Uniform Sec Act

Which statement may be made by an agent about a new securities issue that is being registered by qualification? StatusA A. "Because this is the most difficult registration process, you are guaranteed that the issue is safe" StatusB B. "The Administrator has approved of the offering once registration is effective" Correct C. "The security is being registered in the State" StatusD D. "The issue is selling out fast to knowledgeable investors" C

Making untrue or coercive statements is a violation of the Act. Stating that the security is registered with the State is true. Stating that "you are guaranteed;" "the Administrator approved;" or "the issue is selling out fast;" are all either untrue or coercive and are prohibited.

def of guaranteed

guaranteed as to pymt of int, div or principal by someone oth than the issuer

institutional buyer

(distinguished fr general public) firms with no office in the State that only deal with institutions are not req'd to register - big boys: banks, savings and loans, trust cos, ins cos, invest cos, pension and profit sharing plans and anyone else so designated by the State Admin

Canadian b/ds w/ clients temporarily vacationing in US - EXEMPT

< 1/2 year & who intend to return to Canada

Under NASAA rules, a complaint is defined as one received: I in a written letter II by e-mail III verbally over the telephone StatusA A. I only Correct B. I and II only StatusC C. II and III only StatusD D. I, II, III B

A complaint that must be recorded and resolved (if possible) is one received in writing (e-mail is written). Screamers don't count until they put the complaint in writing.

Under the Uniform Securities Act, the registration of a broker-dealer may be revoked if the firm: A. effects short sales in non-exempt securities B. effects over-the-counter transactions on a principal basis C. does not maintain required records D. does not file customer complaints with the Administrator C

A broker-dealer's registration may be revoked if the firm fails to maintain required records. Broker-dealers are allowed to sell securities short - this is a normal trading practice. Broker-dealers effect over-the-counter transactions on either an agency basis (earning a commission) or a principal basis (earning a mark-up). There is no requirement for a broker-dealer to file customer complaints with the Administrator.

Federal covered advisers are required to register with: StatusA A. FINRA StatusB B. NASAA Correct C. SEC StatusD D. SIPC C

A federal covered adviser is one that must register with the SEC and that cannot be required to register in each State (but it still must "notify" each State in which it does business). The federal covered advisers are advisers to investment companies; and advisers that have $100 million or more of assets under management.

All of the following information is included on an applicant's registration application EXCEPT: Correct Answer A. Educational history of applicant Incorrect Answer B. Business history of applicant StatusC C. Conviction record of applicant StatusD D. Financial condition of applicant A

Educational history is not part of a registration application. The applicant's business history, financial condition and record of any convictions for securities law violations are part of the application.

Which of the following securities is/are EXEMPT under the Uniform Securities Act? I Savings and loan association stock II Municipal industrial revenue bonds III Bonds issued by a company listed on the Midwest (Chicago) Stock Exchange A. I and II B. I and III StatusC C. II only Correct Answer D. I, II, III D

Exempt securities under the Act include securities issued by Savings and Loans; municipal bonds, including industrial revenue bonds; and the securities of companies listed on stock exchanges (a "blue chip" exemption). Also note that the securities of issuers listed on the major exchanges (NYSE, AMEX (NYSE-MKT) and NASDAQ) are now federal covered securities and cannot be required to be registered in the State.

Under NASAA recordkeeping rules for investment advisers, a communication to a client must be retained if it is circulated to MORE than: Correct A. 1 person StatusB B. 5 persons StatusC C. 10 persons StatusD D. 35 persons A

NASAA does not set recordkeeping rules for broker-dealers and for federal covered advisers, because these are set under federal law. NASAA does set recordkeeping rules for state-registered advisers. Under the NASAA model rule, advertisements, circulars, bulletins or other communications circulated by the adviser to 2 or more persons must be retained for 5 years.

sale

contract to sell or dispose of a security, or an interest in a security, for value

Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following information EXCEPT: Correct A. time of execution of the order StatusB B. person who placed the order StatusC C. name of account for which order was entered StatusD D. name of broker-dealer to which the order was sent A

Order ticket information required for investment advisers is different than that required for broker-dealers. The IA writes an order and sends it to a broker-dealer or bank for execution. The IA must keep a record of the order as it was sent; the IA does not keep the record of the actual execution of the order - this is the responsibility of the executing broker-dealer. The record must contain the terms and conditions of the order; name of the person at the IA who recommended the transaction; name of the person who placed the order; date of order entry; name of account for which order was entered; name of broker-dealer or bank to which the order was sent for execution; and whether the order was discretionary.

Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act? I Agents of broker-dealers are subject to post-registration requirements II Agents of broker-dealers are not subject to post-registration requirements III Agents of investment advisers are subject to post-registration requirements IV Agents of investment advisers are not subject to post-registration requirements Incorrect Answer A. I and III StatusB B. I and IV StatusC C. II and III Correct Answer D. II and IV D

Post-registration requirements cover such things as maintaining books and records; making required filings with the Administrator; giving reports to customers; and filing advertising and sales literature with the State. These are requirements for both broker-dealers and investment advisers. This portion of the Uniform Securities Act does not apply to their agents, however.

A wealthy investor has $400,000 of funds to invest, but will need the money in one year to pay for a house that is currently under construction. Which investment is suitable? StatusA A. 30-year U.S. Government bonds StatusB B. 20-year AAA rated corporate bonds Correct C. 1-year Treasury securities StatusD D. Blue chip stocks C

Since the investor needs the funds in one year, investing in long term bonds is not suitable, nor is investing in common stocks. Both of these are subject to price volatility. The best choice is to invest in Treasury securities with 1 year maturities. The maturity matches the cash needs of the customer. They are safe since they are U.S. Government guaranteed. Also, they give competitive market yields.

An elderly customer has a stroke and is hospitalized, where he falls into a coma. The customer's adult son calls the agent and tells him that he wants to sell some securities out of his father's account to pay for the ongoing hospital bills. The representative should: Correct A. do nothing StatusB B. go to the hospital and get the father's signed permission to sell the securities StatusC C. follow the son's instructions but remit the proceeds of the sale directly to the hospital to pay the medical bills StatusD D. follow the son's instructions as given

The customer is in a coma and cannot give directions over the account. The question does not mention whether the son has a signed durable power of attorney granted by the father, so we cannot assume that this is the case. The agent can do nothing. Note that if the agent had a signed durable power of attorney on file from the customer giving a power of attorney to the son, then the agent would have been able to follow the son's instructions.

A violation of the Uniform Securities Act occurs if statements made about a security are: I true, but omit non-material facts II true, but omit material facts III untrue, but include material facts IV untrue, but include non-material facts StatusA A. I and II only StatusB B. III and IV only Correct Answer C. II, III, IV Incorrect Answer D. I, II, III, IV C

Untrue statements are prohibited - it makes no difference if they contain material or non-material facts. True statements are the only ones that can be made, but remember that a true statement that omits material facts is not really true - it is deceptive and misleading.

de minimis exemption

b/c b/d does NOT have physical presence in State and is only doing "minimal business" in the State - has no office, has a "few" clients

EXCLUDED: depository institutions

banks, savings &loans, trusts

securities given as a bonus are part of a sale

considered t/b part of that purch, & hence t/h/b offered & sold for value

def of investment adviser

invest adv give advice for a fee and must register in the State

professionals

lawyers, accountants, engineers, teachers (incidental)

Filing of advertising with the Administrator is NOT required for: I U.S. Government securities II Municipal securities III Investment company securities IV NYSE-listed securities StatusA A. IV only StatusB B. I and II only StatusC C. III and IV only Correct D. I, II, III, IV D

Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities.

A customer that typically buys NYSE-listed stocks places an order to buy a very thinly traded stock that is quoted only in the Pink Sheets. Because of the extra work involved in handling this transaction, the firm imposes an extra $150 charge in addition to the regular commission. Which statement is TRUE? Correct A. The extra charge must be disclosed to the customer at the time that the order is placed StatusB B. The extra charge must be disclosed to the customer no later than on the confirmation of the transaction StatusC C. The extra charge must be disclosed to the customer no later than on the next account statement StatusD D. There is no requirement to disclose the extra charge A

Unusual charges or fees involved with a transaction must be disclosed to the customer at the time that the order is placed. Disclosure cannot be made "after the fact" - which would be the case if the fee were disclosed on the trade confirmation or on the next account statement.

persons NOT considered to be b/ds

agents, depository institutions (banks, sav inst, trust cos), issuers (except when an issuer effects trans OTHER than with respect to its own securities)

agent (an individual, not a person)

an individual who represents an issuer or b/d in effecting sec trans, aka sales repres, and must regis in each State in which they wish to perform trades; registered repres

def of state

any State, territory, or possession of the US, DC and Puerto Rico

b/ds

incidental, rec' no special compensation

broker-dealer

must register in State in which they solicit or conduct business, unless an Exemption is available

registration of securities: unlawful for any person to offer or sell any sec in State unless 1/ sec is regis in State under Act or 2/ sec is federal covered sec of 3/ sec/trans is EXEMPT under Act (USA)

o regis effec for 1 year, w/ qtrly updates o filing fees o filing of advertising o persons who may file regis application - made by issuer, any oth person on whose behalf offering is t/b made or registered b/d o amended regis- m/b filed prior to regis becoming effective o post effec amendment to incr offering size - pay late fee and addtl filing fee

revocation of an exemption

order c/not be entered unless: o appropriate prior notice is given to all interested parties o opportunity for a hearing is provided, AND o written findings of fact and conclusions of law are provided :. Admin m/ summarily deny or revoke any exemption pending final determination of any proceeding - IF summary order is entered, Admin m/: (c/not be applied retroactively - o promptly notify all interested parties that order h/b entered, w/ reasons for entering order AND o that w/in 15 days of written request, matter w/b set down for a hearing

REQUIREMENTS FOR MAINTAINING REGISTRATION

stand for maintaining registration: can req o books & financial records: in accordance w/ Sec Exch Act of 1934, or Invest Advisers Act of 1940 - NSMIA avoiding duplicate o b/d records - Act of 1934 sets rule: - cust corres / emails - 3 years - cust trade confirmations - 3 years - cust acct stmts - 6 years o Federal covered advisers keep records 5 years o State registered advisers - NASAA rule: IA records to be kept: - journals of orig entry - G/L and trial balances - order tkt copies - copies of canceled cks, bank stmts and bank recon - orig of all written commun sent to or rec'd fr clients, incl complaints- list of discretionary accts - copy of ea POA granted to adviser - copy of ea advisory agree entered into w/ client - copy of ea notice, circular, advertisement, article invest letter, etc sent to 2 or more cust - record of ea sec trans except for trans in US govt sec - init Form U-4 and ea amendment o advertising defined as a communication to more than one person - it can incl recomm of purch or sale of a specific sec, and if commun does NOT state the reason for recomm, memo m/b retained indicating reasons for recomm o cust accts posted by 10 bus days after end of calendar qtr (in contrast, b/ds m/ post cust acct trans on settlement under SEC rules o retain both bus and personal emails - b/c agents often send emails to clients, ore rec' emails fr clients while at home o electronic recordkeeping - data integrity, storage medium m/b non-rewritable and non-erasable, sep dupl copy m/b retained in ano location o recordkeeping rules for adviser based on location of principal office - applies to advisers only, not to b/ds o adviser that takes custody must keep cust records in principal office for 5 years: - client purch and sales history and - current client sec positions o 5 year retention w/ first 2 years' records kept in principal office - applies only to State-registered advisers, now Invest Adv Act of 1940 has same rule for Federal covered advisers o perm records kept for life of firm - IAs art of incorp, minutes to Bd of D's mtgs, stock cert books, partnership art and any amendments o perm records (above) must be kept for 3 years after firm is closed: - rpts to customers (IAs, not b/ds): "Brochure Rule" b/c Invest Adv Act of 1940, given to pros cust at least 48 hrs prior to entering into any invest adv contract, - financial rpts: requirement m/b met by filing Federally req'd rpts w/ State, - inaccurate information: if any filing is found to have material E/O, registrant m/file correcting amendment promptly, - inspections: reviews c/b performed by repres of FINRA or SEC Admin c/ inspect records, c/ conduct inspections on 'surprise' basis, - advertising and sales literature: unless exempt, incl'd prospectuses, pamphlets, circulars, form ltrs, advertising (incl Internet) "commun seen by genl public incl TV, radio, newspapers, mags, non-p/word protected websites" & sales lit "commun that goes to specific audience, incl mkt & research rpts, form ltrs that are NOT broadly distr'd, p/word protected websites" o Federal law supercedes State law in most cases - if there is no Federal law, then State law w/ apply & NSMIA req's that if any State law impedes Federal legis, Federal law prevails

automatic regis of officers named in bd application as agents

the names of the officers of the co that will act as agents are incl'd in b/d app filed to register in the State (Form BD) - once regis is effective, these persons who were named as officers w/ sales func, or supervising sales func, were also registered as agents

that if these persons were EXCLUDED fr def of a b/d, agent, invest adviser and invest adviser repres

the registration as such is NOT req'd in the State b/c they do not fall under the def

agency capacity

when a firm effects trades for acct of others, it is a middleman in trans, same as acting as a broker

principal capacity

when a firm trades OUT of its own acct, firm is considered to be a "dealer"

firms that trade exclusively with professional investors with no place of business in the State are EXCLUDED

who transact exclusively with issuers of the securities involved in the trans; oth b/ds; OR institutional buyers.

Which of the following are defined as a "State" under the Uniform Securities Act? I Hawaii II Puerto Rico III Virgin Islands IV Key West StatusA A. I only StatusB B. II and III Correct C. I, II, III StatusD D. I, II, III, IV C

"State" is defined under the Act to be any state, territory, possession of the United States, the District of Columbia, and Puerto Rico. Key West is part of the State of Florida; it is not a territory or possession.

4 exclusions for individuals who represent ISSUERS (b):

#2/ individuals who represent issuers in exempt trans are excluded; exempt trans

4 exclusions for individuals who represent ISSUERS (c):

#3/ individuals representing issuers in trades of some covered securities; individuals who represent issuers in trades of Federal covered securities - MUST register in the State

types of sec registration

#1/ registration by filing: lets est'd cos use prospectus filed w/ SEC as filing doc w/ State; easiest and Least costly State regis method, commonly used by "non-issuers" to offer shs in State o used by "seasoned" cos o used by officers in non-issuer trans o req'd conditions for regis o consent to service of process req'd o reqd information: - in bus continuously for past 3 years - prev registered equity sec w/ SEC, m/b held by < 500 shareholdrs - filed all req'd rpts w/ SEC during past 36 mos & m/h/b timely in filing all rpts during preceding 12 mos. - have either 1/ NW of $4,000,000 OR 2/ NW of $2,000,000 & net pre-tax inc fr oper for at least 2 of last 3 years - < 400,000 shs o/s, excl shs held by officers, directors, u/w & "insiders" (10%+) - not have any warrants or options held by u/w or officers & directors in excess of 10% of o/s shs - < 4 registered mkt mkrs, making mkt in issuer's equity sec for 30 days out of preceding 3 mos - h/ this offering performed by u/w who is FINRA mbr & u/w c/not take commissions in excess of 10% of offering price for performing u/w & min offer price / sh is $5 - h/ not defaulted in any pymt of principal, int, div on lease pymts for fiscal year preceding regis filing IF issuer is open-end mutual fund or unit trust, to Register by Filing applicant m/: - prev registered sec in State for at least preceding 24 mos - b/ in compliance w/ all material terms of such prior registrations - h/ nomaterial change in terms of issuer's sec, meth of selling sec, fund's invest obj or practices, terms of sole of its sec - stmt demonstrating eligibility for regis by filing - name, addr, form of org of issuer - descr of sec being registered, IF person, ie, Rule 144 addtl info disclosed o regis effec on 5th bus day aft filing - when regis w/ SEC b/comes effec, State regis is effec #2/ registration by coordination: more rigourous meth than Regis by Filing & c/b used by any co filing a regis stmt w/ SEC (vs. Regis by Filing is only avail to "seasoned" cos) o State regis is coordinated w/ Federal regis o req'd information: - 3 copies of proposed Pros filed w/ SEC under Sec Act of 1933 - copy of issuer's Art of Incorp & By-Laws - copy of any Agreement Among U/w - copy of any Indenture governing the issuance of sec - specimen of sec t/b issued o application m/b on file for 10 bus days bef State Regis c/b effective - amt of sec t/b offered in State, w/ max & min proposed offering prices & max u/w discounts m/b on file w/ State for at least 2 bus days prior to effec date o if Admin issues stop order, burden of proof is on Admin - the Federal law supremacy #3/ registration by qualification o most difficult regis o req'd information: - issuer's name, addr, formof org, character & loca of bus, descr of physical prop & equip & stmt of competitive industry conditions - name, addr & prin occ for past 5 years of ea officer, director or 10% sharehldr; amt of issuer's sec held by ea such person; amt of issuer's sec in this offering t/b purch'd by ea such person; any material trans btw officer & issuer in past 3 years m/b disclosed - ea director's earnings for last yr & coming yr - any amts paid to promoters & non-issuers in past 3 years & proposed future pymts, ie, Admin c/ req that if promoter is compensated w/ stock, that stock b/ held in escrow for upto 3 years aft regis is effec - stops promoter fr immed "cashing out" at a profit - curr b/s & inc stmt - terms of offering - how sale proceeds w/b used by issuer - descr of stock options o/s - all contracts made w/in past 2 years, disclosure of all litigation - copy of proposed prospectus, advertising & sales lit - specimen copy of sec t/b offered; copy of issuer's articles of incorp, any trust indenture related to sec offering - legal opinion; accountant's opinion - any oth information req'd by Admin o regis effec when Admin determines

issuer transaction (or primary transaction)

= the sale of the securities is for the benefit of the issuer - the issuer rec's the proceeds fr the sale; it takes place in the primary or new issue mkt

Under the Uniform Securities Act, "consent to service of process" means that the: StatusA A. Administrator is empowered to fine or penalize an agent or broker-dealer Correct B. Administrator is authorized to receive suits on behalf of an agent or broker-dealer StatusC C. registrant is under the jurisdiction of the Administrator for up to 1 year after withdrawal from registration StatusD D. registrant cannot be compelled to give testimony in an investigation B

A "consent to service of process" in an initial registration application appoints the State Administrator as attorney for the registrant, authorizing the Administrator to receive any lawsuits on behalf of the registrant. If such occurs, then the Administrator will, in turn, notify the registrant that he or she (or "it" in the case of a corporation or partnership) is being sued.

Under the Uniform Securities Act, which of the following would be defined as a "non-issuer" transaction? A. An initial public offering of common stock by a corporation B. The sale of open-end mutual fund shares C. The sale of a security effected on the New York Stock Exchange floor D. The sale of limited partnership interests in a private placement C

A "non-issuer" transaction is one where the proceeds do not go to the issuer; this is a normal secondary market trade, such as a trade performed on the NYSE floor. An issuer transaction is one where the proceeds go to the issuer. Initial public offerings; mutual fund offerings, and private placements of limited partnerships are all "issuer" transactions, since the proceeds of the sale go to the issuer.

Under the provisions of the Uniform Securities Act, a "person" includes: I A parent that is acting as custodian II An adult couple III Municipality IV Corporation A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV D

A "person," as defined under the Act, can be just about anyone who has legal authority to issue or trade securities. A custodian account opened for a minor is a person (note that a minor acting on his or her own is not a "person" since a minor has no legal authority to trade securities). An adult couple is a "person" (when they open a joint account). A municipality is a person. Finally, a corporation is a person.

n a secondary offering, a member who acted as manager or co-manager CANNOT issue a research report on that company within how many days following the effective date? Incorrect Answer A. 30 calendar days StatusB B. 20 calendar days StatusC C. 10 calendar days Correct Answer D. 3 calendar days D

A member, who acted as manager or co-manager of a secondary offering for an issuer, may not issue research reports regarding the issuer within 3 calendar days following the effective date of the offering.

Surety bond coverage can be required by the Administrator as a condition of registration for all of the following EXCEPT: StatusA A. broker-dealers StatusB B. investment advisers StatusC C. agents Correct D. issuers D

A surety bond can be required as a condition of registration for the State registration of broker-dealers, their agents, and investment advisers who take custody. There is no surety bond requirement for issuers to register their securities in a State.

