internet, NASAA developed an interpretive order concerning broker-dealers, investment advisers, agents, and investment adviser representatives using the internet for general dissemination of information on products and services. The primary focus of this order was to set the parameters under which securities professionals could communicate on the internet or use their websites in states in which they were not registered. Meeting all of the requirements stated in the answer is necessary.

Under the National Securities Markets Improvement Act of 1996, which of the following describe federal covered securities? A security registered under the USA A security registered under the Investment Company Act of 1940 A security of a company traded on the Nasdaq Stock Market A security issued by the U.S. government A) II and IV B) I and II C) II, III, and IV D) II and III

C Explanation A federal covered security has a federally imposed exemption from state registration, so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq, as well as investment companies registered under the Investment Company Act of 1940.

Which of the following is required for a preorganization subscription to be an exempt transaction? A) There may be no more than 15 subscribers. B) Full payment has been made. C) No commission has been paid. D) Prior notification of intent to incorporate must be given to the Administrator.

C Explanation A preorganizational subscription is an exempt transaction if there are no more than 10 subscribers and no commissions are paid, either directly or indirectly. The subscribers make no payments until they purchase the underlying security.

Under the Securities Act of 1933, the definition of prospectus includes an offer of a security made orally a tombstone advertisement for a new issue of common stock an offer of a security made in an email communication A) II and III B) III only C) I and III D) I, II, and III

C Explanation A prospectus is a communication made in writing or by radio or television that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. An email meets the definition of a written communication.

Under the Uniform Securities Act, a consent to service of process must accompany which of the following? An agent's application for renewal of registration A civil complaint against a broker-dealer An agent's initial registration application A) I, II, and III B) I only C) III only D) II and III

C Explanation All initial applications for registration must be accompanied by a consent to service of process. This is not required for renewal applications.

As enumerated in the USA, exempt securities would include those issued by all of these EXCEPT A) a promissory note that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization B) any credit union organized and supervised under the laws of this state C) a corporation based in Toronto, Ontario, whose common stock trades on the Toronto Stock Exchange D) a sovereign foreign government with which the United States maintains diplomatic relations

C Explanation Although securities issued by the Canadian government or any political subdivision are exempt, those issued by Canadian corporations would only be exempt if trading on U.S. exchanges as federal covered securities.

Life insurance companies offer many different products. Which of the following would NOT be considered a security? Index annuity Modified endowment Variable annuity Variable life A) II and IV B) III and IV C) I and II D) I and III

C Explanation Any insurance product that includes the word variable is a security. Otherwise, it is not.

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if the minimum denomination is $50,000 the maximum maturity is 270 days it is rated in 1 of the 3 highest rating categories by a recognized rating agency it is in book entry form A) II, III, and IV B) I and III C) I, II, and III D) I and II

C Explanation Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, has a maturity of not more than 270 days, and is rated in one of the three highest rating categories by a nationally recognized rating agency.

Which of the following are exempt securities under the Uniform Securities Act? Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 Preferred stock issued by an insurance company authorized to do business in this state Municipal bonds issued by Toronto, Ontario Private placements A) I and II B) I and III C) II and III D) II, III, and IV

C Explanation Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

Under both federal and state law, an exemption from registration is granted to municipal bonds. Qualifying for that exemption would be all of the following EXCEPT A) bonds issued by a school district B) bonds issued by a city C) bonds issued by a state D) bonds issued by the U.S. Treasury

D Explanation Municipal bonds are those issued by any governmental unit from the state level on down. This would include political subdivisions and local entities such as school, park, and road districts. Treasury bonds are government, not municipal, bonds.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A) the adviser must state that the client may be subject to certain limitations because of this arrangement B) the adviser may collect fees for investment advice and commissions for executing trades C) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment D) this practice is ethical if full disclosure is made to all clients

C Explanation Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed.

Creative Financial Solutions (CFS) is a broker-dealer registered with the SEC. CFS has its principal and only office in State A. CFS also does business with clients in State B. Which of these clients would cause CFS to have to register in State B? A) 15 other broker-dealers B) 1 mutual fund registered with the SEC C) 4 retail clients residing in State B D) 6 banks doing business in State B

C Explanation Excluded from the definition of broker-dealer under the Uniform Securities Act is a broker-dealer with no place of business in a given state whose clientele consists exclusively of other broker-dealers, financial institutions (banks, investment companies), or existing customers who are temporarily in the state. However, once the BD has even 1 retail (noninstitutional) client who resides in the state, registration is required. There is no de minimis exemption for broker-dealers (unlike investment advisers).

First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has A) violated the Uniform Securities Act by charging commissions in addition to advisory fees B) violated the prohibition against charging performance fees C) not violated the prohibition against performance fees D) violated the Uniform Securities Act by charging excessive advisory fees

C Explanation First Securities Advisers, Inc., has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed.

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and the issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment the Administrator of another state has revoked the issue's registration an officer of the registrant has been convicted of a securities-related crime the prospectus contains misstatements of nonmaterial information A) I and II B) II, III, and IV C) II and III D) I and III

C Explanation If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

Jake Aaron is registered as an agent with ABC Securities, a broker-dealer registered with the SEC doing business in 34 states. In addition, Aaron has his own investment advisory business, Jake's Money Advisers, and is registered with the SEC. To comply with all appropriate regulations, which of the following would have to be stated on the business card for Jake's Money Advisers? Jake Aaron, RIA Jake's Money Advisers, RIA Jake's Money Advisers, registered investment adviser Securities offered through ABC Securities A) II and IV B) I and III C) III and IV D) I, III, and IV

C Explanation It is not permissible to use the initials RIA, but one would properly describe the fact that the firm is a registered investment adviser. If one is registered as an agent with a broker-dealer, that fact always must be stated on that person's business card.

As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following EXCEPT A) training staff to identify and manage conflicts in accordance with firm policies and procedures B) establishing mechanisms to identify conflicts in a firm's business as it evolves C) ensuring that the firm remains solvent for protection of customers and employees alike D) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity

C Explanation Managing conflicts of interest does not take into consideration making enough money to remain solvent.

Under Section 303 of the Uniform Securities Act, in order for an issue to register using coordination, it must simultaneously register under the provisions of A) the Uniform Securities Act B) the Securities Exchange Act of 1934 C) the Securities Act of 1933 D) the Investment Company Act of 1940

C Explanation Registration by coordination is a form of state registration that coordinates state registration of a security with simultaneous federal registration of that security. Securities are registered at the federal level under the Securities Act of 1933.

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) filed a brochure with the Administrator, noting that it was available to clients upon request B) sent a brochure within 150 days of the end of AT's fiscal year C) did not send an annual brochure to its clients if there was no material change from the previous year D) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year

C Explanation The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.

A broker-dealer would most likely hire an agent to A) implement the firm's new recordkeeping program B) solicit for advisory clients C) sell securities to clients D) engage in marketing for the broker-dealer

C Explanation The Uniform Securities Act defines an agent as follows: "'Agent' means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." They are not there to do marketing or handle recordkeeping. Soliciting for advisory clients would be done by an investment adviser representative, not an agent.

A person who has no place of business in this state would not be considered a broker-dealer if he effects transactions in this state exclusively with all of the following except A) the issuers of the securities involved in the transaction. B) insurance companies. C) investment advisers. D) other broker-dealers.

C Explanation The Uniform Securities Act excludes from the definition of broker-dealer, a person who has no place of business in this state if he effects transactions in this state exclusively with or through: 1. the issuers of the securities involved in the transactions, 2. other broker-dealers, or 3. banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. Please note that investment advisers are not included in this list. What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers.

Broker-dealers and investment advisers must keep all of the following records EXCEPT A) electronic correspondence B) memoranda C) records of incoming and outgoing telephone calls D) account books

C Explanation The company is not required to keep a record of telephone calls unless the Administrator specifically rules that it do so; however, memoranda, correspondence (whether electronic or paper), and account books must be kept.

Under the USA, an Administrator may A) revoke the registration of an agent and thereby place into suspense the registration of the agent's broker-dealer B) require broker-dealers to retain books and records for the life of the firm plus two years C) revoke the registration of a broker-dealer and thereby place into suspense the registration of all the agents employed at the broker-dealer D) require that registrants post a surety bond prior to hearing to ensure payment of money fines

C Explanation Under the USA, if the sentence fits the crime, an Administrator may revoke the registration of a broker-dealer. When a broker-dealer's registration is revoked, all its agents' registrations are placed into a suspended status because agents must be associated with a registered broker-dealer for their registration to be valid. While revocation of the broker-dealer's registration affects each of the agents, the reverse is not true when an agent's registration is revoked. The USA does not provide for posting of bonds on the part of registrants subject to an Administrator's investigation.

Which of the following would be considered an unethical business practice? A) Broker-dealers sending retail clients an email 30 days in advance of a change to fees B) Agents exercising discretion in discretionary accounts C) Agents correcting execution orders in their customer's accounts D) Broker-dealers charging larger than ordinary commissions on certain transactions

C Explanation When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).