Canadian b/d exempt for existing customers who are temporarily residing in the US

as long as Canadian client spends < 1/2 year in US, and intends to return to Canada, then Canadian b/d and agent are NOT req'd to be registered in the State where customer is temporarily residing

other rules

Admin can req filing of advertising used in connection w/ new securities offering in State; canNOT be req'd for offerings of Exempt securities, Federal covered securities and securities in exempt trans

Federal covered securities

Admin canNOT req regis of federal covered sec in State: o NYSE, AMEX (NYSE-MKT) or NASDAQ o invest co issues o sold to qualified (wealthy) purchasers - Person $5,000,000; invest mgrs: $25,000,000 o sold in trans exempt under 1933 Act - ie, Reg D, private placements o init public offering - notice filing in State: - filing w/ State of docs filed w/ SEC along w/ consent to service of process AND - the pymt of filing fee in State - if an issuer refuses to pay req'd "notice fees" then State is authorized to req regis of sec o concurrent filing of amendments o fees based on sales in State

The Administrator: I is permitted to deny an exemption retroactively II cannot deny an exemption retroactively III can vacate a stop order retroactively IV cannot vacate a stop order retroactively Incorrect Answer A. I and III StatusB B. I and IV Correct Answer C. II and III StatusD D. II and IV C

As a general rule, the Administrator cannot issue an order stopping the sale of a security, or denying or revoking a registration, retroactively. However, if the Administrator were to issue a stop order because of something trivial, like not paying the required fee, then once the fee is paid, the stop order would be vacated, and this is done retroactively to the date of the original stop order.

In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed in writing EXCEPT: A. the periods that will be used to measure performance and their significance in the computation of the fee B. the fee arrangement is based solely on realized capital gains C. the nature and significance of any index used as a comparative measure D. the reason why the adviser believes that any comparative index used is appropriate B

Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing: o that the fee arrangement may create an incentive for the adviser to make investments that are riskier; o that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; o the basis for valuing any illiquid investments used in computing unrealized appreciation; o the periods that will be used to measure performance and their significance to the computation of the fee; and o the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate.

Broker-dealers may charge: Correct A. commissions on recommended transactions StatusB B. advisory fees on recommended transactions StatusC C. both commissions and advisory fees on recommended transactions StatusD D. commissions, advisory fees and performance fees on recommended transactions A

Broker-dealers charge commissions. Investment advisers charge advisory fees. Each is a legally separate entity. Brokers do not charge advisory fees - to do so they would have to establish a separate investment adviser subsidiary that is registered with the State. Investment advisers do not charge commissions - to do so, they would have to establish a separate broker-dealer that is registered with the State.

The President of a small company owns 100% of the company's stock. The President sells some of the company's stock to four employees and officers of that company without taking a commission. Under the Uniform Securities Act, the President is: StatusA A. considered to be an agent who must be registered Correct B. selling securities in an exempt transaction, so no registration is required StatusC C. selling exempt securities, so no registration is required StatusD D. considered to be an issuer, and the shares must be registered B

Common stock of a corporation is a non-exempt security that must be registered unless it is sold in an exempt transaction. This transaction qualifies as a private placement since the offer is made to less than 10 persons and no commission is being taken by the President. Private placements are exempt transactions, meaning that the security involved is exempt from registration in the State.

A customer has an individual account. Upon written request, the customer's account statements and confirmations may be received by whom? I The customer II One of the customer's immediate relatives III The customer's agent IV The customer's broker-dealer Correct Answer A. I only StatusB B. I or II StatusC C. III or IV Incorrect Answer D. I, II, III, IV A

Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office (nor to a relative's home), because then the customer would not know what was going on in the account.

A customer has an individual account. Upon written request, the customer's account statements and confirmations may be sent to the: StatusA A. Agent StatusB B. Broker-dealer StatusC C. State Administrator Correct D. None of the above D

Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office, because then the customer would not know what was going on in the account.

A Registered Investment Adviser pays a flat fee to a Certified Public Accountant for client referrals. The RIA charges his clients a fee based on a percentage of assets under management. Which statements are TRUE regarding required disclosures to customers? I No disclosure of fees paid by the adviser to the CPA is required II Disclosure of the fees paid by the adviser to the CPA is required III No disclosure of the management fees to be paid by the customer is required IV Disclosure of the management fees to be paid by the customer is required StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV D

Disclosure of all fees paid must be made to customers. Thus, the Registered Investment adviser must disclose that he pays the CPA for referrals; and management fees charged by the adviser to the customer must be disclosed as well.

A representative is making a presentation to a married couple, ages 75 and 77, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statement made by the representative would NOT be misleading and fraudulent? StatusA A. "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" StatusB B. "EIAs can be redeemed at any time without penalty if you have an emergency cash need" StatusC C. "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" Correct D. "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company" D

Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice A is a misleading statement. If the contract is redeemed early, there are steep surrender charges, making Choice B misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice C a misleading statement. Choice D is true - the contracts have a minimum guaranteed rate of return (like around 3%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.

All of the following are EXCLUDED from the definition of an agent EXCEPT an individual who represents the issuer in the: A. sale of municipal securities to the public B. private placement of common stock C. sale of common stock to the issuer's employees D. sale of federal covered common stock to the public D

Excluded from the definition of an agent are individuals who represent issuers (not broker-dealers) in: Sales of specified exempt securities such as Treasury, Agency and Municipal debt (but not all exempt securities); Exempt transactions, such as the sale of securities only to institutions or underwriters or private placements as defined under State law; Sales of specified covered securities (basically private placement issues and sales to persons with investment assets of at least $5,000,000 and investment managers handling assets of at least $25,000,000) - however if the individual is selling federally covered "nationally traded" securities or investment company securities, he or she must register as an agent; and Sales of securities to employees of that issuer if no remuneration is paid - (the example here is a corporate employee who places company stock into employee 401(k) accounts). In these transactions, either the security being sold is extremely safe (such as governments, agencies or municipals); or the sale is not being made to the general public. If the individual is representing an issuer selling a security that must be registered, including federal covered "nationally traded" stocks and investment company issues, that person must be registered in the State as an agent.

If an issuer offers a Federal Covered security in a State, the State Administrator may require the issuer to: I register the issue in the State II pay a filing fee in the State III file documents relating to the issue in the State StatusA A. I only Incorrect Answer B. II only Correct Answer C. II and III StatusD D. I, II, III C

Federal Covered Securities are registered at the Federal Level; they cannot be required to be registered in each State. This is intended to reduce the legislative burden on issuers, since duplicate registration is avoided. The major Federal Covered Securities are exchange listed securities and mutual fund shares. However, the State can require a "notice filing" in the State, along with a consent to service of process. And to file notice in the State, a fee must be paid (which is the reason why the States require "notice" filings) - the States like these fees!

All of the following are federal covered securities EXCEPT: StatusA A. NYSE listed issues StatusB B. NASDAQ listed issues Correct Answer C. SEC registered issues Incorrect Answer D. Registered investment company issues C

Federal covered securities that cannot be required to be registered in each State include NYSE listed issues, NASDAQ listed issues and registered investment company issues. SEC registered issues are not necessarily "federal covered" securities. For example, issues listed in the OTCBB or Pink Sheets are SEC registered, but they are not "federal covered" securities. These issues represent the speculative (risky) side of the marketplace, and it is specifically these issues that are in the state regulators' crosshairs. These issues are SEC registered, but they also are required to be registered in each State where offered.

Filing of advertising with the Administrator is NOT required for: I U.S. Government securities II Municipal securities III Investment company securities IV Options Clearing Corporation securities StatusA A. I and II only StatusB B. III and IV only Correct Answer C. I, II, III Incorrect Answer D. I, II, III, IV C

Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities. *** Options are non-exempt securities and are not federal covered, so the Administrator can require filing of advertising for these.

If FINRA issues an order suspending a broker-dealer's federal registration, which statement is TRUE? A. The Administrator can only suspend that broker-dealer's registration in the State if a violation occurred in the State B. The Administrator cannot suspend the broker-dealer's State registration as a result of FINRA's suspension order C. The Administrator can suspend the broker-dealer's registration in the State as a result of FINRA's suspension order D. The Administrator can only suspend the broker-dealer's registration in the State if FINRA's order was the result of a violation of that State's laws C

If FINRA suspends or expels a broker-dealer from membership, then the State Administrator can suspend or revoke that firm's registration based upon the FINRA action.

A Registered Investment Adviser (RIA) headquartered and registered in State X gives advice only to insurance companies, pension plans and investment companies. The RIA has no office in any other State. The adviser does business in State Y and receives a letter from the Securities Commissioner of State Y which explains that State Y believes that the adviser is required to be registered there, along with a questionnaire to be completed and returned to State Y. Which statement is TRUE? A. The RIA will be required to be registered in State Y because it is doing investment advisory business there B. The RIA will be required to be registered in State Y because it is not a Federal Covered Adviser C. The RIA will not be required to be registered in State Y because it has no office there and it only deals with professional investors D. The RIA will not be required to be registered in State Y because it can only be required to be registered in one State and it is already registered in State X C

If a State-Registered Investment Adviser has no office in a State and only deals with professional investors in that State, then it is exempt from registration in that State - therefore State Y cannot require registration. Note that if the RIA had an office in State Y, then it would be required to register there.

An agent of a broker-dealer wishes to withdraw his registration. If there is a customer complaint, the Administrator: Correct A. retains jurisdiction over the resigned agent for a period of 1 year StatusB B. retains jurisdiction over the resigned agent for a period of 3 years StatusC C. retains jurisdiction over the resigned agent for a period of 5 years StatusD D. has no authority over the agent as the agent is no longer employed by the broker-dealer A

If there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 1 year from the withdrawal date. If an agent resigns from a broker-dealer, both the agent and the broker-dealer must notify the Administrator promptly of the withdrawal. The withdrawal does not become effective for 30 days.

To get a customer to open an account, an agent tells a client that he will personally visit the client each month to explain that month's investment results. The agent fails to tell the customer that he expects to be transferred to another state in 3 months. Which statement is TRUE? Correct A. This is a prohibited business practice StatusB B. This statement is allowed if the agent will arrange for another individual to take over the account when he is transferred StatusC C. This statement is acceptable StatusD D. This statement must be given to the customer in writing to be acceptable A

It is a prohibited practice to make promises to customers that the agent cannot reasonably expect to honor. In this case, the agent has promised to personally visit the customer each month to go over investment results, even though the agent is being transferred to another state in 3 months. This is a promise that cannot be kept.

Under the Uniform Securities Act, an investment advisory contract could contain all of the following compensation arrangements EXCEPT: StatusA A. monthly fees based on a percentage of the total value of all assets being managed StatusB B. yearly fees based on a percentage of all assets being managed, inclusive of any capital gains achieved StatusC C. fixed fee levels depending on the total value of assets being managed Correct D. fees based solely on capital gains achieved D

It is prohibited for an investment adviser to be compensated on the basis of capital gains achieved. It is allowable for the adviser to get a percentage of all assets under management (even if this value includes capital gains achieved) or for a fixed fee arrangement to be established.

In most States, an agent may be associated at one time with no more than: A. 1 broker-dealer B. 2 broker-dealers C. 3 broker-dealers D. 4 broker-dealers A

Most States do not allow dual registration - an agent may only be associated with 1 broker-dealer at any time. However, it is permitted, in all instances, for an agent to be registered with a number of broker-dealers that are under "common control." For example, Prudential may have a separate mutual funds broker-dealer and a separate general securities broker-dealer. Agents of Prudential can be associated with both broker-dealers without violating State law. Finally, a few State Administrators permit multiple registrations with different broker-dealers. If this is the case, the agent must disclose all registrations to each of the broker-dealers with whom he or she is associated.

Under NASAA rules, a customer MUST sign and return the margin agreement: StatusA A. prior to placing the first trade in the account StatusB B. prior to confirmation of the first trade in the account Incorrect Answer C. prior to settlement of the first trade in the account Correct Answer D. promptly after the initial transaction in the account D

NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!

If an investment adviser is an individual, which of the following items would be included in the computation of adviser's net capital? StatusA A. Goodwill StatusB B. Automobile Correct C. Accounts receivable StatusD D. Copyright C

Net capital is really the adviser's "liquid net worth." It is liquid assets minus all liabilities. For an adviser that is an individual, excluded from assets that count in net capital are any non-liquid assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, home, home furnishings, automobiles and any other personal items that cannot be readily converted to cash. Basically, this means that the only assets that count in the computation for an individual adviser are cash, accounts receivable and marketable securities positions. Note, however, that if the adviser is a partnership or corporation, the computation is permitted to include automobiles and furnishings used in the adviser's business. Why State law permits this is anyone's guess, but this point should be known for the exam!

All of the following are exempt transactions under the Uniform Securities Act EXCEPT non-issuer transactions in stocks listed on the: StatusA A. American Stock Exchange (NYSE-MKT) Correct B. Tokyo Stock Exchange StatusC C. Pacific Stock Exchange StatusD D. NASDAQ Stock Market B

Non-issuer transactions in securities that are U.S. exchange listed or NASDAQ listed are exempt from State registration requirements (because the IPO of that security was either registered in the State already or a notice filing was made in the State). Secondary market trades on the Toronto Stock Exchange are given a similar exemption (NAFTA - The North American Free Trade Agreement between the U.S., Canada and Mexico - permits the State Administrator to exempt transactions on exchanges in these countries). No such exemption is given to secondary market trades occurring on any other foreign stock exchange.

A non-password protected website is defined as: Correct A. advertising StatusB B. sales literature StatusC C. correspondence StatusD D. public forum A

Non-password protected websites can be seen by the general public, so they are defined as advertising. In contrast, a password-protected website is defined as sales literature, because it is seen by a specific audience.

An order ticket for the purchase of stock does NOT contain: StatusA A. Quantity StatusB B. Time that the order is placed StatusC C. Fill price Correct D. Market price at the time that the order is placed D

Order tickets do not contain the market price at the time of placement of the order.

Under the Uniform Securities Act, registration of a security in a State means that: I disclosure documents have been filed with the Administrator II the Administrator has reviewed the content and accuracy of the filing III the Administrator has approved of the securities being offered StatusA A. I only StatusB B. II and III Correct Answer C. I and II Incorrect Answer D. I, II, III C

Registration of a security does not mean that the Administrator approves of the issue. Registration means that required papers have been filed and reviewed by the Administrator.

Registration of securities in a State by Filing becomes effective: A. when the filing with the State is completed B. 2 business days after the filing with the State is completed C. 5 business days after the filing with the State is completed D. when the Federal registration becomes effective C

Registration of securities in a State by filing becomes effective on the 5th business day after filing (unless the Administrator allows a shorter period).

Under the Uniform Securities Act, all of the following transactions are exempt EXCEPT the sale of stock: StatusA A. by a trustee in a bankruptcy proceeding StatusB B. to an insurance company StatusC C. by the executor of an estate Correct D. in a transaction solicited by a registered agent d

Sales of securities by fiduciaries such as executors of estates, or trustees in a bankruptcy proceeding, are exempt. Sales to financial institutions are also exempt transactions SINCE THE GENERAL PUBLIC IS NOT INVOLVED. Solicited sales of securities by agents are not exempt transactions. The security must be registered to solicit in the state unless another exemption is available. Please note, however, that unsolicited transactions are exempt from state registration requirements. Also remember that these exemptions only apply to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.

An agent of a broker-dealer conducts a seminar for the general public about investing in different types of securities. At this seminar, it would be unethical for the agent to: StatusA A. discuss the merits of allocating investment funds across different asset classes StatusB B. distribute his or her business card to the attendees of the seminar StatusC C. distribute the prospectuses of any specific mutual fund investments that were discussed during the seminar Correct D. recommend the purchase of specific mutual fund investments to the attendees of the seminar D

Since the making of a recommendation to a customer requires a suitability determination, making a recommendation of a specific security in a speech or advertisement is prohibited (because there is no way to determine the suitability of that recommendation for each person in the audience).

"An investment in a common enterprise for profit, with management provided by a third party" is the definition for a(n): A. Agent B. Investment Adviser C. Security D. Broker Dealer C

The basic definition of a security is: an investment in a common enterprise for profit, with management provided by a third party.

A customer invests $500,000 and opens a discretionary account with an agent specifying an investment objective of current income. The agent decides that it is best to diversify and spreads the monies between an income fund and a growth fund. Which statement is TRUE? StatusA A. The agent acted prudently as it is best to diversify a portfolio to reduce risk StatusB B. The agent acted prudently as long as the manager approves of the transaction Correct C. The agent acted inappropriately and fraudulently StatusD D. The agent's actions are acceptable if there is a profit on the investments made C

The customer specified an investment objective of current income, not growth and income. If the agent splits the funds between an income fund and a growth fund, the action is inappropriate and fraudulent.

Donna Dixon posts a website offering to provide financial plans for individuals that complete an on-line questionnaire and submit it to her. For this, she charges a fee of $150 per plan. She receives responses from 32 individuals, receiving 8 responses from individuals who reside in 4 different States. Which statement is TRUE? A. Donna is not defined as an investment adviser because the compensation received per client is low enough to qualify for a "de minimis" exemption B. Donna must register with the SEC as a federal covered adviser C. Donna is defined as an investment adviser and is required to register in each State D. Donna is not defined as an investment adviser because she does not meet with clients C

The de minimis exemption applies not to the fee received per client, but rather to advisers with no office in a State who solicit no more than 5 new clients in the State. Since she solicited 8 clients in each State, this will not work. She must register in each of the 4 States. She could not be a federal covered adviser because she is not doing business in 15 or more States and must also have at least $25 million of assets under management.

Under the Uniform Securities Act, the definition of "guaranteed" means that the security is guaranteed by another party as to: StatusA A. payment of dividends StatusB B. payment of interest StatusC C. payment of principal Correct D. any of the above D

The term "guaranteed" is defined as guaranteed as to payment of principal, interest, or dividends by someone other than the issuer.

Who must register in a State as an investment adviser? A. A person selling a subscription to a service that gives timing of buy and sell orders for specific investment company securities that are exchange traded B. An investment adviser representative who has been registered with an investment adviser for more than 5 years C. An on-line broker-dealer who offers a "no maximum number of trades" program for a 90-day period for a set dollar amount D. A bank that is offering "Raise-Your-Rate" Certificates of Deposit for a set promotional period C

This question gets at an interesting lawsuit filed against brokerage firms by investment advisers when these brokerage firms started offering non-managed fee based accounts. For an annual flat fee, the brokerage firm client could trade an unlimited amount. The investment advisers argued that a "flat fee" product is an advisory product that requires investment adviser registration - and they won. Thus, any flat fee product offered by a broker-dealer is considered to be an advisory product and requires that the firm and each agent register as an IA and IAR respectively in order to sell these. Choice A is incorrect because general market newsletters are not investment advisers - they only become IAs if they tailor advice to a specific client situation. Choice B makes no sense; and Choice D is incorrect because banks are excluded from the definition of an investment adviser.

An agent living in one state wishes to solicit business in another state. Which statements are TRUE? I The agent must be registered in the other state II The broker-dealer must be registered in the other state III If the agent is a partner of the broker-dealer, the agent does not have to register separately from the broker-dealer in that state A. I only B. II only C. I and II D. I, II, III D

To do business in a given state, both the broker-dealer and agent must be registered in that state, unless an exemption is available. If the agent is a partner of the broker-dealer, he does not have to register separately in the State, since the broker-dealer registration names all the principals of the firm and gives all of their background history required by the Administrator.

An adviser is permitted to exercise discretion over a customer account when such trades: StatusA A. are not too frequent in the account StatusB B. are not too large relative to the amount of capital in the account StatusC C. are effected only after new funding is placed in the account Correct D. occur under a written power of attorney D

To exercise discretion in a customer account, an investment adviser must have a written power of attorney. Note that such written power is needed for the adviser to select the security to be traded or the amount to be traded. No written power of attorney is needed to select price or time in a securities transaction.

To register a successor firm with the State Administrator for the unexpired portion of the current license year, which statement is NOT true? StatusA A. The predecessor firm must have ceased business operations and can only conduct winding down transactions Correct Answer B. The successor firm must continue business operations through the end of that license year StatusC C. The successor firm must file a Form BD or ADV amendment with the Administrator Incorrect Answer D. The filing becomes effective on the date designated by the licensee B

Uniform State law does not require the filing of a new registration application for a successor firm. The successor firm files a registration amendment with the State, that takes its registration through the end of that year, without having to pay a new filing fee. The effective date of the successor firm's registration is the date indicated on the amendment. The "old" firm must have ceased business operations for the "new" firm to be registered in the State. Whether or not the successor firm continues in operation through the rest of that year is irrelevant.

Which of the following is EXCLUDED from the definition of a security under the Uniform Securities Act? Correct A. Fixed Annuity Contract StatusB B. Variable Annuity Contract StatusC C. Investment Contract StatusD D. Mortgage Bond A

Variable annuities are defined as securities; fixed annuities are not. Investment contracts are defined as securities. Mortgage bonds are defined as securities; mortgages are not.

Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II The exchange where the transaction was effected III The customer name and account number IV The price of execution StatusA A. I and II Correct Answer B. III and IV Incorrect Answer C. II, III, IV StatusD D. I, II, III, IV B

Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.

non-issuer

a person who is not defined as an issuer under the Act

M&A advisers - finders can be defined as b/ds

being in the business of engaging in securities trans, if one co buys the securities of the other in the deal and compensation is pad based on closing the deal

firms that contact existing customers on vaca in ano State are EXCLUDED, does NOT apply to new customers

cover situ where a customer is vacationing (if < 30 days are spent) in ano State, or simply traveling through ano State

exclusions fr def of agent - only apply to individuals representing issuers

do NOT apply to individuals who represent b/ds, AND they apply only to trans in exempt securities or trans

def of administrator

each State has one, can be State Securities Commission, commissioner or secretary

Natl Securities Mkts Improvement Act of 1996 (NSMIA)

enacted to elim duplicate regulations that req'd regis at both Federal and State level: o if regis is req'd at Federal level; then the State cannot req regis as well and o if regis is not req'd at the Federal level; then the State can req regis

issuer for trusts

for securities where structure is such that there is no Bd of Dir (ie, collateral trust certs, voting trust certs, certs of deposit for a security and unit invest trusts) - the person performing func of mgr or depositor under Trust agreement

denial, revocation or suspension of registration

if it is in the public interest and: o regis stmt is incomplete in a material respect or is misleading or false w/ respect to a material fact o Act h/b willfully violated by any person involved in offering o sec t/b registered is subj to temporary or permanent injunction fr ano State or Federal court o issuer's enterprise is illegal o offering tends to work a fraud on purchasers o offering is being made on terms that are unfair, unjust or inequitable o u/w compensation in offering is unreasonable o sec is sought t/b registered by method for which it is ineligible, ie, Filing avail for "seasoned" companies o applicant h/ failed to pay filing fees :. Admin is prohibited fr issuing a stop order based upon fact known to Admin when regis b/came effective, unless Admin takes axn w/in 30 days of effec date if stop order entered opportunity for hearing is given: o promptly notify all interested parties that order h/b entered, w/ reasons for entering order AND o that w/in 15 days of written request, matter w/b set down for a hearing

"persons" are legal entities

individuals, cops, partnerships, bus trusts, estates, Trusts (where interests of the benef of the Trust are evidenced by a security), assns, joint stock cos or joint ventures, govts and political subdivisions of govts, unincorp orgs and any oth legal or commercial entity

gift of assessable stock is considered to be a sale

ltd partnership interests are generally "assessable" by the general partner

def of Federal covered advisers

o $100+ mill of assets OR o advise registered invest cos o SEC interprets that advisers that have btw $100 - $110 mill of assets have option of Federal registration o mid-size adviser regis w/ SEC o mid-size adviser in a State that does NOT req registration MUST register w/ SEC; an adviser w/ $25 mill or more of assets under mgmt that is NOT req'd to register in State where it has its principal office, MUST register w/ SEC o mid-size adviser that MUST register in 15 or more States can opt to be SEC-registered o Federal covered adviser - any person NOT an "IA" under Investment Advisers Act of 1940

overview of the Act's liability and penalty provisions

o civil liability (w/out intending to defraud or deceive): basic remedy is that cust who lost $ m/b paid back incl interest o criminal liability and criminal penalties (intending to defraud or deceive or commits a serious felony): Criminal Liability & Criminal Penalties apply - cust m/b paid back plus interest and person who violated Act c/b made to pay fines and/or go to jail o file lawsuit to obtain damages; burden of proof is on plaintiff

agents may be compensated on either a salary or commission basis

o clerical employees and managerial employees who do not effect trades w/ the public are NOT considered to be agents & do NOT have to be registered in the State o partners, directors, or officers of b/d are only considered to be "sales repres" if they represent the b/d or an issuer in effecting sec trans - otherwise they are NOT defined as "agents"

issuer for equipment trusts

person to whom equipment is to be leased or conditionally sold - which is the corp

firms EXCLUDED fr def of b/d (all of above, plus)

o firm has no place of bus in a State & transacts solely w/ issuers, oth b/ds & institutional investors o firm has no place of bus in s State where an existing cust is vacationing & contacts cust in that State

individuals EXCLUDED fr def of an agent

o trades of exempt sec o exempt trans o in covered trans: - sale of private placement sec or sale of sec to qualified purchasers (investors w/ at least $5,000,000 invested) - invest mgrs w/ at least $25 mill under mgmt o selling sec to issuer's employees (as long as no commissions are paid)

Federal law supercedes State law in most cases

re: net cap rules, custody rules, margin rules, fin resp rules and recordkeeping rules - NSMIA req's that if any State law impedes Federal legislation, Federal law prevails

Delivery of a prospectus is required if a: I new issue of corporate bonds is being offered to the public II trade in a corporate bond takes place in the secondary market III new issue of government bonds is being offered to the public IV trade of a government bond takes place in the secondary market Correct A. I only StatusB B. I and II StatusC C. I and III StatusD D. I, II, III, IV A

rospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement. There is no prospectus requirement for exempt securities - governments, agencies and municipals (because we trust that our government won't fleece us!).

unless an EXEMPTION is available

the Act req's that b/ds, agents, invest advisers, and invest adviser repres be registered in the State

Blue Sky laws

these State registration laws pre-date adoption of the Federal Securities Acts in 1933 and 1934

A firm is retained by a company that wishes to make acquisitions of other companies to act as a finder. The finder can be considered to be a broker-dealer: A. under no circumstances B. if it receives compensation contingent on the closing of a deal C. if it receives a flat fee for services rendered D. if it signs a written contract with the company B

"Finders" operate in a grey area, which may, or may not, require registration as a broker-dealer. First of all, if the acquisition transaction only involves the sale of assets, as opposed to the sale of securities, then there is no requirement to be registered as a broker-dealer. Second, if the finder receives a retainer fee or flat compensation, then the finder is not considered to be a broker-dealer. If the finder receives transaction-based compensation, such as compensation contingent of the closing of the deal, the finder can be considered to be a statutory broker-dealer that must register. This question is not clear as to whether the transaction involves the sale of assets or securities, but it always best to go with the choice that is the most restrictive!

REGISTRATION / NOTICE REQUIREMENTS FOR INVEST ADVISERS: invest advisers MUST register

"IAs" cannot employ persons who have suspended or barred

Which of the following are defined as "persons" under the Uniform Securities Act? I Joint Stock Company II Partnership III Estates IV Unincorporated Organization A. II only B. I and IV only C. I, III, and IV D. I, II, III, IV D

"Persons," as defined under the Uniform Securities Act, include Joint Stock Companies, Partnerships, Estates, and Unincorporated Businesses. It is important to know who are defined as "persons," since these entities may then be further defined as "agents" (which can only be individuals), "broker-dealers" (which can be incorporated or unincorporated businesses); or "issuers" (which can be incorporated or unincorporated businesses, joint ventures, municipalities etc.).

no issuer for fractional interest in oil and gas programs

"Registration by Qualification" - forces securities to undergo a stringent review bef they can be sold in the State (due to prev frauds)

A firm's market making desk, aware that the firm is about to publish a bullish research report on ABCD stock, purposefully increases its long position in order to satisfy anticipated retail demand. This action is: StatusA A. permitted without restriction StatusB B. permitted as long as the research report is released within 48 hours of the first trade made to increase the firm's position StatusC C. permitted as long as the market listing the stock is notified, in writing, of the impending research report Correct D. prohibited D

"Trading ahead of research" is prohibited. A member firm cannot alter its inventory position in anticipation of a research report that it is about to release. In essence, the member firm is treated as an "insider." Once the favorable report is released, this may cause the general public to become more bullish and buy the stock, pushing the price up. If the firm were to increase its inventory position prior to the release of the report, it could make a nice profit based on the stock's upward movement once the report is disseminated. This is prohibited.

4 exclusions for individuals who represent ISSUERS (a):

#1/ individuals representing ISSUERS trading exempt securities, ie, an individual who is hired by a municipality to mkt that issuers GO bonds to the public is EXCLUDED -- however individuals who represent b/ds in selling exempt securities MUST register, ie, an individual who represents a b/d selling muni bonds (which are exempt) in a State must still be registered in that State; exempt securities, ie, US govt, foreign govts, muni govts, Canadian govt, bank & savings institutions, trust cos, promissory notes mature in < 9 mos rated in one of 3 highest rating cats, issued in amt of < $50,000 (same as sell corp commer paper), securities issued in connection w/ savings, pension, profit sharing plans and empl stock option plans

4 exclusions for individuals who represent ISSUERS (d):

#4/ covered trans - Federal private placement; covered trans - qualified purchasers; employees of an issuer who effect trades only for the issuer's employees are excluded

Which of the following does NOT qualify as an exempt transaction under the Uniform Securities Act? StatusA A. A sale of common stock to an insurance company Incorrect Answer B. A sale of preferred stock by an executor of an estate StatusC C. A sale of an outstanding security that is listed on the New York Stock Exchange Correct Answer D. An isolated sale of corporate bonds on behalf of an issuer D

*** Isolated "non-issuer" transactions are EXEMPT - meaning that the securities involved are not required to be registered in the State. These are transactions that take place in the secondary (trading) market. An isolated "issuer" transaction is not exempt. In this case, a corporate issuer is selling bonds, which is a security that must be registered under the Act. The sale of common stock to an insurance company is an EXEMPT transaction, since sales to financial institutions are exempt. The sale of preferred stock by an executor of an estate is an EXEMPT transaction, since sales by fiduciaries are exempt. Any security of an issuer which is listed on a recognized stock exchange such as the New York Stock Exchange is also exempt under the so-called "blue chip" exemption. Since these companies are also registered with the SEC under the Securities Exchange Act of 1934, secondary market trading of these securities falls under the exemption given to "non-issuer transactions in outstanding securities of companies registered under the 1934 Act." Also remember that these exemptions only apply to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.

Which of the following statements are TRUE regarding private placements under the Uniform Securities Act? I No commissions can be paid for sales to individual investors II No more than 10 prospective investors may be contacted III General advertising is prohibited Incorrect Answer A. III only StatusB B. I and II StatusC C. II and III Correct Answer D. I, II, III D

*** Private placements under State law differ from the Federal law private placement exemption. Under State law, a private placement is an offer of securities to no more than 10 persons, where no commissions can be paid for sales to individual investors (they can be paid on sales to institutional investors). Advertising is prohibited, since advertising would make this an offer to the general public - not a "private placement." In contrast, under Federal law, a private placement is a sale of securities to no more than 35 "non-accredited" investors. No advertising is permitted; and Federal law is silent about commissions (thus, they can be paid).

Under the provisions of the Uniform Securities Act, a "person" includes all of the following EXCEPT a(n): A. adult couple B. minor C. municipality D. corporation B

A "person," as defined under the Act, can be just about anyone who has legal authority to issue or trade securities. A minor acting on his or her own is not a "person" since a minor has no legal authority to trade securities. An adult couple is a "person" (when they open a joint account). A municipality is a person. Finally, a corporation is a person.

Which of the following would MOST likely be an investment adviser that is State registered? A. Certified Financial Planner B. Adviser with assets under management of $100 million C. Investment Company D. Trust Company A

A Certified Financial Planner is the type of "smaller" investment adviser that is likely to be State registered. Remember that it is only the "big guys" that are Federal covered advisers - these are advisers with $100 million or more under management and advisers to investment companies. Trust companies are excluded from the definition of an investment adviser at both the Federal and State level, since they are already regulated as depository institutions under both Federal and State law.

A Canadian broker-dealer has a client who comes to the United States for 4 months as a contract employee for an American company. Which statement is TRUE about the Canadian broker-dealer doing securities business with the client in the United States? A. The Canadian broker-dealer can continue to do business with the client in the United States without taking any further action B. The Canadian broker-dealer can rely on the "vacationing" client exemption and does not have to register in the State C. The Canadian broker-dealer must register in the State D. The Canadian broker-dealer need only register in the State if the client is not a dual citizen A

A NASAA interpretation that only applies to Canadian broker-dealers says that Canadian BDs can contact existing customers who are temporarily residing in the United States without having to register in a State, as long as the client is in the U.S. for less than ½ year and intends to return to Canada. Since this Canadian client will only be in the U.S for 4 months, the Canadian BD can continue to do business with the client while he or she is in the U.S. without having to register in the State where the client is working. Note that the Canadian BD cannot contact prospective clients in the U.S - only existing clients can be contacted. And also note that this rule does NOT apply to a U.S. BD registered in one State that contacts an existing client who is temporarily in another State. In this case, if the client spends more than 30 days in the other State, that BD must be registered in the other State.

Which of the following actions on the part of an agent is unethical in a margin account that does not have a written trading authorization from the customer? The customer directing that the agent: StatusA A. buy 1,000 shares of ABCD sometime during that day and the agent executing the trade at the market close that day StatusB B. sell short 500 shares of DEF whenever he thinks the time is right and the agent executing the trade at 2:00 PM ET that day Correct C. buy 1,000 shares of a high dividend paying stock as soon as possible and the agent executing the purchase of 1,000 shares of PDQQ 10 minutes later StatusD D. sell his entire holding of DEFF stock at whatever the agent thinks is the best price that day and the agent immediately places a market order to sell that is executed 1 minute later C

A broker is always permitted to choose price or time of execution without needing a written authorization from the customer. However, to choose either the security or the size of the trade, a written authorization is needed.

Which of the following are defined as securities under the Uniform Securities Act? I Certificates of participation in an investment plan II Fixed annuity III Cash value life insurance policy Correct A. I only StatusB B. I and II StatusC C. II and III StatusD D. I, II, III A

A certificate of participation in an investment plan is a security. A fixed annuity is an insurance product - it is not a security since the holder has no investment risk. Similarly, a life insurance policy is not a security.

An Investment Adviser wants to change its approach and management style, focusing more on growth funds and emerging company stocks and less on strategies that provide stable income. In order for the Investment Adviser to do this: StatusA A. prior approval must be obtained from the Administrator Correct B. each customer must approve the change by signing a new advisory agreement StatusC C. no action need be taken by the Investment Adviser StatusD D. the IA must be a Federal Covered Adviser B

A change in the adviser's style requires that each customer sign a new advisory contract. Remember, the customer signed on with this adviser because its approach was to invest with the objective of stable income, and now this adviser must change that to "growth and aggressive growth." This is a material change to the advisory agreement and thus, it requires customer agreement. Note that the Form ADV filed in the State must be amended within 30 days for this change, but there is no Administrator approval of this.

A non-registered agent of a broker-dealer can sell: A. warrants B. certificates of deposit C. real estate partnership units D. fixed annuities B

A non-registered agent of a broker-dealer cannot sell securities, making both Choices A and C wrong. So we are down to whether a non-registered agent of a broker-dealer can sell a certificate of deposit or a fixed annuity. A certificate of deposit is a bank product, and because it has all of the protections of a bank product, there is no State registration required to sell it. Regarding a fixed annuity, this is an insurance product, so there is no registration required as an agent of a broker-dealer to sell it; however, a State insurance license is required. Since you only get to pick one, Choice B is better and unfortunately, this is very close to an exam-type question!

All of the following persons are EXCLUDED from the definition of a broker-dealer or are EXEMPT from registration as a broker-dealer under the Uniform Securities Act, EXCEPT a firm: A. with an office in the State that effects trades exclusively with other broker-dealers B. with no office in the State that effects trades exclusively with trust companies and other financial institutions C. with no office in a State with a broker-dealer "de minimis" exemption that has a few clients in the State in the preceding 12 months D. with an office in that State that is a trust company that deals with the public A

A firm is not defined as a broker-dealer if it has no place of business in the State and transacts solely with issuers, other broker-dealers, and financial institutions. However, if a firm that effects securities trades has an office in a State, it is defined as a broker-dealer and must register in the State. Thus, the broker-dealer in Choice A must register and the broker-dealer in Choice B is not required to register. The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State. In Choice C, the State has a broker-dealer "de minimis" exemption and would not be required to register. Banks, S&L's, and trust companies are also excluded from the definition of a broker-dealer, so no registration as a broker-dealer is required in Choice D.

Which investment advisory fee arrangement would MOST likely be viewed as unreasonable for a client with a small amount of assets under management? StatusA A. Hourly rate B. Flat fee assessed for the year C. Assessment based on value of the account at the beginning of the month D. Assessment based on value of the account at the end of the month B

A flat fee arrangement is permitted, but this question is "digging deeper" and is actually looking at the way advisory fees are charged in the real world. Annual flat fees are typically paid by clients with very large accounts, because advisers will change their fee arrangement for very large customers from a percentage of assets under management to a flat fee. For example, a customer with $10,000,000 to invest, if charged a typical 1% annual management fee, would pay $100,000. This is a very large dollar amount, so the adviser might have a fee schedule of 1% of assets under management for amounts invested up to $2,500,000 and then the schedule shifts to an annual flat fee of $25,000 for amounts invested over $2,500,000. If the adviser were to charge the same $25,000 flat fee for all accounts rather than a percentage of assets under management for accounts under $2,500,000, then, for example, a small account of $100,000, would have a ridiculously large fee. Hourly fees take into account complexity of management - smaller accounts are simpler and get billed fewer hours, while larger accounts are more complex and get billed more hours - this is a reasonable arrangement. Finally, an assessment based on value is reasonable - smaller accounts get a smaller assessment, while larger accounts get a larger assessment.

A customer has a free credit balance at a broker-dealer. The customer makes a verbal request over the phone that the broker-dealer pay the amount of the balance immediately, in check form. Which statement is TRUE? Correct A. The request should be honored as given StatusB B. The broker-dealer cannot honor the request unless it is in writing StatusC C. The broker-dealer cannot honor the request unless the customer makes it in person StatusD D. The request cannot be honored since free credit balances are not payable to the customer A

A free credit balance is an uninvested cash balance. The customer can request that the firm pay this amount at any time - there is no need for a written request. The firm must make the payment promptly to the customer, if a request is made.

In order for a money market fund to be called "no load" it cannot charge any of the following EXCEPT: StatusA A. front-end load StatusB B. contingent deferred sales charge StatusC C. back-end load Correct D. 12b-1 fees D

A fund cannot be called "no load" if it charges any type of sales charge, whether it be a front-end load, back-end load, or a contingent deferred sales charge. A mutual fund (money market funds are mutual funds) can advertise itself as a "no-load" fund if it charges 12b-1 fees of no more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares.

A mutual fund is offered with no up-front sales charge and no contingent deferred sales charge. It charges 50 basis points of 12b-1 fees annually. The fund publishes an advertisement stating that: "This is a no-load fund." Which statement is TRUE? Incorrect Answer A. The statement is true as presented StatusB B. This statement is misleading because no-load mutual funds cannot charge 12b-1 fees Correct Answer C. This statement is misleading because a no-load fund cannot charge more than 25 basis points of 12b-1 fees StatusD D. This statement is misleading because mutual funds are not permitted to advertise themselves as no-load funds C

A mutual fund is not permitted to advertise itself as a "no-load" fund if it charges 12b-1 fees of more than .25% (25 basis points) annually. 12b-1 fees are charges against net asset value that pay for the cost of soliciting new investment to the fund, and they can be used to compensate salespersons that sell the fund's shares.

Under the Uniform Securities Act, which of the following is a non-exempt transaction? StatusA A. The sale of common stock to an institutional investor such as an insurance company Correct Answer B. A non-issuer transaction of common stock effected through a broker-dealer Incorrect Answer C. A sale of common stock by a trustee in bankruptcy StatusD D. A private placement of common stock B

A non-issuer transaction of common stock is a normal market trade of common stock. This is a non-exempt transaction and only becomes exempt if the securities involved are "blue chips." The sale of common stock to a financial or institutional investor; the sale of common stock by a fiduciary such as a trustee in bankruptcy: and the private placement of common stock; are all defined as exempt transactions under the Act.

Under the Uniform Securities Act, a person who renders investment advice solely about U.S. Government Agency securities is defined as a(n): StatusA A. investment adviser and must register under the Act Correct B. federal covered adviser, and is not required to register under the Act StatusC C. broker-dealer and must register under the Act StatusD D. agent and is required to register under the Act B

A person who gives investment advice relating solely to U.S. Government securities (including Agency securities), is excluded from Federal registration under the Investment Advisers Act of 1940. Any person excluded from registration with the SEC under the Investment Advisers Act of 1940 is a "federal covered adviser" and cannot be required to register in the State.

Under what circumstances may an agent draw on a graph or chart in a mutual fund prospectus during a presentation to a customer? Correct A. Under no circumstances StatusB B. When the drawing will help the customer to understand the presentation StatusC C. When the graph or chart appears misleading to the customer StatusD D. When a customer has drawn on the graph or chart A

A prospectus is a legally prepared document that cannot be altered when it is presented to customers. The information as filed with the SEC must be presented in the same manner to customers. Marking up, highlighting, or summarizing a prospectus are all prohibited.

Under the Uniform Securities Act, an offer or sale does NOT exist if the securities are: I being pledged as collateral for a loan II non-assessable and are given as a gift III exchanged for another type of security under a judicially approved reorganization StatusA A. I only Incorrect Answer B. I and II StatusC C. II and III Correct Answer D. I, II, III D

A sale is defined as a contract to dispose of a security for value. The pledge of securities is not a "sale;" the gift of non-assessable securities is not a "sale;" and an exchange of one security for another under a judicially approved corporate reorganization is not considered a "sale."

To register as an Investment Adviser Representative in a state, which form is filed? StatusA A. U-2 Correct B. U-4 StatusC C. U-6 StatusD D. U-8 B

A standard registration form (Form U-4) is used for federal and state registration of agents and state registration of investment adviser representatives.