Because, under the USA, many different securities qualify for an exemption from registration, proof of qualification for an exemption is the responsibility of A) any interested investor B) none, the exemptions are automatic C) the person requesting the exemption D) the Administrator

C Explanation The USA provides for exemption from registration in a number of cases. If the exemption is challenged by the Administrator, it is up to the person, usually the issuer, requesting the exemption to prove that it is merited.

An agent of a broker-dealer who willfully violates the Uniform Securities Act may be subject to which of the following? Civil liabilities Criminal penalties Action taken by the Administrator to deny, suspend, or revoke the agent's registration A) I and II B) I only C) III only D) I, II, and III

D Explanation Persons who are convicted of violating securities laws may find themselves subject to criminal penalties, civil liabilities, and suspension, denial, or revocation of registration.

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 and III C) I and II D) I, II, and III

D Explanation 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.

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I and III B) I and II C) I, II, and III D) II and III

D Explanation An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.

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

D Explanation 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.

Under the USA, the definition of "issuer" includes A) a specialist on the floor of an exchange B) a market maker for publicly traded securities C) an officer or director of a company traded at the NYSE D) a person proposing to issue a security

D Explanation An issuer is any person who issues or proposes to issue any security for sale to the public. Stock exchange specialists, company directors, and market makers do not issue securities and therefore are not issuers.

When describing exempt transactions under the USA, which of the following are fiduciaries? Executor of an estate Administrator in intestacy Custodian for a minor in an UTMA account An agent with authority over time and price execution A) II and IV B) I and III C) III and IV D) I and II

D Explanation Both executors and administrators are fiduciaries. An agent is a fiduciary if the agent has discretionary authority over the assets in the account, but time and price authority is not considered discretion. A sale made by the custodian for a minor in an UGMA or UTMA account does not qualify as an exemption transaction under the USA, even though, as a matter of law, the custodian is functioning in a fiduciary capacity.

There are several ways that a securities professional's registration can be terminated. Nonpunitive termination of a securities professional's registration could be done through cancellation suspension revocation withdrawal A) I and III B) II and III C) II and IV D) I and IV

D Explanation Cancellation and withdrawal are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment.

A registrant's registration may be canceled by the Administrator A) when the registrant has been found in violation of the Uniform Securities Act B) as long as there is opportunity for a hearing C) upon the order of a court of competent jurisdiction D) if the Administrator is unable to locate the registrant

D Explanation Cancellation is nonpunitive—nothing wrong was done. But when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.

A manufacturing company is in the process of registering a securities issue with the SEC. In order to make the shares available for sale in this state, the method of registration that would most likely be used is A) qualification B) notice filing C) notification D) coordination

D Explanation Coordination is the method used for nonexempt companies that are registering with the SEC. Qualification is for intrastate registration of those companies not registered with the SEC. Notice filing is the procedure whereby federal covered investment companies notify the states in which they want to issue shares and to whom they must pay a fee.

Which of the following would be included in the Uniform Securities Act's definition of a "sale"? A) Sale of a large fixed annuity contract to a taxable institution B) Conveying, for value, precious metals to a jewelry distributor C) Donation of interests in rights, warrants, or options on a nonexempt security D) Transfers, for value, of unit trusts to a nontaxable organization

D Explanation For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Hal owns a successful plumbing business. If he engages in a substantial amount of short-term trading in stocks for his own benefit, he would be considered A) an accredited investor B) an institutional investor C) a dealer D) an individual investor

D Explanation Hal is not in the business of engaging in securities transactions; he is in the plumbing business. Thus, he is an individual investor rather than a dealer. Because the question provides no information as to Hal's annual income or net worth, we have no indication that he is an accredited investor. Hal is a plumber rather than a financial institution, similar to a bank or an insurance company.

Under federal law, the statute of limitations for civil liability is A) 1 year after discovery of the action B) 2 years after the action C) 2 years after discovery or 3 years after the action, whichever is sooner D) 1 year after discovery or 3 years after the action, whichever is sooner

D Explanation In the federal regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action. Under the USA, it is the sooner of 2 years after discovery or 3 years after the action.

Under the Uniform Securities Act, an Administrator investigating violations A) may subpoena records only with court approval B) may subpoena records but may not compel individuals to testify C) must maintain the confidentiality of all records D) may appoint an officer who has the power to subpoena records, administer oaths, or require production of documents and books

D Explanation Public or private investigations may be conducted by the Administrator to determine whether violations of the act are about to take place or have already occurred. These investigations may take place inside or outside the state. In conducting the investigation, the Administrator, or any officer designated by him, may subpoena records or compel testimony from individuals.