All of the following orders must be retained as a record by broker-dealers EXCEPT: StatusA A. executed orders Incorrect Answer B. unexecuted orders StatusC C. canceled orders Correct Answer D. subscription orders D

A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

Which of the following orders MUST be retained as a record by broker-dealers? I Executed orders II Unexecuted orders III Canceled orders IV Subscription orders StatusA A. I and II only StatusB B. III and IV only Correct C. I, II, III only StatusD D. I, II, III, IV C

A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

Which order is NOT required to be retained as a record by a broker-dealer? Correct Answer A. Subscription order pursuant to a rights offering StatusB B. Market-not held order Incorrect Answer C. Unexecuted order that is subsequently canceled StatusD D. Market order that is immediately filled A

A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

An agent has an individual account for a husband. The husband calls the agent and states that he wishes to open an account in his wife's name and buy 500 shares of PDQ stock. Which statement is TRUE? StatusA A. The agent can open the account StatusB B. The agent can open the account only if the husband gives authorization Correct Answer C. The agent can open the account only if the wife gives written authorization Incorrect Answer D. The account cannot be opened unless the wife orally approves C

A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. A husband (Third Party) cannot open an individual account in his wife's name (Customer). To allow the husband to trade in her account, the wife must open the account and she must sign a Third Party Trading Authorization, giving the husband power of attorney over the account.

John Jones has an individual account at a broker-dealer. John calls his agent at the broker-dealer and states that he wishes to open an account for his brother Jake in his brother's name and buy 1,000 shares of DEF stock. Which statement is TRUE? StatusA A. The agent can open the account Correct B. The agent can open the account only if the brother Jake gives authorization in writing StatusC C. The agent can open the account only if the manager approves in writing StatusD D. The account cannot be opened unless the brother Jake orally approves B

A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. John cannot open an individual account in his brother's name. Jake (the customer in this case) must either sign the new account form to open the account; or can give his brother John a full power of attorney, signed by Jake, that names John as a person allowed to act of Jake's behalf.

Primary market offerings are: A. exempt transactions B. issuer transactions C. non-issuer transactions D. private placement transactions B

A trade in the primary market is a new issue being sold to the public for the first time. This is an issuer transaction since the sale proceeds go to the issuer.

A person who renders advice on variable annuities for a fee; and who then sells the annuities, charging a commission, MUST: I register as an investment adviser in that State II register as a broker-dealer in that State III register as an agent in that State StatusA A. I only Correct Answer B. I and II Incorrect Answer C. I and III StatusD D. None of the above B

A variable annuity is defined as a non-exempt security under the Uniform Securities Act. If advice is rendered for a fee about variable annuities, then registration as an investment adviser would be required. If a variable annuity is sold for a commission, then the firm must register as a broker-dealer as well.

Which individual would most likely be required to be registered as a representative of a broker-dealer? A. An administrative staff person involved in back-office support work B. A secretary taking messages to buy and sell securities C. A sales assistant taking an order for a limited partnership unit D. A staff person who reports completed trades to customers C

Administrative personnel are not registered making Choices A and D incorrect. In Choice B, the secretary is taking a "message" while in Choice C, the sales assistant is taking an "order." Taking an order to buy or sell a security requires that individual to be registered. An argument could be made that in Choice B, since the "message" was about buying or selling a security, these also are orders. However, Choice C is clearly the better answer!

The Administrator may deny or revoke a securities registration by: StatusA A. rule Correct B. order StatusC C. edict StatusD D. subpoena B

Administrators are permitted to enter orders denying or revoking registration.

Under NASAA recordkeeping rules, advisers must retain records for no less than: StatusA A. 3 years, with the first 2 years kept in the principal office of the adviser Correct Answer B. 5 years, with the first 2 years kept in the principal office of the adviser Incorrect Answer C. 7 years, with the first 3 years kept in the principal office of the adviser StatusD D. 10 years, with the first 5 years kept in the principal office of the adviser B

Advisers must retain records for 5 years under NASAA rules (note that this differs from SEC rules for broker-dealer records, most of which must be retained for 3 years). The first 2 years' worth of records must be kept at the adviser's principal office, where it is available for inspection.

Under NASAA rules, which record is NOT required to be retained by an investment adviser? StatusA A. Written customer complaint received 4 years ago StatusB B. Advertising copy distributed to the public 2 years ago StatusC C. Trial balance of the investment adviser prepared 1 year ago Correct D. Customer account statements prepared 6 years ago D

Advisers must retain records for 5 years under NASAA rules (note that this differs from SEC rules for broker-dealer records, most of which must be retained for 3 years). The first 2 years' worth of records must be kept at the adviser's principal office, where it is available for inspection.

An investment adviser that claims that it is a "fee only" adviser could NOT be compensated based on: Incorrect Answer A. a percentage of assets under management StatusB B. a flat annual or hourly fee for all work performed Correct Answer C. 12b-1 fees paid by mutual funds StatusD D. a performance based fee for wealthy investors C

Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,000,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

Which statement is TRUE regarding the anti-fraud provisions of the Uniform Securities Act? StatusA A. Trades of securities issued by the U.S. Government are exempt from the anti-fraud provisions of the Act StatusB B. Trades of securities issued by foreign governments or political subdivisions are exempt from the anti-fraud provisions of the Act StatusC C. Trades of securities which are registered are exempt from the anti-fraud provisions of the Act Correct D. All securities trades, whether the issue is exempt or non-exempt, fall under the anti-fraud provisions D

All securities transactions, whether exempt or non-exempt securities are involved, come under the anti-fraud provisions of the Act.

An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under management II a flat annual or hourly fee for all work performed for wealthy investors III 12b-1 fees paid by mutual funds IV a performance based fee for wealthy investors StatusA A. I, II, III StatusB B. III and IV Correct C. I, II, IV StatusD D. I, II, III, IV C

Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,000,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

All of the following persons are defined as federal covered advisers EXCEPT: A. advisers with $100,000,000 or more of assets under management B. advisers to investment companies C. advisers to sophisticated investors D. advisers not subject to State regulation C

Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These are so-called federal covered advisers; and they cannot be required to register with the State. The smaller advisers are only required to be registered at the State level. If an adviser has under $100,000,000 of assets, it must register in the State. However, there are a few States that do not require registration of investment advisers (New York and Wyoming), so to make sure than SOMEONE regulates them, these are also defined as "federal covered advisers."

Which statements are TRUE about an investment adviser with an office in State A? I If the investment adviser's only clients are investment companies, the investment adviser must register with the SEC II If the investment adviser's only clients are investment companies, the investment adviser must register in the State III If the investment adviser's only clients are insurance companies, the investment adviser must register with the SEC IV If the investment adviser's only clients are insurance companies, the investment adviser must register in the State A. I and III B. I and IV C. II and III D. II and IV B

Advisers to investment companies are "federal covered" - they must register with the SEC and cannot be required to register in the State (but the State can require a notice filing). The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and limit their compensation. Thus, they fall under federal regulation and cannot be regulated by the States. Advisers to insurance companies are not "federal covered" advisers - the Investment Advisers Act of 1940 was not worried about insurance companies being overcharged for investment advice, since they are normally "frugal" and are unlikely to overpay. So, advisers to insurance companies are only required to register at the State level.

An investment adviser has determined that it MUST register as a federal covered adviser. This means that the adviser: A. solicits clients on behalf of other investment advisers B. currently operates in at least 10 States C. has at least $110,000,000 of assets under management D. provides financial planning to customers for compensation as a regular business C

Advisers with $100,000,000 or more of assets under management must register with the SEC as "Federal Covered Advisers" and cannot be required to be registered in each State (though each State can require a notice filing). The SEC then issued an interpretation regarding this requirement. It states that advisers that have between $100,000,000 and $110,000,000 of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser is truly only required once an adviser has $110,000,000 or more of assets under management. Another SEC interpretation allows any adviser that has at least $25 million of assets under management and that operates in 15 or more States to register with the SEC. Since Choice B is an adviser operating in 10 States, this rule does not apply.

An investment adviser has determined that it can register as a federal covered adviser. This means that the adviser: I solicits clients on behalf of other investment advisers II currently operates in at least 15 States III has at least $25,000,000 of assets under management IV provides financial planning to customers for compensation as a regular business A. I and III B. I and IV C. II and III D. II and IV C

Advisers with $100,000,000 or more of assets under management must register with the SEC as "Federal Covered Advisers" and cannot be required to be registered in each State (though each State can require a notice filing). The SEC then issued some interpretations regarding this requirement. These are: Advisers that have between $100,000,000 and $110,000,000 of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser is truly only required once an adviser has $110,000,000 or more of assets under management. The SEC then issued interpretations regarding so-called "mid-size" advisers, which are advisers with at least $25,000,000 under management. These are: Mid-size advisers that are not required to be registered in a State where they have their principal office must register with the SEC (there are a handful of States that do not require investment advisers to register and this forces them to register with the SEC and be regulated by someone!); Mid-size advisers that do business in 15 or more States can choose to register with the SEC rather than having to register with, and be regulated by, 15 or more States.

If an agent receives a written customer complaint, the agent should: StatusA A. wait for the customer to telephone before attempting to resolve the complaint StatusB B. resolve the complaint without giving notice to the employing broker-dealer StatusC C. forward the complaint to the State Administrator for resolution Correct D. forward the complaint to the manager or principal of the firm for resolution D

All written customer complaints must be forwarded to the manager or principal of the firm for resolution. They cannot be "buried" by agents, hoping they will go away!

The Administrator may summarily deny or revoke the exemption of which type of security? Correct A. Non-Profit Charitable Organization Issues StatusB B. Securities guaranteed by a Canadian province StatusC C. Federal Credit Union Issues StatusD D. Insurance Company Issues A

Affinity fraud is a "hot button" issue for State Administrators. "Church" bond offerings are typically bought by members of that church who are usually quite trusting individuals, and there have been some big frauds that have occurred because they trusted another member of the church who offered them securities that turned out to be worthless. Therefore, the Administrator has the power to deny or revoke the exemption from registration given these issues under State law. On the other hand, Canadian Government securities, Federal Credit Union issues and Insurance Company issues are all exempt securities under State law where the exemption cannot be summarily denied by the Administrator (either because the issuer is "trusted," like the Canadian Government; or the issuer is regulated under other Federal or State laws, such as insurance companies, credit unions and banking institutions).

An agent's license remains in effect: StatusA A. for 30 days StatusB B. for 2 years unless terminated earlier Incorrect Answer C. until canceled by the agent or revoked by the administrator Correct Answer D. for a period of time that may vary from State to State D

Agent, broker-dealer, investment adviser, and investment adviser representative registrations are good for time periods that vary from State to State, though most States have a 1 year renewal period. Registrations expire on December 31st of each year, unless the Administrator designates another date.

Which of the following statements is (are) TRUE about the commingling of customer funds and securities with those of the broker-dealer and its agents? StatusA A. Broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities Incorrect Answer B. Agents are prohibited from commingling customer funds and securities with their own funds and securities Correct Answer C. Both of the above StatusD D. None of the above C

Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take customer cash or securities into his possession - this is a violation. He or she can have the customer send cash directly to the broker-dealer for credit to the customer's account, however.

Which of the following statements are TRUE regarding customer funds or securities and broker-dealer's funds or securities? I Broker-dealers are allowed to commingle customer funds or securities with their own funds or securities positions II Broker-dealers are prohibited from commingling customer funds or securities with their own funds or securities positions III An agent can take customer securities into his or her own possession to deliver to the broker-dealer IV An agent cannot take customer securities into his or her possession to deliver to the broker-dealer StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV D

Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.

Misstatements of material fact in a securities registration are violations of the Act for all of the following persons EXCEPT: StatusA A. issuers StatusB B. directors of issuers StatusC C. underwriters Correct D. agents D

Agents are not involved in the filing of registration statements for securities; therefore, they are not responsible for the contents of the registration statement. However, issuers, directors of issuers, and underwriters are all involved in preparing a securities registration statement and have liability for material omissions under the Act.

Which of the following conditions must be met in order for an agent to share in the gains and losses of a customer's account? I The agent and customer must enter into a written agreement to share in the account II The agent can only share to the extent of capital contributed by the agent, and must share in both gain and loss III The agreement must be approved by the broker-dealer before it takes effect StatusA A. I only StatusB B. II only Correct C. I, II, III StatusD D. None of the choices, since sharing in a customer's account is a prohibited practice C

Agents are prohibited from sharing in the gains and losses of a customer's account unless there is a written agreement between the customer and the agent which has been approved by the broker-dealer; and the agreement specifies that sharing in gain and loss is proportionate to the capital contribution of each participant in the account.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices are prohibited? I Guaranteeing a client against loss for non-exempt securities II Guaranteeing a client against loss for exempt securities III Borrowing money or securities from a customer IV Lending money or securities to a customer StatusA A. I and II StatusB B. III and IV StatusC C. II, III, IV Correct D. I, II, III, IV D

Agents may not personally guarantee a customer's account against loss, regardless of the securities being exempt or non-exempt. Borrowing money or securities from a customer; or lending money or securities to a customer; is a prohibited practice.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, prohibited business practices include: I being deliberately selective in the information told to a customer II giving inaccurate statements about an issuer's projected earnings III telling a customer that a company is about to be listed on the New York Stock Exchange without knowing the truth of the statement StatusA A. II only StatusB B. II and III StatusC C. III only Correct D. I, II, III D

All of the choices given are violations of the Act - being deliberately selective in the information told to a customer; giving inaccurate statements about an issuer's projected earnings; or telling a customer that an exchange listing is expected without knowing the truth of the statement.

Which of the following are violations under the Uniform Securities Act? I Failure to make reasonable inquiry as to the financial objectives and needs of a customer II Recommending a security without having a reasonable basis for making the recommendation III Failure to sufficiently describe the material facts and risks about a transaction StatusA A. I only StatusB B. II only StatusC C. III only Correct D. I, II, III D

All of the choices given are violations of the Act - failing to inquire as to the financial objectives and needs of a customer; recommending a security without having a basis in fact for making the recommendation; and failing to describe the material facts and risks of a transaction.

Which of the following individuals would be defined as an "agent" under the Uniform Securities Act? A. A secretary who works for an agent taking telephone messages to buy and sell securities B. A sales associate who accepts orders for limited partnership units being offered in a private placement C. An employee of a corporation who processes 401(k) contributions, issuing shares of the company's stock to the company's employees D. A Chief Financial Officer of the issuer that negotiates with an investment banker to set the terms of an additional share offering B

An "agent" is an individual that represents a broker-dealer or issuer effecting securities transactions. The Act exempts from licensing as an "agent," those individuals who do not deal with the public. Thus, individuals representing issuers who deal solely with underwriters or financial institutions are not defined as "agents" who must be registered, so the CFO negotiating the terms of a share offering with an underwriter is not an agent. The employee who represents the issuer selling securities of that issuer to that issuer's employees (as long as no commissions are paid) is not considered to be an agent, since he or she is not selling to the public. This is the case for the employee that processes 401(k) contributions and distributions. Therefore, we are left with Choices A and B as possibly correct - and arguments can be made for either one! Choice A - the secretary who takes "telephone messages to buy and sell securities" for an agent - sure sounds like a sales assistant that must be registered. Choice B - the sales associate that accepts orders for limited partnership units (which are securities) is clearly an agent. So we must go with Choice B. Note that in the actual exam, you will often be presented with 2 choices that are "close" and you must pick the better one!

Which of the following persons would be defined as an "agent" under the Uniform Securities Act? A. April Showers, an administrative assistant in the Treasurer's Department at Rainwear Industries, who sells Rainwear common stock to Rainwear employees under Rainwear's ESOP B. John Q. Public, a municipal employee that accepts tender offers from the public for new issues of general obligation bonds being sold by New York City C. Marvin Mercenary, the President of Capital Industries, who sells Capital Industries common stock to the public D. Ima Pigg, the Controller of PorkPie Products, who negotiates and sells a private placement of PorkPie stock to institutional investors C

An "agent" is an individual who represents a broker-dealer or issuer in effecting securities transactions. Under this definition, the President of Capital Industries offering common stock to the public is defined as an agent. The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified exempt securities. Thus, the employee of New York City offering its bonds is excluded from the definition. Also, the Act excludes from the definition of an "agent," any individual who represents an issuer offering securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans (ESOPs). The Act also EXCLUDES from the definition of an "agent," those individuals who represent issuers in "exempt transactions." These individuals do not have to be registered in the State. Generally, exempt transactions are trades that do not involve the public. Transactions with financial or institutional investors, as defined under the Act (including banks, financial institutions, trusts, insurance companies, investment companies, underwriters, and pension plans) are exempt because the investors are sophisticated, and are not deemed to require legislative protection.

Under the Uniform Securities Act, registration as an investment adviser is required for a(n): I broker-dealer who renders advice on securities for a fee II broker-dealer who makes recommendations of securities to customers III investment newsletter of a general circulation IV financial planner who creates an investment plan for a fee A. I and II only B. III and IV only C. I and IV only D. I, II, III, IV C

An "investment adviser" is defined as a person who gives advice about securities for compensation. If a broker-dealer receives no special compensation for making a recommendation (in other words, any charge for the recommendation is included in the broker's commission), then the broker-dealer is excluded from the definition of an "investment adviser." However, if the broker-dealer were to charge a separate fee for giving investment advice, then the firm is defined as an "investment adviser" and must register. Investment newsletters that do not render advice based upon the specific investment situation of a client are also excluded from the definition of an "investment adviser." Financial planners who give investment advice for a fee clearly fall under the definition.

The term "issuer" applies to a: A. person who proposes to sell a security B. director of a company that is selling new shares to the public C. trader executing trades off an exchange floor D. market maker in a security traded over-the-counter A

An "issuer" is defined as any person who issues, or proposes to issue, a security. Directors of companies that are selling new issues are not issuers. However they can be defined as "agents" of the issuer. Traders execute trades in the secondary market and have nothing to do with issuers. Market makers also trade stocks for their own accounts in the secondary market and have nothing to do with issuers.

An agent asks a customer to make an offer to sell a security to that agent's broker-dealer for value. Under the Uniform Securities Act, the agent has: Correct A. offered to buy the security StatusB B. offered to sell the security StatusC C. contracted to buy the security StatusD D. contracted to sell the security A

An "offer to purchase" is defined as every attempt to buy a security, or solicitation of an offer to sell a security, for value.

An "offer" or "offer to sell" would include which of the following? I A sale of a security II An offer of a security III An offer of an interest in a security IV The solicitation of an offer to buy a security Incorrect Answer A. I only StatusB B. II and III Correct Answer C. II, III, IV StatusD D. I, II, III, IV C

An "offer" or "offer to sell" is defined as any attempt to offer to dispose of a security; or a solicitation of an offer to buy a security or an interest in a security; for value. Do not confuse an "offer" (the attempt to sell) with a "sale" (which is a "done deal"). A "sale" is defined as a contract to sell or dispose of a security, or an interest in a security, for value.

Under the Uniform Securities Act, an "offer" or "offer to sell" include all of the following EXCEPT: StatusA A. an offer of a security Correct B. a sale of a security StatusC C. the solicitation of an offer to buy a security StatusD D. an offer of an interest in a security B

An "offer" or "offer to sell" is defined as any attempt to offer to dispose of a security; or a solicitation of an offer to buy a security or an interest in a security; for value. Do not confuse an "offer" (the attempt to sell) with a "sale" (which is a "done deal"). A "sale" is defined as a contract to sell or dispose of a security, or an interest in a security, for value.

Which of the following are defined as "Investment Advisers" under the Uniform Securities Act? I Lawyers who advise customers on investments for pension planning without taking a fee II Newspapers having an "Investments" column with a general circulation III Persons who take a fee for advising clients about securities IV Publisher of an investment newsletter that provides advice based upon each client's specific investment situation A. I and II B. I and III C. II and III D. III and IV D

An Investment Adviser is defined as a person who, for compensation, engages in the business of advising others, directly or indirectly, as to the value of securities or the advisability of investing in, buying, or selling securities. Under this definition, persons who take fees for advising clients about investments; and newsletters that give advice based upon the specific investment situation of clients, are defined as "investment advisers." Excluded from the definition are professionals such as lawyers and accountants who give incidental advice without taking a fee; and published media that give general investment advice.

An investment adviser that has no office in State B would be required to be registered in State B if a representative associated with that firm sells advisory services in State B to: Correct A. 6 relatives StatusB B. an investment advisory firm and 2 individuals StatusC C. an investment advisory firm and 6 private individuals, of which 3 are officers of an investment advisory firm StatusD D. 6 investment advisory firms A

An adviser that only sells its services to other investment advisers (who the law considers to be "professionals" and not in need of protection) is not required to be registered in a State, as long as the adviser is not physically located in that State. Officers of advisory firms to whom another adviser offers its services fall under the same "professional" exemption. Offering services to 5 individuals or less allows the adviser with no office in that State to claim the "de minimis" exemption in the State. There is no exemption for offering advisory services to relatives.