Section 402(a) of the Uniform Securities Act contains a lengthy list of securities that are exempt from the registration and advertising filing requirements of the Act. Included in that list would be all of the following EXCEPT A) municipal bonds B) church bonds C) common stock listed on the NYSE D) bonds issued by the city of Berlin, Germany

D Explanation Securities exempt from state registration include those issued by a U.S. or Canadian governmental unit, such as municipal bonds, and securities issued by nonprofit and charitable organizations, such as church bonds. However, bonds issued by a non-sovereign foreign government (cities, etc.) are not considered exempt securities unless guaranteed by the sovereign (German, in this case) government. Even before the NSMIA created the exemption for federal covered securities, those listed on the NYSE received what was called the "blue-chip" exemption.

Which of the following is (are) TRUE regarding violations of the Uniform Securities Act? The Administrator may issue a cease and desist order without a prior hearing. Violators may incur a criminal penalty of a $5,000 fine or 3 years in jail, but not both. There is no statute of limitations on the return of criminal indictments. A) II and III B) I, II, and III C) I and II D) I only

D Explanation The Administrator may issue a cease and desist order with or without a prior hearing. The statute of limitations on criminal violations is 5 years, not unlimited. Regarding the criminal penalties described, the amounts are correct—a $5,000 fine, 3 years in prison—but violators may face both, not just one or the other.

With regard to the powers of the Administrator, which of the following statements are NOT correct? The Administrator must seek an injunction to issue a cease and desist order. The USA requires an Administrator conduct a full hearing, public or private, prior to issuing a cease and desist order. The USA grants the Administrator the power to issue injunctions to force compliance with the provisions of the act. A) I and III B) I and II C) II and III D) I, II, and III

D Explanation The Administrator need not seek an injunction to issue a cease and desist order. The Administrator can seek an injunction from a court. The USA does not require that an Administrator conduct a public or private hearing prior to issuing a cease and desist order. When time does not permit, the Administrator may issue a cease and desist prior to a hearing to prevent a pending violation. The USA does not grant the Administrator the power to issue injunctions to force compliance with the act. The act permits the Administrator to issue cease and desist orders and, if they do not work, to seek an injunction from a court of competent jurisdiction. A cease and desist order is an administrative order, whereas an injunction is a judicial order.

Under the Uniform Securities Act, which of the following are prohibited actions? A) Agency cross transactions B) An investment adviser representative being registered as an agent of a broker-dealer having no affiliation with the investment adviser C) Disclosing the amount of commission on the confirmation when the broker-dealer is acting in an agency capacity D) A investment adviser selling securities as a principal to an advisory client without receiving consent of the client prior to the completion of the trade

D Explanation The USA prohibits an investment adviser from acting as principal or agent in a transaction with an advisory client without approval prior to completion (settlement) of the trade. There is nothing wrong with agency cross transactions as long as disclosure is made and the trade is recommended to only one of the parties by the adviser. Anytime a broker-dealer acts in an agency capacity, the amount of the commission must be disclosed on the trade confirmation and there is no prohibition against an individual being an IAR of an investment adviser and an agent of a totally unrelated broker-dealer.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who A) is registered with the Administrator of the states in which it does business and only deals with issuers of the securities it trades. B) is currently registered with the SEC as an investment adviser. C) does not have a place of business in the state and limits its clientele to institutional clients. D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange.

D Explanation The only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis. Many broker-dealers are registered with the SEC as both BDs and as IAs - one does not suffice for the other. The exemptions from state registration as a broker-dealer are much broader and would include the cases where the BD does not have a place of business in the state and its only clients are institutions or it effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions.

When applying for registration as an agent, which of the following must be disclosed? A) Residential history for the past 3 years. B) Complete employment history for the past 5 years. C) Highest educational level achieved and the institution attended. D) Certain financial information such as any unsatisfied judgments or liens against the applicant.

D Explanation This question probably contains more detailed information than will be covered on the exam. Negative financial information, such as unsatisfied judgments or liens and bankruptcy filings must be disclosed. Employment history for the past 10 years and residential history for the past 5 years must be shown. If, during the past 10 years, the applicant was a full-time student, then that must be shown, but that is the extent of educational information required.

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats B) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers C) the schedule should be made available on the broker-dealer's public website and should be password protected D) the schedule should be made available on the broker-dealer's public website without requiring any login or password

D Explanation Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.

Under the USA, an investment adviser's current clients must be delivered a brochure A) quarterly if the adviser has both discretion and custody B) annually​, but only​ if the adviser has neither custody nor discretion C) within 48 hours of renewal D) annually whether or not the adviser has custody or discretion

D Explanation Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.