Under the Uniform Securities Act, which of the following actions by an agent is (are) prohibited during a sales presentation? I Predicting specific future investment results II Omitting non-essential information III Omitting facts that can influence the investment decision StatusA A. I only StatusB B. II and III only Correct C. I and III only StatusD D. I, II, III C

An agent cannot predict specific future investment results, since he has no basis for knowing what will happen in the future. Omitting facts that can influence an investment decision is prohibited, since these facts are "material." Omitting non-essential information is acceptable, since it is not needed to make an informed investment decision.

An individual who represents an issuer in selling securities of that issuer to the issuer's employees; and who does NOT earn a commission for this work; is defined under the Uniform Securities Act as a(n): A. agent B. broker-dealer C. issuer D. none of the above D

An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. Thus, only an individual who represents an issuer selling non-exempt securities (for example, that issuer's common stock) to the public is defined as an agent. An individual who represents an issuer in a transaction with existing employees without taking a commission is engaging in an exempt transaction (since no commission is taken) and therefore is excluded from the definition of agent. The example here is an issuer-employee that works in the pension department of the company and who places employee purchases of company shares into employee 401(k) accounts. This person also does not fall under the definition of an agent; a broker-dealer; or an issuer; so the best choice is D, none of the above.

An individual is employed by a broker-dealer on a salary basis, solely to give information relating to trades of securities, such as last sale price and size. This individual: A. must be registered as an agent in the State B. must be registered as an investment adviser representative in the State C. must be registered as a broker-dealer in the State D. is not required to be registered in the State D

An agent is defined as an individual who represents a broker-dealer or issuer in effecting, or attempting to effect purchases or sales of securities. It excludes employees that do not solicit trades or who solely perform clerical functions. Thus, a person who solely gives out quotes to customers does not have to be registered as an agent in the State, since this is a clerical function.

Who does NOT have to be registered in the State as an agent of a broker-dealer? A. A secretary that answers the phone and who takes orders B. A trading assistant who only accepts unsolicited customer orders C. A director of the company that is not involved in sales D. An officer of the company that oversees the firm's marketing C

An agent is someone who is engaged in effecting securities transactions with the public. It makes no difference if the transaction is solicited or unsolicited. Thus, the individual in both Choices A and B must be registered. A director of the broker-dealer that is not involved in sales is not an agent and is not required to be registered in the State as such. Note, however, that this individual is still named as an officer on the firm's State registration. An officer or director who oversees marketing is engaged in selling securities to the public and must be registered as an agent in the State.

Which statements are TRUE regarding licenses held by broker-dealers and agents? I If a broker-dealer's license is suspended, all of its agents' licenses are suspended II If an agent's license is suspended, the broker-dealer's license is suspended III If the broker-dealer's license is suspended, its agents may become associated with another broker-dealer A. I only B. I and III C. II and III D. I, II, III B

An agent's license is effective only if that individual is associated with a broker-dealer. If the broker-dealer's license is revoked, all of its agents' licenses are revoked. However, those agents may associate with another broker-dealer, and can be licensed through the new firm. If an agent's license is revoked, it has no effect on the broker-dealer.

Under the Uniform Securities Act, an agent's registration can be denied, suspended or revoked for all of the following reasons EXCEPT the: A. application is incomplete B. applicant was convicted of a securities misdemeanor 15 years ago C. application included misleading statements D. applicant lacks experience, and has not qualified by either training or demonstrating knowledge B

An agent's registration will be denied if the agent was convicted of a misdemeanor involving securities or monies; or any felony; within the past 10 years. Since this conviction occurred 15 years ago, the agent is beyond the time limitation and can re-register in that State. If the application is incomplete; includes misleading statements; or the applicant lacks experience and has not demonstrated either knowledge or taken required training, then registration can be denied by the Administrator.

Which of the following persons is required to register as an investment adviser under the Uniform Securities Act? A. An attorney who writes a legal opinion included in the registration statement filed with the State for a new non-exempt securities offering B. A broker-dealer who gives investment advice in the regular course of business executing transactions for customers C. An agent of a broker-dealer who gives investment advice as part of his or her regular duties and who charges a fee for such advice D. A broker-dealer that charges an annual flat fee to customers for both investment advice and portfolio trade executions D

An attorney that renders a legal opinion is not giving advice about investing in securities - the opinion covers the validity and legality of the securities offering. A broker-dealer is not considered to be an investment adviser unless it charges separately for advice. If the broker-dealer's compensation comes solely from commissions, then the broker-dealer does not fall under the investment adviser definition. On the other hand, if a broker-dealer offers an account that charges a flat fee or a fee as a percentage of assets - this is a "wrap" account that is an advisory product and registration at the State level as an adviser is required (thus, Choice D would have to register in the State as an investment adviser). Regarding Choice C, be careful! Choice C defines an "investment adviser representative" that would have to register at the State level - it does not define an "investment adviser."

A broker-dealer that is registered in New York and that is not registered in any other State may effect transactions in securities in the other States: I with any existing customer that is a New York resident II with any new customer that is a New York resident III while the customer is temporarily on vacation in the other State IV if the customer has relocated to the other State A. I and III B. I and IV C. II and III D. II and IV A

An exemption from registration is given to broker-dealers that have a place of business in a State (thus they must be registered in that State) that are dealing with pre-existing customers who are temporarily visiting other States. This addresses the fact that people travel widely throughout the United States and if that citizen who is on vacation in another State effects a securities transaction with his or her existing broker-dealer, then the State where the customer is vacationing will not require the broker-dealer and its agents to register. Note that the exemption does not apply to new customers; only to pre-existing customers.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged an advisory fee II The account may not be charged an advisory fee III The account may be charged a commission on each trade execution IV The account may not be charged a commission on each trade execution Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged both the advisory fee and a commission on each trade II The account may not be charged an advisory fee and a commission on each trade III This is an unethical practice IV This is not an unethical practice Incorrect Answer A. I and III Correct Answer B. I and IV StatusC C. II and III StatusD D. II and IV B

An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

An investment adviser can borrow money from which of the following customers? StatusA A. Unaffiliated investment adviser StatusB B. Investment company StatusC C. Accredited investor Correct D. Broker-dealer D

An investment adviser can only borrow money from a customer that is an affiliate; or a customer that is a financial institution that is in the business of making loans such as a bank or broker-dealer. Thus, an investment adviser could not borrow from a customer that is another unaffiliated investment adviser; could not borrow from a customer that is an investment company; and cannot borrow from a wealthy customer that is an accredited investor. However, the adviser would be permitted to borrow from a customer that is a broker-dealer. In this case, it makes no difference if the broker-dealer is affiliated or unaffiliated.

An investment adviser is exempted from registering in a State if the firm has no place of business in the State and has no more than: A. 1 client in the State in the preceding 12 month period B. 5 clients in the State in the preceding 12 month period C. 10 clients in the State in the preceding 12 month period D. 15 clients in the State in the preceding 12 month period B

An investment adviser is exempted from registration in a State if the firm has no place of business in that State; and the adviser has no more than 5 clients in that State (other than financial or institutional investors) within a 12 month period. This is known as the "de minimis" exemption.

Under the Uniform Securities Act, an investment adviser is permitted to take physical custody of a customer's monies or securities: StatusA A. under no circumstances StatusB B. only if the Administrator does not prohibit this by rule and the adviser has notified the customer that he has, or will take, custody Correct C. only if the Administrator does not prohibit this by rule and the adviser notifies the Administrator that he has, or will take, custody StatusD D. if the Adviser is properly registered with the State Administrator C

An investment adviser is permitted to take physical custody of a customer's monies or securities only if the Administrator does not prohibit this by rule; and if the adviser notifies the Administrator that he has, or will take, custody. In addition, the customer must be sent a quarterly statement of account by the adviser.

An investment adviser that takes custody MUST send quarterly account statements to which of the following? Correct A. Customer mailing address StatusB B. Qualified custodian mailing address StatusC C. Investment adviser mailing address StatusD D. All of the above A

An investment adviser that takes custody, under NASAA rules, must send quarterly account statements to customers, at the mailing address specified by the customer (an e-mail address is acceptable, as long as the adviser has proof of delivery of the e-mail).

Which of the following is (are) non-issuer transactions? I Purchase of a NASDAQ listed security II Purchase of a mutual fund share III Purchase of a limited partnership interest from the sponsor IV Purchase of an initial public offering from an underwriter A. I only B. I and II C. III and IV D. I, II, III, IV A

An issuer transaction is one where the issuer is either on the sell-side or the buy-side of the transaction. A trade of a NASDAQ listed security is a regular secondary market transaction - this is a non-issuer transaction - making Choice A the correct answer. The issuance of a mutual fund share, or redemption of a mutual fund share, is an issuer transaction. The issuer is receiving the proceeds from the purchase of the fund shares; and is paying the proceeds from a redemption of the fund shares. The sponsor is the issuer of a limited partnership offering - thus buying a limited partnership interest from the sponsor is an issuer transaction. Finally, the purchase of an initial public offering from an underwriter is also an issuer transaction, since the underwriter forwards the net proceeds of the offering to the issuer.

An issuer has filed a registration statement in the State proposing to offer 500,000 shares in a combined primary and secondary distribution, consisting of 300,000 newly issued shares and another 200,000 shares being offered by the officers of the firm. Under Uniform State Law, the: A. 500,000 shares being sold is an issuer transaction B. 300,000 shares being sold is an issuer transaction and the 200,000 shares being sold is a non-issuer transaction C. 300,000 shares being sold is a non-issuer transaction and the 200,000 shares being sold is an issuer transaction D. 500,000 shares being sold is a non-issuer transaction B

An issuer transaction is one where the proceeds of the offering go to the issuer - the primary distribution of 300,000 shares meets this definition. A "non-issuer" transaction is one where the proceeds of the offering go to someone other than the issuer. The secondary offering of 200,000 shares where the proceeds are going to selling shareholders (officers of the company) meets this definition.

Under the Uniform Securities Act, all of the following would be defined as an unsolicited transaction EXCEPT a(n): StatusA A. new customer calling an agent for the first time with directions to place a buy order for a specific security StatusB B. existing customer calling an agent with directions to place a buy order for a specific security that has not been recommended by that firm Correct C. existing customer placing an order to buy a security after receiving a preliminary prospectus about the issue from the broker-dealer StatusD D. existing customer placing an order to buy a security from the broker-dealer after seeing a tombstone advertisement for the issue in the newspaper C

An unsolicited transaction is one where the customer has not been directly contacted by the broker about that security, prior to the placement of the order. Thus, when a new customer calls an agent for the first time with directions to place a buy order for a specific security, this is unsolicited. When an existing customer calls an agent with directions to place buy order for a specific security that has not been recommended by that firm, this is unsolicited. When an existing customer places an order to buy a security after receiving a preliminary prospectus about the issue from the broker-dealer, this is a solicited trade. Finally, when an existing customer places an order to buy a security from the broker-dealer after seeing a tombstone advertisement for the issue in the newspaper, this is unsolicited, because legally, the announcement is not an offer of the security. The announcement is so limited in its information, that it is not legally considered to be an offer.

All of the following statements are TRUE about broker-dealers under the Uniform Securities Act EXCEPT a broker-dealer: A. that is registered in the State may also register as an investment adviser in the State B. is defined as a person who engages in securities transactions for customers or for its own account C. can be legally structured as a sole proprietorship, a partnership or a corporation D. is not required to register in a State unless it has an office in that State D

Any broker-dealer that has an office in a State; or one that solicits in a State; must register in that State (making Choice D false). A broker-dealer can also register as an investment adviser in the State (which it must do if it offers "wrap" accounts - which States consider to be advisory products). A broker-dealer is a person (in the "legal" sense of the word) that effects securities transactions for customer accounts or for its own account. Broker-dealers can be structured as any legal business form allowed in the State. These business forms are sole proprietorships, partnerships, and corporations.

Which of the following would be defined as an investment adviser under the Uniform Securities Act? A. U.S. Trust Corp. B. Washington Savings and Loan Corp. C. AIM Investment Advisers, a firm with $400,000,000,000 of assets under management D. Greenwich Investment Counsel, a firm that offers research and asset allocation services to accredited investors D

Any deposit-taking institution is excluded from the definition of an investment adviser under the Uniform Securities Act (USA), making Choice A and Choice B incorrect. Federal covered advisers are also excluded from the definition of an investment adviser under USA. Since any adviser with $100,000,000 of assets or more under management is a Federal covered adviser, Choice C is incorrect as well. There is no exclusion from the definition of an investment adviser for advisers that only deal with accredited (wealthy) investors. Note, however, that there is an exemption available for investment advisers that have no business location in the State and that only deal with other advisers or with institutions. This exemption is not available to advisers that deal with wealthy individuals, however.

An agent of a broker-dealer that works out of a branch office during the week sends e-mails to customers about potential investment ideas from his home when he works during weekends. Which statement is TRUE? StatusA A. These e-mails are not required to be retained because they originate from the agent's home and not from the agent's regular place of business StatusB B. These e-mails are not required to be retained because only physical, not electronic, records are subject to the record retention requirements StatusC C. These e-mails must be retained for a minimum of 1 year Correct D. These e-mails must be retained for a minimum of 3 years D

Any e-mails sent by an agent to customers, from any location, are a record that must be retained. The retention period is either that specified by the State Administrator; or in the absence of such a rule, they must be kept for the time period required under the Securities Exchange Act of 1934. The 1934 Act requires a 3 year retention period for these records.

Which of the following individuals that offer securities to the public on behalf of a broker-dealer must be registered in the State? I Full-time employees II Part-time employees III Independent contractors IV Officers A. I and II B. III and IV C. I, II, IV D. I, II, III, IV D

Any employee, either full-time or part-time, that offers securities to customers must be registered in the State as an agent of the broker-dealer. Just because an individual is an independent contractor and not an employee does not mean that they are not required to be registered in the State. Any individual who represents a broker-dealer selling securities is an agent who must be registered (unless an exemption is available). Note that many brokerage firms and broker-dealers that have agents that work out of their homes, legally structure these arrangements as "independent contractor" relationships and not as employment relationships. Then the employing firm is not responsible for health and pension benefits that are given to employees. However, these independent contractors are still defined as "agents" that must register in the State. And, of course, the agent's broker-dealer must be registered in the State. Finally, all officers of broker-dealers become registered in the State, regardless of whether they offer securities to the public or not, because they are named in the broker-dealer registration application filed in the State.

Which of the following are registered as agents of a broker-dealer in the State? I Director II Sales employee III Clerical employee A. I only B. I and II only C. II and III only D. I, II, III B

Any officer of a broker-dealer (a director is an officer) is automatically registered in the State when the BD registration becomes effective (these individuals are listed on the form). Any sales employee must be registered. Clerical employees with no sales function are not registered in the State as agents (also note that a Broker/Dealer can withdraw the "automatic registration as an agent" of an Officer or Director if that individual is not involved in sales or marketing, and thus can avoid paying the annual state registration fee for that individual.)

Which of the following are EXCLUDED from the definition of a broker-dealer? I Any person who effects securities trades for the account of others II Any person who effects securities trades for his own account III Any person with no place of business in the state who only deals with financial institutions IV Issuers of securities A. I and II B. III and IV C. I, II, III D. I, II, III, IV B

Any person who effects securities trades for the account of others or for the firm's account is defined as a broker-dealer. Persons with no place of business in a State who only deal with institutional investors are excluded from the definition - this exclusion is given because these are sophisticated investors who "know what they are doing" - the intent of the law is to protect the general public. Finally, issuers are excluded from the definition of a broker-dealer.

An application to register securities may be filed by all of the following EXCEPT a(n): StatusA A. Broker-Dealer Correct B. Agent StatusC C. Issuer StatusD D. Person on whose behalf the offering is to be made B

Applications to register a security in a State cannot be filed by agents. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).

As a condition of registration as an agent or principal of a broker-dealer or investment adviser which of the following statements are TRUE? I An examination may have to be taken by the agent II An examination may have to be taken by the principal III Higher passing grades can be required for principals than for agents StatusA A. I only StatusB B. II only Incorrect Answer C. I and II Correct Answer D. I, II, III D

As a condition of registration as an agent or principal of a broker-dealer or investment adviser, an examination may be required. The examination may be written or oral (oral exams are sometimes given to people with vision problems). Higher passing grades can be required for principals than for agents on these examinations - for example, some States have a passing grade of 80% on the Series 63 or 66 for principals of broker-dealers; while agents pass with a 72% for Series 63 and 73% for Series 66.

As a condition of registration as an agent or principal of a broker-dealer, all of the following statements are true EXCEPT: StatusA A. an oral examination may be required StatusB B. a written examination may be required StatusC C. both an oral and written examination may be required Correct D. there is no requirement for either a written or oral examination to be taken D

As a condition of registration as an agent or principal of a broker-dealer or investment adviser, an examination may be required. The examination may be written or oral, or both (oral exams are sometimes given to people with vision problems). Higher passing grades can be required for principals than for agents on these examinations - for example, some States have a passing grade of 80% on the Series 63 or 66 for principals of broker-dealers; while agents pass with a 72% for Series 63 and 73% for Series 66.

Under Uniform State Law, as adopted in most states, an agent may be affiliated with more than one broker-dealer at the same time: A. if both broker-dealers are under common control B. if each broker-dealer has consented to the arrangement in writing C. if the Administrator consents to the arrangement in writing D. under no circumstances A

As a general rule, an agent cannot be affiliated with more than 1 broker-dealer at the same time (though a few States do permit so-called "dual registration"). However, it is permitted for an agent to be affiliated with more than 1 broker-dealer when both broker-dealers are under "common control." For example, an insurance company may have a mutual fund broker-dealer and a separate general securities broker-dealer. An agent of the insurance company could be affiliated with both broker-dealers without violating the Act.

Which of the following is NOT allowed under the Uniform Securities Act? A. An agent registered with a broker-dealer also is a licensed insurance agent at a life insurance company B. An agent registered with a broker-dealer also is a licensed real estate agent at a real estate company C. An agent registered with a broker-dealer also is licensed as an agent for a mutual fund dealer D. An agent is registered with two affiliated broker-dealers who have an office in the same location C

As a general rule, an agent cannot be registered with two different broker-dealers at the same time under the Uniform Securities Act. (Please note, however, that a few States still permit so called "dual registration" but this is the exception to the general pattern). Since an insurance company or a real estate company is not defined as a broker-dealer, there is no problem with an agent working for either of these firms. A mutual fund dealer is defined as a broker-dealer since the firm effects securities transactions. An agent cannot be registered at the same time with one broker-dealer and another mutual fund dealer. Two "affiliated" broker-dealers at the same location are treated as one broker-dealer, since they are under common control. Thus, an agent could be registered with both affiliated broker-dealers without a problem.

The Administrator: Incorrect Answer A. is empowered to issue stop orders retroactively and can vacate them retroactively StatusB B. is empowered to issue stop orders retroactively and cannot vacate them retroactively Correct Answer C. cannot issue stop orders retroactively but can vacate them retroactively StatusD D. cannot issue stop orders retroactively and cannot vacate them retroactively C

As a general rule, the Administrator cannot issue an order stopping the sale of a security, or denying or revoking a registration, retroactively. However, if the Administrator were to issue a stop order because of something trivial, like not paying the required fee, then once the fee is paid, the stop order would be vacated, and this is done retroactively to the date of the original stop order.

The Administrator is empowered to require the registration of a: StatusA A. municipal bond of another State sold in that State StatusB B. U.S. Government bond sold in that State StatusC C. Federal covered security sold in that State Correct D. security sold in an exempt transaction in that State D

As a general rule, the Administrator cannot revoke the exemption from registration granted to the specific "exempt" securities listed in the Uniform Securities Act, such as U.S. Governments, Agencies, or Municipals. In addition, the State Administrator cannot require the registration of "federal covered" securities in the State (but can require a "notice" filing). (Also note that the Administrator does have the power to compel registration of non-profit issues, such as Church Bonds, due to major abuses that have occurred with these.) However, the Administrator can deny the claim of an exempt transaction and make that security be registered.

Which of the following statements is (are) TRUE about registration as an agent for a broker-dealer? I An unregistered agent can solicit business in a State once the agent's broker-dealer has been registered in that State II A registered agent can only sell securities that are registered in that State or that are exempt from registration III If an agent is not registered in a State, the agent may sell exempt securities in that State StatusA A. I only Correct Answer B. II only Incorrect Answer C. II and III StatusD D. I, II, III B

As an agent, one cannot solicit business in a State unless both the agent and the broker-dealer are registered in the State. This is true, even if the agent wishes to sell exempt securities - the agent must still be registered, though the security is not. Thus, Choices I and III are incorrect. Choice II is true - an agent is only permitted to sell securities that are registered in a State; or that are exempt from registration. It is prohibited for an agent to sell unregistered non-exempt securities.

Which of the following are defined as correspondence? I Written letter to a client II E-mail III Instant message IV Group e-mail StatusA A. I only StatusB B. II and IV only Correct Answer C. I, II, III only Incorrect Answer D. I, II, III, IV C

Correspondence is an item of an individual nature to a customer and includes a written communication, an e-mail or an instant message. A group e-mail would fall under the definition of "sales literature." Sales literature is defined as a communication to 25 or more existing or prospective customers.

The purpose of the Uniform Securities Act is to protect investors from: A. investment fraud B. aggressive sales pitches C. financial loss D. moral turpitude A

The purpose of the Uniform Securities Act is to protect the public from investment fraud. (By the way, moral turpitude is a gross violation of the standards of moral conduct - it has nothing to do with offering securities!)

Which of the following is NOT defined as correspondence? StatusA A. Written letter to a client StatusB B. E-mail StatusC C. Instant message StatusD D. Group e-mail D

Correspondence is an item of an individual nature to a customer and includes a written communication, an e-mail or an instant message. A group e-mail would fall under the definition of "sales literature." Sales literature is defined as a communication to 25 or more existing or prospective customers.

Which of the following would be defined as a broker-dealer in State A? A. The municipal bond department of a bank located in State A B. A person who gives advice about investing in securities in State A C. A broker-dealer located in State B who has an existing active customer who moves to State A D. An agent of a broker-dealer who effects trades in securities in State A C

Banks are excluded from the definition of a broker-dealer, making Choice A incorrect. Choice B defines an investment adviser; not a broker-dealer. Choice D defines an agent of a broker-dealer; not the broker-dealer itself. Choice C gets at an interesting point. Because the customer has moved and is now located in another State (State A), and the customer is "active" -meaning the customer is trading securities, then the firm must be registered as a broker-dealer in State A (and the agent servicing the customer account must be registered in State A as well).

The State Administrator has the power to do which of the following to a federal covered adviser? A. Increase the number of audits that the Administrator makes of the adviser B. Establish minimum financial requirements that are more stringent than the requirements of the Investment Advisers Act of 1940 C. Require the adviser to file financial reports other than those filed under the Investment Advisers Act of 1940 D. Require the adviser to keep records other than those required under the Investment Advisers Act of 1940 A

Because of federal supremacy, the State Administrator cannot require anything of a federal covered adviser that is already covered under the Investment Advisers Act of 1940. The State Administrator can, however, audit any adviser, federal covered or not, who does business in the State.

For an adviser to charge a performance fee, the Investment Advisers Act of 1940 requires which minimum financial standards from customers? I A customer that deposits $1,000,000 or more with the adviser II A customer that deposits $2,000,000 or more with the adviser III A customer with a $1,000,000 or higher net worth IV A customer with a $2,000,000 or higher net worth A. I and III B. I and IV C. II and III D. II and IV B

Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,000,000), NASAA cannot prohibit the charging of a performance fee for these customers. Remember that Federal law supersedes State law; in the absence of a Federal law, then only that State law applies.

A broker-dealer is physically located and registered in State A. The broker-dealer has an existing client in State A who is a student finishing undergraduate studies. The client has just been accepted to medical school in State B. Which statement is TRUE about the broker-dealer contacting the client while she is in medical school in State B? A. The broker-dealer can contact the client while she is in medical school in State B without having to register in State B using the "existing customer" exemption B. The broker-dealer can contact the client while she is in medical school in State B without having to register in State B because the client is attending a not-for-profit educational institution C. The broker-dealer can contact the client while she is in medical school in State B without having to register in State B because of the reciprocity agreements that all States maintain regarding registration requirements D. The broker-dealer must be registered in State B in order to contact the client while she is in medical school in State B D

Because the client will be in State B for an extended period of time (medical school is 4 years), this is not a "vacation" and the broker-dealer cannot rely on the "vacationing customer" exemption. To continue to do business with this client, the BD (an agent) must be registered in State B.

To raise new capital for the company, a company director decides to sell unissued shares directly to employees of the company. The director earns a commission for selling these shares. This director is defined as a(n): A. agent B. broker-dealer C. issuer D. non-issuer A

Because the company is issuing these shares and the proceeds are going to the issuer, this is an issuer transaction. Because an agent is defined as an individual who effects securities transactions for either a broker-dealer or an issuer, the directors are considered to be agents of the issuer and must be registered.

Which of the following are considered to be an "offer to sell" a security? I An offer of a security that will be given as consideration for the purchase of another security II An offer of the gift of an assessable security III An offer of a stock dividend by an issuer to holders of that security IV The offer of rights to purchase an underlying security StatusA A. III only StatusB B. I and II StatusC C. IV only Correct D. I, II, IV D

Before an "offer to sell" a security is made in a state, the issue must either be registered in that state, or must be sold under an available exemption. A stock dividend given by an issuer is excluded from the definition of an "offer to sell" a security, since the holder really is receiving "nothing" - after the dividend is received, he or she holds more shares, with each one being worth proportionately less. Included in the definition of an "offer to sell" is: The gift of an assessable security (which obligates the recipient to make future payments) A security that is "given" in consideration for the purchase of another security, since by tying the "gift" to the purchase of the other security, that person is really buying both, and both must be registered in that State A rights or warrants offering on an underlying security, since the rights give the holder the right to buy the underlying stock from the issuer at a pre-determined price.

Under the Uniform Securities Act, if an offer of not-for-profit "church" bonds is to be made in a State: I the Administrator can require that a Notice Filing be made in the State II the Administrator can require that the issue be Registered by Coordination in the State III the Administrator can require the filing of any promotional materials used in connection with the offer and sale of the issue IV the Administrator can disallow the exemption without providing any reason for such a denial Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

Bonds issued by not for profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: o can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering o can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) o can disallow the exemption, providing the grounds for denial or suspension o can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering) Note that because not for profit issues are exempt securities under Federal law, there would be no Federal registration filing that could be "coordinated" with a State registration.

In order for a "church" bond issue to be exempt, the Administrator: Incorrect Answer A. must approve of the issue before it is offered to any resident of that State Correct Answer B. must not disallow the exemption within a stated time period after a Notice Filing is made StatusC C. can require that the issue only be offered to congregants of that church StatusD D. can require that the issue be registered in the State by Coordination B

Bonds issued by not for profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: o can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering o can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) o can disallow the exemption, providing the grounds for denial or suspension o can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering) Note that because not for profit issues are exempt securities under Federal law, there would be no Federal registration filing that could be "coordinated" with a State registration. Finally, the role of the Administrator is to ensure that any purchases of new issues in the State receive full and fair disclosure in order to make a proper investment decision. Making a proper filing with the State does not constitute approval of the Administrator.

Bonds issued by a church located in Sullivan County, in the State of Indiana, are being offered to congregants of affiliated churches in the State of Illinois. Which statement is TRUE? Incorrect Answer A. The bonds are only exempt securities if the offer is made to church congregants in Illinois and not to the general public StatusB B. The bonds are only exempt securities when being offered to residents of the State of Illinois Correct Answer C. The bonds are only exempt securities in either Indiana or Illinois, as long as a notice filing specifying the material terms of the offer is made in the State StatusD D. The bonds are non-exempt securities that must be registered in each State where offered C

Bonds issued by not-for-profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: o can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering o can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) o can disallow the exemption, providing the grounds for denial or suspension o can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering)

A broker-dealer is offering an IPO to the public. The broker-dealer is permitted to sell the shares to: I its unregistered employees II its registered employees III prospective customers IV its existing customers StatusA A. I and II only Correct B. III and IV only StatusC C. I and IV only StatusD D. II and III only B

Broker-dealers and their employees (whether registered or unregistered) are prohibited from buying IPO shares at the offering price in the underwriting. They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding the issue from sale to the public" with the intention of taking a "free ride" on the likely upward price movement once the issue opens for trading in the market. This is a violation called "free riding and withholding."

Instead of charging a customer a per trade commission charge, a broker-dealer wants to charge its customers that are active traders a flat monthly fee equal to 8% of the value of monthly trades. The broker-dealer identifies its active traders and tells them of the new arrangement. Which statement is TRUE? StatusA A. The fee arrangement is permitted because the customers were notified of the change Correct B. The fee arrangement is prohibited because the monthly fee is excessive StatusC C. The fee arrangement is prohibited because broker-dealers are only permitted to charge commissions for trades performed StatusD D. The fee arrangement is permitted without restriction B

Broker-dealers are permitted to charge a flat fee for trade executions instead of a per trade commission charge. Such an arrangement is appropriate for a customer that is an active trader, where the flat charge would be less than the total charged on a per trade commission basis. However, any fees charged cannot be excessive - and a fee equal to 8% of the value of trades is clearly excessive.

The State Administrator can require all of the following of broker-dealers to maintain registration EXCEPT: A. filing of advertisements and circulars B. periodic financial reports C. maintenance of records for 3 years D. semi-annual registration renewal D

The Act provides that registrations are good for 1 year time periods, though each Administrator may vary this from State to State. To maintain registration, the Administrator can require periodic financial reports; maintenance of specified records; and the filing of advertisements and sales literature.

Which of the following information would be found in a registration statement for a security that is going to be registered by qualification in a State? I Current equity and debt capital of the issuer II Description of issuer's business, product lines and competitive environment III Use of proceeds of the offering IV Offering terms StatusA A. I and III only StatusB B. II and IV only StatusC C. I, II, III only Correct D. I, II, III, IV D

Consider this to be a learning question: Any registration statement for a securities offering includes: o Current balance sheet and income statement; o Business description; o Use of proceeds of offering; o Offering Terms; o Legal Opinion; o Accountant's Opinion.

A Canadian broker-dealer has some clients who move to Florida for the winter. The agent who services their accounts wants to be able to contact them when they are in Florida. Which statement is TRUE? A. Neither the Canadian broker-dealer nor the agent are required to be registered in Florida B. There is no requirement for the Canadian broker-dealer to be registered in Florida, but the agent must be registered in Florida C. The Canadian broker-dealer must be registered in Florida, but there is no requirement for the agent to be registered in Florida D. Both the Canadian broker-dealer and the agent must be registered in Florida A

Canadian broker-dealers with no office in a State are allowed to effect securities business with existing customers who are "vacationing" in a State, without having to be registered in that State. A NASAA interpretation that only applies to Canadian broker-dealers says that Canadian BDs can contact existing customers who are temporarily residing in the United States without having to register in a State, as long as the client is in the U.S. for less than ½ year and intends to return to Canada. Thus, the Canadian BD can contact existing clients who are spending the winter in Florida without having to register in Florida. Note that the Canadian BD cannot contact prospective clients in the U.S - only existing clients can be contacted. And also note that this rule does NOT apply to a U.S. BD registered in one State that contacts an existing client who is temporarily in another State. In this case, if the client spends more than 30 days in the other State, that BD must be registered in the other State.

Which of the following information would NOT be found in a registration statement for a security that is going to be registered by qualification in a State? A. Current equity and debt capital of the issuer B. Description of issuer's business, product lines and competitive environment C. Use of proceeds of the offering D. Analysis of company profitability as compared to industry norms D

Consider this to be a learning question: Any registration statement for a securities offering includes: o Current balance sheet and income statement; o Business description; o Use of proceeds of offering; o Offering Terms; o Legal Opinion; o Accountant's Opinion. There is no analysis of company profitability in the registration statement as compared to other companies in the industry.

A Chinese Wall must be maintained by a broker-dealer between all of the following EXCEPT: Correct A. Sales and Back Office Operations StatusB B. Research and Trading StatusC C. Investment Banking and Research StatusD D. Investment Banking and Sales A

Chinese Walls to stop information flow must be maintained between: o Investment Banking and each of the following: Trading, Sales and Research o Trading and each of the following: Research and Sales The intent of the information barriers around investment banking is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups. The intent of the information barrier between research and trading is to stop a trading desk from getting advance knowledge of a research report that the firm will issue and trading on that information before it is publicly released. The intent of the information barrier between trading and retail sales is that if retail brokers know in advance of a broker-dealer's trading strategy, they could use the information to front-run those trades.

Which statement CAN be made to a customer under the provisions of the Uniform Securities Act? Incorrect Answer A. "If you purchase 20 year 6% Treasury Bonds at par, you are guaranteed to earn a 6% yield on the investment" StatusB B. "You should buy ABCD common stock now at $20 per share because it will go up to $35 per share once it publishes its next quarterly earnings report" StatusC C. "This REIT pays a 4% dividend. Buying it now means that you will receive the next scheduled dividend payment that will be made in 1 week" Correct Answer D. "Your investment portfolio needs to be rebalanced - you have appreciated stocks that should be sold, with the proceeds invested in long term corporate bonds" D

Choice A is prohibited because the 6% return is only guaranteed if the customer holds the bond to maturity. If the bond is sold prior to maturity, the market value at the time of sale can result in either a gain or loss on the bond that will change the yield. Choice B is prohibited because the agent is predicting a future price for the stock - and no one knows what the future price of a stock will be! Choice C is the prohibited practice of "selling dividends" - that is, inducing a customer to buy stock in order to receive a dividend. If the customer waits until after the "ex-dividend date" to buy the stock, the price is reduced for the dividend that the customer will no longer receive - so the net effect is a "wash." Choice D is just fine - telling a customer that his or her portfolio should be rebalanced (as long as the statement is truthful) is probably good advice.

Which statement is FALSE regarding registration and licensing requirement for broker-dealers and investment advisers in a State? StatusA A. A broker-dealer with no place of business in a State that solely offers securities to non-institutional customers must register StatusB B. A broker-dealer with no place of business in a State that solely offers municipal securities must register Correct C. An investment adviser with no place of business in a State that only deals with institutional customers must register StatusD D. An investment adviser with no place of business in a State that offers its services to a limited number of non-institutional customers is exempt from registering in the state C

Choice A is true - a broker-dealer with no place of business in a State that deals with non-institutional clients in the State (this means the general public) must be registered in the State. Choice B is true - a broker-dealer with no place of business in a State that solely offers exempt securities must also register, as must its agents. "Exempt" only means that the securities being offered are exempt from State registration - the broker-dealers and agents that sell exempt securities must still be registered in the State. Choice C is false - an investment adviser with no place of business in a State that only deals with institutional clients is EXEMPT from registration. If the adviser with no office in the State offers its services to the general public in the State, then it must register. Choice D is true - an adviser with no place of business in a State that offers its services to no more than 5 prospective customers in the State within a 12 month period is exempt from registering (the de minimis exemption).

A 75-year old investor calls his securities agent, wanting to buy 1,000 shares of a high risk stock. To fund the investment, the customer is going to liquidate some certificates of deposit that he uses for current income. The registered representative should: StatusA A. execute the trade as instructed StatusB B. refuse to execute the trade since it is not suitable Correct C. explain to the customer that the trade is not suitable and get a signed non-solicitation letter from the customer before accepting the order StatusD D. refer the customer to the manager C

Clearly the trade is unsuitable for the customer, and he must be told this. If the customer still insists that the trade be performed, follow the customer's instructions but get a signed "non-solicitation" letter from the customer for this trade. If the investment turns sour, the agent is protected from customer complaints since he has a written statement from the customer that the agent did not solicit this trade.

Which of the following must be included in an investment advisory contract under NASAA rules? I The formula for computing the advisory fee II The amount of prepaid fees to be returned if the contract is terminated early III Whether the contract grants discretionary authority to the adviser IV Disclosure that the fee for managing equity securities may be higher than for managing fixed income securities StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III only Correct D. I, II, III, IV D

Consider this to be a learning question. The advisory contract, under NASAA rules, must include: o Description of services provided; o Term of contract; o Formula for computing fees; o Amount of prepaid fees to be returned if contract is terminated early; o Assignment of the contract is not permitted unless the customer approves; o Whether the contract grants discretionary authority to the adviser; and o Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

All of the following are exempt securities under the Uniform Securities Act EXCEPT: StatusA A. U.S. Government bonds StatusB B. Investment grade commercial paper maturing within 9 months StatusC C. Bank issues Correct D. Corporate stocks D

Corporate stocks are not exempt under the Uniform Securities Act and thus must be registered in the State. U.S. Government bonds, bank issues, and commercial paper maturing within 9 months and rated in one of the 3 highest categories, are exempt securities.

A market maker in ABCD stock is currently quoting the stock in the OTCBB at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to sell 800 shares of ABCD at $42.50, the market maker: StatusA A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) Correct B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) StatusC C. must send the order to a stock exchange floor for execution StatusD D. is not required to take any action B

Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently offering the stock at $43.00 - this is the price at which he is willing to sell up to 1,000 shares. Since this customer is willing to accept less to sell - $42.50 for up to 800 shares, the customer's offer must be displayed in the market. Note that NYSE, AMEX (NYSE-MKT), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.

All of the following may be required to be filed with the Administrator EXCEPT: StatusA A. Advertising StatusB B. Sales Literature StatusC C. Circulars Correct D. Customer Complaints D

The Administrator can require the filing of advertising, sales literature, pamphlets, prospectuses, form letters, etc. used by any registrant. There is no requirement to file customer complaints with the Administrator.

All of the following securities are exempt from registration under the Uniform Securities Act EXCEPT: A. Railroad common stock B. Municipal bonds C. Canadian common stocks D. Foreign government bonds C

Foreign government securities (that means debt, since governments don't issue stock) are exempt. Foreign stocks, however, are non-exempt, and must be registered with the State. Railroad common stock is exempt, since common carriers regulated by the Interstate Commerce Commission (ICC) are exempt; so are municipal bonds and foreign government bonds.

All of the following would be defined as a "sale" or "offer" under the Uniform Securities Act EXCEPT: Correct A. a stock dividend given to existing shareholders StatusB B. a bonus of stock that is given for completing a securities purchase StatusC C. stock warrants given to purchasers of a debt offering StatusD D. subscription rights given to existing shareholders for a different class of securities than originally purchased A

Dividends paid to existing shareholders are specifically excluded from the definition of a "sale" or "offer to sell." The bonus of stock given for completing a securities purchase is a "sale" since the price of the securities would have taken into account the value of the stock "bonus" - thus, the stock bonus was also sold for value. Stock warrants given to the purchasers of a debt offering, and subscription rights given to holders of another class of securities, are also considered to have been "sold" using the same logic.

A broker-dealer located in State A has all of its agents registered in State A. The broker-dealer has no office in neighboring State B. The broker-dealer would be required to register in State B if its clients in State B consisted solely of: A. broker-dealers B. investment advisers C. XXX D. deposit taking institutions C

If a broker-dealer has no office in a State; and it only deals with institutional customers in that State, then it is excluded from registration in that State. Broker-dealers, investment advisers and deposit taking institutions such as banks are all institutional clients. On the other hand, the sale of securities to government employees of State B would require that broker-dealer to be registered in the State, since the broker-dealer is now dealing with "average investors."

Which of the following is NOT EXCLUDED from the definition of an "investment adviser"? A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan C

EXCLUDED from the definition of an investment adviser are: investment adviser representatives, broker-dealers, depository institutions (banks, trusts, savings and loans), professionals (lawyers, accountants, teachers, engineers) and newsletters that do not render advice based upon a specific client situation. Insurance companies and investment companies are NOT excluded from the definition (though they may be exempt from registration under certain circumstances).

An individual who previously worked as an agent at a broker-dealer leaves the employ of that firm and wishes to start his own broker-dealer as a sole proprietorship. In order to register in the State, the Administrator will require the filing of a(n): Incorrect Answer A. income statement StatusB B. federal tax return Correct Answer C. statement of financial condition StatusD D. W-2 C

Each applicant for initial registration as either an investment adviser or broker-dealer must file an original statement of financial condition (a balance sheet) with the Administrator, along with an oath or affirmation made by the applicant that the financial statement is true and current.

An individual sells the securities of a federal chartered bank. This individual will be EXCLUDED from the definition of an agent if the individual: A. is the employee of a broker-dealer B. is the employee of the bank C. only offers the securities to 5 or fewer investors D. only offers the securities in 5 or fewer states B

Employee of ISSUERS (not employees of broker-dealers) that sell specified exempt securities, are excluded from the definition of an agent. These include employees of the U.S. Government selling Treasury securities; employees of municipalities selling municipal securities; and employees of banks, savings institutions and trust companies, selling that depository institution's securities. For example, the employee of a bank selling that bank's CDs (which are defined as a security) is excluded. The offer of advisory services (and in most States, securities as well) to 5 or fewer investors in a State is an exemption from investment adviser (or broker-dealer) registration, not agent registration. Finally, Choice D tries to confuse you with a variation on this "de minimis" exemption. It is only available to investment advisers (and in many States to broker-dealers as well) with no office in a State, that have 5 or fewer clients in the State in a year. It does not apply if offers are made in 5 or fewer States.

Under the Uniform Securities Act, all of the following are defined as investment adviser representatives EXCEPT a(n): A. employee who sells advisory services B. officer of the advisory firm overseeing client portfolios C. clerical employee of the advisory firm D. employee of the advisory firm who performs research on securities C

Employees who perform clerical or ministerial duties are excluded from the definition of an investment adviser. This term includes any employee or officer of the advisory firm that sells advisory services, performs research, makes recommendations or manages portfolios.

An agent representing a broker-dealer lives in one State and wishes to solicit business in a neighboring State. Which statement is TRUE? A. The agent does not have to register in the neighboring State if his or her transactions are limited to securities exempted under the Uniform Securities Act B. The agent does not have to register in the neighboring State if no commissions or remuneration is received on these trades C. The agent does not have to register if he or she solicits 10 or fewer customers in a 12 month period in the neighboring state D. The agent, and the employing broker-dealer, must be registered in the neighboring state D

Even if a transaction is exempt (which means that the securities that are the subject of the trade need not be registered), the agent handling the trade must be registered with the State. The fact that the agent will not earn any commissions for effecting trades in the neighboring State has no bearing on his requirement to be registered. The "de minimis" exemption for broker-dealers (and agents) is only available in a minority of states and, for those states that have it, generally limits a broker-dealer (or an agent) to no more than 3 clients in the State in a year. This agent is soliciting 10 clients in a neighboring State, so the "de minimis" exemption would not apply. The only reason for an agent not to register is if that individual does not fall under the definition of "agent," or if his broker-dealer is exempt from licensing in that State.

A bank in a State is making an offering of its own securities, which are exempt, to the public. Which of the following would NOT be required to be registered as an agent in the State? A. An employee of a broker-dealer who is offering the securities to the public B. An employee of the bank who is offering the securities to the public C. An employee of a broker-dealer who is offering the securities only to institutional investors D. All of the choices above are not required to be registered B

Even though the securities are exempt, an employee of a broker-dealer that offers the securities to the public must be registered in the State. An employee of an issuer (as opposed to an employee of a broker-dealer) is exempt from registration if the employee is selling specified exempt securities, which include bank securities. As illustrations for this exclusion, consider the following: An individual who represents Wells Fargo Bank (the issuer), selling certificates of deposit (an exempt issue) to the public, is not required to be State registered. An individual who represents Cowen and Co. (a broker-dealer), selling commercial paper to the public (an exempt issue), must be registered in the State (unless another exemption is available).

*** All of the following are EXCLUDED from the definition of a broker-dealer under the Uniform Securities Act EXCEPT a firm with no place of business in the State that: A. has a few clients in the State with a de minimis exemption B. deals exclusively with issuers of securities C. deals exclusively with other broker-dealers D. deals exclusively with insurance companies A

Excluded from the definition of a broker-dealer under Uniform State Law are persons with no place of business in the State that effect transactions exclusively with issuers; other broker-dealers; depository institutions; insurance companies; investment companies; and pension trusts. These persons are not dealing with the general public. Note that if the broker-dealer has an office in the State and deals with any of these persons - it would be required to register in that State. Now for the picky part! ** - The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State. Thus. Choice A qualifies for the exemption and does not have to register because it is exempt from registration (as opposed to being excluded from the definition and therefore not being required to register). Thus, Choice A is defined as a broker-dealer, but it is one that is exempt from registration in that State. Yes, this must be known for the exam.

Under the Uniform Securities Act, which of the following persons with no place of business in a State is EXCLUDED from the definition of an "Investment Adviser"? A. A person who gives advice for a fee about public utility mortgage bond issues B. A person who gives advice for a fee about municipal securities C. An insurance company that renders advice about securities for a fee to its clients D. A trust that receives special compensation for rendering advice about securities D

Excluded from the definition of an investment adviser are: o Investment Adviser representatives (agents) o Depository Institutions (banks, savings and loans, trusts) o Professionals (accountants, lawyers, teachers, engineers, whose performance of these services is wholly incidental to their professional practice) o Broker-dealers o Newsletters that give general investment advice o Federal covered advisers Thus, the trust company (Choice D) is excluded from the definition of an investment adviser. Note that none of the other choices fits the definition of a Federal covered adviser, and that insurance companies that give advice (Choice C) are not afforded an exclusion.

Which of the following persons with no place of business in a State, is EXCLUDED from the definition of an "Investment Adviser"? A. A bank that receives special compensation for rendering advice about securities B. A person who gives advice for a fee about investment grade corporate bonds C. A person who gives advice for a fee about municipal securities D. A person who gives advice about securities for a fee solely to lawyers and accountants A

Excluded from the definition of an investment adviser are: Investment Adviser representatives (agents) Depository Institutions (banks, savings and loans, trusts) Professionals (accountants, lawyers, teachers, engineers, whose performance of these services is wholly incidental to their professional practice) Broker-dealers Newsletters that give general investment advice Federal covered advisers Thus, the bank (Choice A) is excluded from the definition of an investment adviser. A person who gives advice about corporate or municipal securities is not on this list; and therefore is not excluded. While a lawyer or an accountant who gives incidental advice about securities is excluded from the definition of an investment adviser; a person who gives advice about securities to lawyers or accountants is defined as an investment adviser. Do not confuse this exclusion with those persons who are defined as investment advisers; but whose type of work exempts them from registration. For example, an adviser with no place of business in the State, who only gives advice to "professional investors," is exempt from registering in the State. There is no State exemption available to advisers who only give advice on certain exempt securities such as municipals. (Please note, however, that a person who gives advice solely about U.S. Government securities is defined as a Federal covered adviser, and would be excluded from registration in the State.)

All of the following securities are subject to registration under the Uniform Securities Act EXCEPT: StatusA A. Subordinated debentures of a Canadian Paper company StatusB B. Preferred stock of a bank holding company Correct Answer C. Equipment trust certificate of a railroad subject to Interstate Commerce Commission regulations Incorrect Answer D. Limited partnership investing in issues of Federally chartered savings and loans C

Exempt securities under the Uniform Securities Act include: o Canadian Government Securities (not common stocks of Canadian companies); o Bank Issues (not securities issued by bank holding companies!); and o Savings and Loan issues (not limited partnerships that invest in such securities!). Thus, Choices A, B, and D are all non-exempt and must be registered under Uniform State Law. Choice C, securities issued by common carriers subject to Interstate Commerce Commission regulation, are an exempt issue.

If an issuer offers a Federal Covered security in a State, the State Administrator may: Correct A. require the issuer to pay a filing fee in the State StatusB B. require the issuer to register the issue in the State StatusC C. deny the issuer the right to offer the security in the State if it is in the public good StatusD D. deny the issuer the right to offer the security in the State if the issuer has never offered securities in that State A

Federal Covered Securities are registered at the Federal Level; they cannot be required to be registered in each State. This is intended to reduce the legislative burden on issuers, since duplicate registration is avoided. The major Federal Covered Securities are exchange listed securities and mutual fund shares. However, the State can require a "notice filing" in the State, along with a consent to service of process. And to file notice in the State, a fee must be paid (which is the reason why the States require "notice" filings) - the States like these fees!

A customer wishes to open a margin account at a broker-dealer. The customer provides all of the necessary information to open the account, but refuses to sign the margin agreement when the agent gives it to the customer. Which statement is the correct course of action to be taken? StatusA A. The firm should approve the opening of the account since the customer provided all of the necessary information StatusB B. The agent should have the customer sign a waiver, obviating the need for the customer to sign a margin agreement StatusC C. The agent should sign the customer's name to the margin agreement, since all of the necessary information has been provided by the customer Correct D. The account cannot be opened because the customer did not sign the margin agreement D

If a customer refuses to sign a margin agreement, then a margin account cannot be opened. When the agreement is signed, the customer is legally pledging the securities in the account to the broker-dealer as collateral for the margin loan made from the broker-dealer to the customer. Unless this agreement is signed, the broker-dealer cannot make the loan!

Which of the following is NOT defined as a federal covered adviser? A. An adviser to insurance companies registered in the State B. An adviser to investment companies registered with the Securities and Exchange Commission C. An adviser that manages $100,000,000 or more of assets D. An adviser that gives advice solely about U.S. Government securities A

Federal covered advisers are NOT required to register in the State; they are required to register with the SEC (or are excluded from the Federal definition of an investment adviser and are neither required to register with the SEC nor the State). Federal covered investment advisers are defined under the Investment Advisers Act of 1940 (federal law). They are advisers managing $100,000,000 or more of assets; and advisers to investment companies. It is not a coincidence that the Investment Advisers Act of 1940 and the Investment Company Act of 1940 were written at the same time. One of the main intentions of the Investment Advisers Act of 1940 was to regulate advisers to investment companies and limit their compensation (for example, advisers to investment companies cannot be compensated based on gain or loss). Investment advisers to insurance companies are not defined as Federal covered advisers. This is the case because regulators were not worried about insurance companies being overcharged by their investment advisers, since insurance companies are very cost conscious. Finally, under State law, anyone excluded from the Federal definition of an investment adviser, is also excluded from the State definition. The "excluded" persons at not defined as investment advisers at either the Federal or State level and thus, no registration is required for these. Excluded from the Federal definition of an investment adviser under the Investment Advisers Act of 1940 are: o banks; o broker-dealers; o professionals who give incidental investment advice such as lawyers, accountants, engineers, and teachers; o publishers of general circulation financial publications; and o persons who give advice solely about U.S. Government obligations. Note that this list of exclusions is the same as under State law, with the specific difference that the Investment Advisers Act of 1940 excludes advisers that only give advice about U.S. Government obligations, while State law does not mention this.

Federal covered advisers are required to: I register with the Securities and Exchange Commission II file notice with the Securities and Exchange Commission III register with the State IV file notice with the State A. I and III B. I and IV C. II and III D. II and IV B

Federal covered advisers are required to register with the SEC under the Investment Advisers Act of 1940. They are not required to register in the State. They can also be required by the State Administrator to file notice in each State where they conduct business.

Under the Uniform Securities Act, which of the following are defined as federal covered investment advisers? I Investment advisers managing assets of $100,000,000 or more II Investment advisers to investment companies registered under the Investment Company Act of 1940 III Investment advisers to insurance companies A. I only B. I and II C. II and III D. I, II, III B

Federal covered investment advisers are defined under the Investment Advisers Act of 1940 (Federal law). They are advisers managing $100,000,000 or more of assets; and advisers to investment companies. It is not a coincidence that the Investment Advisers Act of 1940 and the Investment Company Act of 1940 were written at the same time. One of the main intentions of the Investment Advisers Act of 1940 was to regulate advisers to investment companies and limit their compensation (for example, advisers to investment companies cannot be compensated based on gain or loss) Investment advisers to insurance companies are not defined as federal covered advisers. This is the case because regulators were not worried about insurance companies being overcharged by their investment adviser, since insurance companies are very cost conscious. Federal covered advisers need only register with the SEC; they are not required to register with the State; though they may be required to file notice with the State.

Under the provisions of the Uniform Securities Act, a federal covered security: I is an investment company security of a company registered with the Securities and Exchange Commission under the Securities Act of 1933 II must be registered in the State before it can be offered in the State III must be registered with the SEC before it can be offered in the State StatusA A. II only StatusB B. I and II only Correct C. I and III only StatusD D. I, II, III C

Federal covered securities are major exchange listed companies and investment company securities that are registered federally with the SEC. These are no longer required to be separately registered in each State; however the State can still require a notice filing for these offerings.

Which of the following is (are) defined as federal covered securities? I Common stock of ABC Corp. - which is listed on the NYSE II Preferred stock of ABC Corp. - whose common stock is listed on the NYSE III Bonds of ABC Corp. - whose common stock is listed on the NYSE StatusA A. I only StatusB B. I and II StatusC C. II and III Correct D. I, II, III D

Federal covered securities include NYSE listed, AMEX (NYSE-MKT) listed and NASDAQ listed securities of an issuer; and any senior securities (preferred stock and bonds) of that issuer.

Under the Uniform Securities Act, the financial records of a broker-dealer must be retained for: Incorrect Answer A. 5 years, with the prior 2 years records readily accessible for audit StatusB B. any time period specified by the State Administrator Correct Answer C. the time period specified by the Securities Exchange Act of 1934 and if the record is not specified in the 1934 Act, then the time period specified by the Administrator StatusD D. the lesser of the time period specified by the State Administrator or the time period specified in the Securities Exchange Act of 1934 C

Financial records of a broker-dealer must be kept for the time period specified by the Administrator. In the absence of a rule by the Administrator, the retention period is the same as that required under the Securities Exchange Act of 1934. If there is a retention period for the same record set by both regulators, then federal supremacy dictates that the record be maintained under the 1934 Act requirements, even if this is longer than the Administrator's rule.

Which of the following securities is (are) NOT considered to have an issuer? I Collateral trust certificate II Equipment trust certificates III Fractional interests in oil and gas programs IV Certificates of interest in a gravel mining program A. I and II only B. III only C. III and IV only D. I, II, III, IV C

For collateral trust certificates, the "issuer" is defined as the person performing the functions of manager or depositor under the Trust agreement. For equipment trust certificates, the issuer is the person to whom the equipment is to be leased. For fractional interests in oil and gas programs, or mining titles or leases, there is not considered to be any "issuer." (Note: States have been concerned for many years about sales of highly risky oil and gas exploration deals to unsophisticated investors. The legal wording of "no issuer" is a "technicality" that makes a person offering oil and gas units to investors register in the State under the toughest method - Registration by Qualification. The easier methods cannot be used.)

If a filing with the Administrator is found to have material misstatements or omissions, a correcting amendment must be filed: Correct A. promptly StatusB B. within 45 days StatusC C. only if requested by the Administrator StatusD D. only if requested by a customer A

If a filing with the Administrator is found to have material misstatements or omissions, a correcting amendment must be filed promptly.

A Federal Covered Adviser discovers a material error in its Form ADV. When must Form ADV be amended with the State to correct the error? StatusA A. There is no requirement to amend the filing in the State because the investment adviser is Federal covered Correct B. Within 30 days StatusC C. Within 60 days StatusD D. Within 90 days B

Form ADV is filed through the IARD Investment Adviser Registration Depository) system run by FINRA - this is used by both Federal Covered and State-registered advisers. In IARD, the adviser details whether this is a Federal or State registration and IARD reports to the correct regulator. In addition, for Federal Covered Advisers, the adviser details which States get "notice" filings. When a Form ADV is filed or updated by a Federal covered adviser, this is reported to the SEC, and at the same time, this is also reported to the designated States that get notice filings. The annual updating amendment to Form ADV must be filed within 90 calendar days of the adviser's fiscal year end - note that this is the same rule for both NASAA (State registered advisers) and the SEC (Federal Covered Advisers). For material changes that occur during the year, an "other than annual amendment" must be filed via IARD. Here, the SEC states that it must be filed "promptly" for Federal Covered Advisers, while NASAA requires that it be filed within 30 days of the change for State registered advisers and for notice filings made by Federal Covered Advisers. (Yes, it would be nice if NASAA and the SEC "got together" on their rule writing, but they don't!)

Which State-registered adviser is considered to have taken custody of client funds? An adviser: I that accepts $300 of advisory fees II that accepts $600 of advisory fees III as a prepayment covering the upcoming 3 months IV as a prepayment covering the upcoming 6 months StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV D

If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers).

Which State-registered adviser is considered to have taken custody of client funds? StatusA A. An adviser that accepts $300 of advisory fees as a prepayment covering the upcoming 5 months StatusB B. An adviser that accepts $400 of advisory fees as a prepayment covering the upcoming 4 months Correct C. An adviser that accepts $500 of advisory fees as a prepayment covering the upcoming 6 months StatusD D. All of the above

If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. The only choice that meets these limits is Choice C. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers).

If a broker-dealer buys out another broker-dealer, which statement is TRUE about filing fees paid to the State? StatusA A. Two additional separate filing fees must be paid for each of the broker-dealers Incorrect Answer B. A new filing fee covering the entire year must be paid for the combined broker-dealer StatusC C. An additional pro-rata filing fee covering the balance of the year for the combined broker-dealer must be paid Correct Answer D. No additional filing fee is required D

If a broker-dealer "buys out" another broker-dealer, then the firm that is "bought out" ceases to exist; and the accounts of the firm that is "bought out" become part of the existing acquiring broker-dealer. No additional filing fee must be paid by the acquiring broker-dealer, since a new firm is not being created. As an additional note, if a new "successor" firm were created from the merger of 2 firms, the State Administrator will allow the successor firm to complete the predecessor firm's filing year, so no additional fee would be required either.

Under the Uniform Securities Act, a broker-dealer that has no place of business in a state does NOT have to register if the firm: A. deals solely with the public in that state B. solicits orders for non-exempt securities in the state C. effects securities trades from its own account on a principal basis with customers in that state D. has a few clients in a state with a broker-dealer "de minimis" rule in the preceding 12 months D

If a broker-dealer deals with the public, it must register in that State. If the firm has no place of business and deals solely with issuers or financial institutions, it does not have to register. Therefore, Choice A must register as a broker-dealer. Soliciting orders or effecting trades on a principal basis have no bearing on whether a firm must register as a broker-dealer. A broker-dealer is defined as a firm that engages in securities trades for its own account (principal or proprietary trading) or one that effects trades for others. Therefore Choices B and C must register as a broker-dealer. The "de minimis" rule for broker-dealers is available in a minority of States. A broker-dealer with no office in the State that only does a "few" trades" in the State in a year would be exempt from registration as long as the State had a broker-dealer "de minimis" rule. Therefore, Choice D is not required to register.

An agent is aggrieved by an action of the Administrator summarily suspending that person's registration. The agent can: A. file a claim in civil court B. request that the matter be set down for a hearing C. make a demand for rescission D. do nothing B

If the Administrator summarily suspends an agent's registration, the agent (who is not too happy about this!) can request a hearing in front of the Administrator.

A broker-dealer has a place of business in State A does business exclusively in State A and is registered in the State. The broker-dealer has no office in State B and is contacted by a client in State B who wants to sell some securities that he inherited. State B does not have a de minimis rule for broker-dealers. The client is not interested in opening an account and only wants the broker-dealer to do this transaction and remit the proceeds to the customer. Which statements are TRUE? I In order to effect this transaction, the broker-dealer must be registered in State B II In order to effect this transaction, the broker-dealer is not required to be registered in State B III In order to effect this transaction, the securities involved must be registered in State B IV In order to effect this transaction, the securities involved are not required be registered in State B StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

If a broker-dealer with no office in that State, effects an isolated non-recurring trade in that State in a 12 month period, the transaction is exempt, and the security is not required to be registered in that State. This is an "isolated non-issuer transaction." Note that the broker-dealer still must be registered in the State unless the broker-dealer has no office in the State and the broker-dealer qualifies for a "de minimis" exemption in the State. This State does not have a "de minimis" rule for out-of State broker-dealers, therefore the broker-dealer must be registered in State B to do the trade.

All of the following are true about registration of agents under the Uniform Securities Act EXCEPT: A. a non-resident agent can solicit business in another State only if both the agent and broker-dealer are registered in that State B. an agent can only sell securities that have been registered in a State, or that are exempt from registration C. if an agent resigns and affiliates with another broker-dealer, the agent, old broker-dealer and new broker-dealer must notify the Administrator D. if a broker-dealer's registration in a State is revoked, it has no effect on the agent's registration D

If a broker-dealer's registration is revoked in a State, then the agent(s) registration(s) are revoked as well. On the other hand, if an agent's registration is revoked, it has no effect on the broker-dealer's registration. Non-resident broker-dealers and agents that solicit in another State must be registered in that State. Agents can only sell securities that are either registered, or that are exempt from registration, in a State. If an agent resigns, and affiliates with another broker-dealer, the agent, old broker-dealer and the new broker-dealer, must all notify the Administrator.

An investment adviser is opening that day's mail and receives a check from a customer for $8,000, however the adviser shows no balance due from the customer - the check was mailed in error to the adviser. 5 business days later, the investment adviser mails the check back to the customer. Under NASAA rules, the investment adviser: I is deemed to have taken custody of the customer's funds II has not taken custody of the customer's funds III must keep a record of the check received IV is not required to keep a record of the check received Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

If a client inadvertently gives securities or funds to an investment adviser, as long as they are returned within 3 business days, then the adviser has NOT taken custody. Since the adviser mailed the check back 5 business days later, it is defined as having "taken custody." If the adviser inadvertently receives a check made out to a third party, as long as the adviser mails the check to the third party within 3 business days, then the adviser has NOT taken custody. Regardless, the adviser must keep a record of the receipt of the check.

A married customer who has an individual account dies. The broker who handles the account learns that one of the major holdings in the account is likely to miss its earnings projections and is thus likely to fall sharply in value. The broker should: StatusA A. sell the stock immediately StatusB B. contact the customer's spouse immediately and get permission to sell the stock Correct C. wait for the appointment of an executor over the account before taking any action StatusD D. get approval from the branch manager and then sell the stock C

If a customer dies, the account must be frozen. Nothing can be done until the appropriate documentation is obtained, permitting the transfer of the account into the name of a beneficiary or an executor. Such documentation includes a copy of the death certificate; a copy of the will (which names the beneficiaries and the executor); and inheritance tax waivers.

An agent recommends that a customer buy shares of ZIZI Mutual Fund. The fund has a sales charge of 7%. The first breakpoint occurs at the $10,000 level, where the sales charge is reduced to 5%. The fund offers a letter of intent provision. The customer gives the agent a check for $9,500 to invest in the fund, which the agent forwards promptly for investment in ZIZI shares. Which statement is TRUE? StatusA A. The agent has acted properly by forwarding the customer's check promptly StatusB B. The agent has acted properly because he does not have a fiduciary obligation to the customer StatusC C. The agent has acted unethically because he did not make the client aware of the upcoming breakpoint Correct D. The agent has acted unethically because he did not make the client aware of the upcoming breakpoint and the letter of intent provision

If a customer is getting "close" to the purchase amount needed to qualify for a breakpoint, it is unethical under NASAA rules not to make the customer aware of the relevant sales charge discount on the purchase of shares in dollar amounts at or above the breakpoint. Thus, the agent was supposed to tell the customer that if he or she put in another $500, the sales charge would be reduced. If the customer does not have the extra $500 right now, the agent must tell the customer about the letter of intent feature, which gives the customer up to 13 months to deposit the extra $500 and obtain the lower sales charge on the entire $10,000 invested. Thus, Choice D is the better answer than Choice C.

A fee payment is NOT required to be made when a(n): StatusA A. agent of a broker-dealer registers in a State for the first time Correct B. new broker-dealer files as a successor to a firm that has ceased operations StatusC C. renewal registration is filed by an investment adviser by December 31st of that year StatusD D. notice filing is made in the State by a Federal Covered Adviser B

If a new broker-dealer is created as a successor firm to an existing registered broker-dealer that has ceased business operations at some point during the year, then the State does not require a new filing fee to be paid. The fee is paid at the initial registration and for every annual (on December 31st) renewal registration thereafter. When the successor firm files its year-end registration renewal, the full fee for the next year must be paid.

If a registration is found to be incomplete, the issuer must send the Administrator a(n): StatusA A. new registration application Correct B. amendment to the registration application StatusC C. consent to service of process StatusD D. certified financial statement B

If a registration statement is found to be incomplete, there is no requirement for a complete new filing. The additional information is provided by filing an amendment with the Administrator.

If a registration is found to be incomplete, which of the following statements are TRUE? I The issuer must send the Administrator a complete new filing II The issuer must send the Administrator an amendment to the original filing III A new consent to service of process is required IV A new consent to service of process is not required StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV D

If a registration statement is found to be incomplete, there is no requirement for a complete new filing. The additional information is provided by filing an amendment with the Administrator. A consent to service of process is required for the initial application of a broker-dealer, agent, investment adviser, and investment adviser representatives, and is also required for securities registration. This form appoints the State Administrator to be the "attorney" for the registrant. If a person is sued, the State Administrator would receive the summons and then notify the person being sued.

If a representative that transacts business in a State terminates employment with a federal covered adviser: A. notice must be given to the Administrator by the representative only B. notice must be given to the Administrator by the federal covered adviser only C. notice must be given to the Administrator by both the federal covered adviser and the representative D. no notice is required to be given to the Administrator A

If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.

If a representative that transacts business in a State terminates employment with a federal covered adviser: A. the representative must notify the Administrator promptly B. the federal covered adviser must notify the Administrator promptly C. both the representative and the federal covered adviser must notify the Administrator promptly D. both the representative and the federal covered adviser must notify the Administrator within 30 days A

If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.

An investment adviser representative quits her employment with a State-registered adviser so that she can attend graduate school. After completing her MBA, she intends to reassociate with the same advisory firm in a management capacity. Which statement is TRUE about notifying the State Administrator of the IAR's termination? A. No notice to the Administrator is required because the IAR will reassociate with the same investment advisory firm after completing graduate school B. Only the IAR is required to notify the Administrator of the termination C. Only the Investment Adviser is required to notify the Administrator D. Only the Investment Adviser is required to notify the Administrator, but if the IAR learns that the adviser has not given notice, the representative must do so D

If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. If the representative learns that the adviser has not given notice, then the representative must do so promptly. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

If a representative that transacts business in a State terminates employment with an investment adviser, notice must be given to the Administrator by the: A. Investment Adviser only B. Investment Adviser Representative only C. both the Investment Adviser and the Investment Adviser Representative D. Investment Adviser, but if the representative learns that the adviser has not given notice, the representative must do so D

If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. If the representative learns that the adviser has not given notice, then the representative must do so promptly. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

If a representative that transacts business in a State terminates employment with an investment adviser: A. notice must be given to the Administrator by the representative only B. notice must be given to the Administrator by the investment adviser only C. notice must be given to the Administrator by both the investment adviser and the representative D. no notice is required to be given to the Administrator B

If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

If a representative that transacts business in a State terminates employment with an investment adviser: A. the representative must notify the Administrator promptly B. the investment adviser must notify the Administrator promptly C. both the representative and the investment adviser must notify the Administrator promptly D. both the representative and the investment adviser must notify the Administrator within 30 days B

If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

Which of the following is NOT a federal covered security? StatusA A. An offering made over-the-counter of $250,000,000 of 10% convertible debentures of ACME Corporation, a company whose common stock is listed on the American Stock Exchange (NYSE-MKT) Incorrect Answer B. A private placement of $250,000,000 of debt backed by automobile finance company receivables sold to investment managers that are qualified purchasers Correct Answer C. An offering of $250,000,000 of General Obligation bonds by the City of New Orleans to the residents of Louisiana StatusD D. An offering of $250,000,000 of common shares of a mutual fund that will be offered to the general public C

If a security is defined as "exempt" under the Uniform Securities Act, then it is not required to be registered in each State where offered. If a security is a "federal covered security," then it cannot be required to be registered in each State where offered (though the State can require a notice filing and payment of a filing fee). Municipal bonds (Choice C) are an exempt security. The other 3 choices are federal covered securities. A federal covered security is defined as one that is: o NYSE, AMEX (now renamed NYSE-MKT) or NASDAQ listed or is a senior security of such an issuer; o issued by a registered investment company; o sold only to qualified investors - that is, investment managers with at least $25,000,000 under management - essentially these are federal covered advisers; or o sold in exempt transactions specified under the Securities Act of 1933 such as Regulation D private placements. *** Note that for all 4 choices, there would be no registration required in the State. The question is looking for the distinction between an exempt security and one that is a "federal covered security."

Securities traded on the Midwest (Chicago) Stock Exchange are NOT exempt from which requirement of the Uniform Securities Act? StatusA A. Registration Correct B. Anti-fraud StatusC C. Filing of advertising and sales literature StatusD D. All of the above B

If a security is exempt (exchange listed issues are exempt from under the State law "blue chip" exemption), then the issue is exempt from the registration requirement in that State. Furthermore, if a security or transaction is exempt, then it is also exempt from any rules that the Administrator may impose regarding the filing of advertising in that State. However, the anti-fraud provisions of the Act cover all offerings, whether exempt or non-exempt.

An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What MUST the adviser do prior to placing an order to buy ABCD stock for the client's account? Correct A. Obtain verbal authority for that specific transaction StatusB B. Obtain verbal authority to exercise discretion over the account StatusC C. Obtain verbal authority to exercise discretion only over price and time of execution in the account StatusD D. Secure an appointment as trustee over the account to formalize the fiduciary relationship A

If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.

If an agent changes his place of employment from one broker-dealer to another, the registration must be transferred: A. promptly B. within 5 days C. within 10 days D. within 30 days A

If an agent changes his place of employment, the registration must be transferred promptly under the Act. (Please note, in contrast, that notification to the Administrator when an investment adviser representative is terminated is only given by the investment adviser; or if the representative is associated with a federal covered adviser, the notice is only given by the representative.)

Which of the following can an agent choose in a customer transaction without a written power of attorney? I Security II Size III Price IV Time StatusA A. I and II Correct B. III and IV StatusC C. I, II, III StatusD D. I, II, III, IV B

If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." If the agent chooses any more than price or time - that is, the size of the trade or the security to be traded - a power of attorney is required.

If an agent fails to renew his or her license at the end of the year, the registration: Correct Answer A. expires with no action by the Administrator StatusB B. is automatically renewed and the agent receives a bill for the fee Incorrect Answer C. enters a 30 day grace period, during which it can be reinstated without a complete new filing StatusD D. is revoked A

If an agent fails to renew his license after the 1 year registration period, the license expires with no action on the part of the Administrator. The renewal is handled by the registration department of the broker-dealer with whom the agent is affiliated.

An agent of a broker-dealer effects a securities trade for a customer privately, where the transaction is neither known to the broker-dealer nor is it recorded on the books of the broker-dealer. This individual is defined as a: A. statutory broker-dealer B. statutory issuer C. statutory investment adviser D. statutory administrator A

If an agent of a broker-dealer engages in a securities transaction that is not known to the broker-dealer (a so-called "private securities transaction"), a prohibited practice has occurred. All securities transactions effected by agents must be known to the broker-dealer; must be recorded on the books of the broker-dealer; and must be supervised by the broker-dealer. If the agent performs a "private securities transaction" that is not known to the broker-dealer, then that agent has, himself, become a broker-dealer under this definition. As such, he would have to register in the State as a "statutory" broker-dealer before effecting such a transaction.

A broker-dealer registered in States A and B has an agent that is registered in State A. The agent takes an unsolicited order from a customer in State B. The agent will have to register in State B if: A. this is an existing customer who resides in State A but is temporarily vacationing in State B B. the customer is the issuer of the securities involved in the transaction C. this is an isolated transaction D. the customer is an accredited investor D

If an agent of a broker-dealer resides in the State; or is a non-resident who solicits customers in a State; then the agent must be registered in the State. An exemption is granted to the broker-dealer (and also the agent) having to register in the State if the firm has no office in the State and is contacting an existing customer who is temporarily in that State (e.g., a customer who is on vacation). An exclusion is granted to non-resident broker-dealers (and their agents) who are only dealing with issuers or financial institutions. Another exemption that is available in many States permits an out-of-State broker-dealer to effect an isolated trade in that State without having to register. If the broker-dealer or agent is not a resident, but is dealing only with wealthy investors in the State, there is no exemption granted and both must be registered in the State.

An agent receives confidential information of a material nature about a registered corporation. Which statements are TRUE? I The information cannot be transmitted to someone who might trade that company's stock based on that information II The information cannot be used as the basis for making trades in that company's stock III The information cannot be used to make recommendations to buy that company's stock IV The information cannot be used to make recommendations to sell that company's stock StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III Correct D. I, II, III, IV D

If an agent receives "inside information," the information cannot be used as the basis for the agent to make trades in that stock; cannot be used to make recommendations to buy that stock; cannot be used to make recommendations to sell that stock; and cannot be transmitted to someone who is likely to trade on the information. Only when such information is made "public" may such actions occur.

If an agent withdraws from employment from a broker-dealer, the withdrawal takes effect: Incorrect Answer A. promptly StatusB B. within 5 days StatusC C. within 10 days Correct Answer D. within 30 days D

If an agent withdraws from registration, the withdrawal does not take effect for 30 days (or sooner, if the Administrator so permits).

Under the Uniform Securities Act, if an agent withdraws his or her registration, the withdrawal becomes effective: StatusA A. immediately StatusB B. after 10 days Correct C. after 30 days StatusD D. only when the Administrator so allows C

If an agent withdraws his or her registration, the withdrawal does not become effective for 30 days unless the Administrator allows an earlier date for withdrawal. Similarly, when a registration application is filed with the Administrator, it does not become effective for 30 days, unless the Administrator allows an earlier date.

An agent registered under the Uniform Securities Act has his registration revoked by the Administrator. The Administrator may revoke any future applications of the person to be a(n): I Broker-dealer II Agent of a broker-dealer III Investment adviser IV Representative of an investment adviser A. II only B. I and II only C. III and IV only D. I, II, III, IV D

If an individual has his or her registration revoked as an agent, the Administrator is empowered to deny any future registration application(s) of that individual to be a broker-dealer, investment adviser or agent in that State.

An individual who represents an issuer selling federally covered investment company securities: A. is not required to register as an agent in the State B. must register as an agent in the State if compensation is being paid for this activity C. must register as an agent in the State if the individual is not federally registered D. must register as an agent in the State B

If an individual represents an issuer selling a security that must be SEC-registered and compensation is paid for this activity, then the individual must register in the State. Both "nationally traded securities" and investment company securities are "federal covered," but because they are non-exempt and are SEC-registered, this individual must be registered in the State to sell them. If the individual were representing the issuer selling exempt securities, such as Treasuries, Agencies and Municipals, then the individual is not defined as an agent. The exclusion from registration given to an individual who represents an issuer in transactions in specified "covered securities" only applies to private placements and to sales to qualified investors (wealthy investors).

A representation by an investment adviser that a performance chart, in and of itself, can be used to determine which securities to buy or sell: StatusA A. must be accompanied by the disclosure that past performance is the most reliable predictor of future results StatusB B. is an unethical practice unless the customer is a sophisticated investor Correct Answer C. must be accompanied by a statement that there are limitations and difficulties in using performance charts alone to judge results Incorrect Answer D. must be accompanied by a copy of a chart showing the performance of the Dow Jones Industrial Average over the same time frame so that a relevant comparison can be made by the client C

If an investment adviser advertises that a performance chart, in and of itself, can be used by a customer to measure performance, or to decide which investments to make, it must be accompanied with the disclosure that there are limitations and difficulties in using performance charts alone to judge results. There is no requirement for a performance chart to be accompanied by a comparison to the Dow Jones Industrial Average's performance over the same period. The only rule is that if a comparison is made to an index, the index used must be comparable to the investment style of the adviser.

An investment adviser headquartered in State A wishes to solicit institutional customers only in State B. Which statements are TRUE? I If the investment adviser has an office in State B, it must register in State B II If the investment adviser has an office in State B, it need not register in State B III If the investment adviser has no office in State B, it must register in State B IV If the investment adviser has no office in State B, it need not register in State B A. I and III B. II and IV C. I and IV D. II and III C

If an investment adviser has an office in a State, it must be registered in that State - regardless of whether its customers are institutions or the general public. Basically, any adviser or broker dealer that is physically located in a State must register in that State. However, if an investment adviser has NO office in a State, and solicits only institutional customers in that State, then it is exempt from registration in that State, since it has no physical presence and it is dealing solely with sophisticated investors who can "watch out for themselves."

Under the provisions of the Uniform Securities Act, all of the following statements are true EXCEPT: StatusA A. an investment adviser with no place of business in the State, need not register in that State if it is only dealing with insurance companies StatusB B. a broker-dealer with no place of business in the State, need not register in that State if it is only dealing with insurance companies Correct C. if a broker-dealer is registered with the Financial Industry Regulatory Authority, then it is also registered in that State StatusD D. if a broker-dealer has its registration revoked, then the registration of its agents will also be revoked C

If an investment adviser has no place of business in a State, and only deals with "professional investors" in that State, then it is exempt from registration in that State. Once the adviser has an office in the State, it makes no difference who the adviser deals with - the adviser must register. Broker-dealer registration requirements are similar to the rules outlined above. If a broker-dealer has no place of business in a State, and transacts only with other broker-dealers and institutional investors, it is exempt (making Choice B correct). Once a broker-dealer has an office in the State, it must register - it makes no difference who the firm's customers are. If a broker-dealer is registered with FINRA, this does not mean that the firm is registered in the State. FINRA member firms are required to register under Federal Law (Securities Exchange Act of 1934). Federal registration requirements have no bearing on State registration requirements for broker-dealers (though this is not the case with federal covered advisers!). Thus Choice C is incorrect. Finally, Choice D is true. If a broker-dealer has its registration revoked, then its agents' registrations are also revoked (since an agent can only register through a registered broker-dealer). Note, conversely, that if an agent's registration is revoked, this has no bearing on the status of the broker-dealer's registration.

Under the provisions of the Uniform Securities Act, which statements are TRUE? I An investment adviser with a place of business in the State, need not register in that State if it is only dealing with insurance companies II A broker-dealer with no place of business in the State, need not register in that State if it is only dealing with insurance companies III If a broker-dealer is registered with the Financial Industry Regulatory Authority, then it is also registered in that State IV If a broker-dealer has its registration revoked, then the registration of its agents will also be revoked StatusA A. I and III Correct Answer B. II and IV Incorrect Answer C. I, II, IV StatusD D. I, II, III, IV B

If an investment adviser has no place of business in a State, and only deals with "professional investors" in that State, then it would be exempt from registration in that State. However, in Choice I, the adviser has a place of business in the State, and hence, must register. Once the adviser has an office in the State, it makes no difference who the adviser deals with - the adviser must register. Broker-dealer registration requirements are similar to the rules outlined above. If a broker-dealer has no place of business in a State, and transacts only with other broker-dealers and institutional investors, it is exempt (making choice II correct). Once a broker-dealer has an office in the State, it must register - it makes no difference who the firm's customers are. If a broker-dealer is registered with FINRA, this does not mean that the firm is registered in the State. FINRA member firms are required to register under Federal Law (Securities Exchange Act of 1934). Federal registration requirements have no bearing on State registration requirements for broker-dealers (though this is not the case with federal covered advisers!). Thus Choice III is incorrect. Finally, Choice IV is true. If a broker-dealer has its registration revoked, then its agents' registrations are also revoked (since an agent can only register through a registered broker-dealer). Note, conversely, that if an agent's registration is revoked, this has no bearing on the status of the broker-dealer's registration.

An Investment Adviser Representative uses a graph/chart to illustrate investment results for a client. Which of the following MUST be disclosed by the IAR to the customer? Incorrect Answer A. The performance of prior recommendations over the past 5 years Correct Answer B. The fact that a chart, by itself, can be misleading and may not represent true performance StatusC C. The fact that prior performance as shown in the chart is an accurate predictor of future results StatusD D. The performance of the Standard and Poor's 500 Index over the same period B

If an investment adviser uses a performance chart to promote itself, it must disclose that a chart, in and of itself, should not be used by a customer to measure performance, or to decide whether to invest to with the adviser. The chart must be accompanied with the disclosure that there are limitations and difficulties in using performance charts alone to judge results. When prior performance is shown, the disclaimer that past performance does not predict future results must be made. There is no minimum 5 year time period for showing prior performance. A comparison may be made to an index that is comparable to the investment style of the adviser, but there is no requirement to do so.

A person with no office in a State would be required to register as an investment adviser in that State if that individual: A. has been qualified as a Chartered Financial Analyst and sells securities analyses to customers in the State B. only deals with other investment advisers in that State C. only deals with existing customers that are briefly vacationing in that State D. makes solicitations to no more than 5 clients in that State in any 12 month period A

If an investment adviser with no office in a State only deals with institutional investors, broker-dealers, or other investment advisers, then it is not required to register in that State (it would be required to register in the State where it did have an office, however). If an adviser with no office in the State only deals with customers who are vacationing in that State; or solicits fewer than 6 clients in that State; then it is exempt from registration. Just because a person has a CFA certification does not exempt him or her from registration if advisory services are offered to customers in that State.

Under the Uniform Securities Act, an investment adviser with no place of business in a State only does 1 trade in a non-exempt security in the State within a 12 month period. Which statements are TRUE? I The security must be registered in the State II No registration of the security is required because the transaction is exempt III The investment adviser must be registered in the State IV The investment adviser is not required to register in the State because it qualifies for a "de minimis" exemption A. I and III B. I and IV C. II and III D. II and IV D

If an investment adviser with no office in that State, effects an isolated non-recurring trade in that State in a 12 month period, the transaction is exempt under the "isolated non-issuer transaction" exemption. This means that the security involved is not required to be registered in the State. Furthermore, because the investment adviser has no office in the State and is only doing 1 transaction in the State in a year, it qualifies for a "de minimis" exemption from State registration (available to investment advisers with 5 or fewer clients in a State in a 12 month period in most States)

If an investment adviser finds that its Net Capital is below the minimum requirement, it MUST: I give immediate electronic notice to the Administrator II give notice to the Administrator no later than the next business day III file a report of financial condition with the Administrator no later than the day after notice is given IV file a report of financial condition with the Administrator no later than 10 business days after notice is given StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

If an investment adviser's net worth (or net capital) falls below the minimum level set by the State, notice must be given to the Administrator by the close of business the next day of such net worth deficiency. After transmitting such notice, the investment adviser must file, by the close of business on the next business day, a report of its financial condition, including a: trial balance of all ledger accounts; statement of all client funds, securities, or assets which are not segregated; computation of the aggregate amount of client ledger debit balances; and a statement as to the number of client accounts.

A Registered Investment Adviser that is formed as a partnership has been in business for 15 years. They decide to merge with another investment adviser, in which they will have a 50% ownership interest. The RIA must: StatusA A. pay a new filing fee to the State Correct Answer B. have its existing clients sign an acknowledgment of the change of ownership StatusC C. liquidate its customer accounts and complete a new account application for each customer Incorrect Answer D. notify its customers of the change B

If the adviser is a partnership, any changes in the composition of the partnership must be told to customers; and if there is a change in the majority of the partners, the customer must sign a new advisory contract (since a majority change in a partnership is deemed to create a new business entity).

An agent of a broker-dealer located in the State of New York, that has its sole office in New York, wishes to sell to a customer in New Jersey. Which statements are TRUE? I The agent must be registered in the State of New Jersey II The agent must be registered in the State of New York III The broker-dealer must be registered in the State of New Jersey IV The broker-dealer must be registered in the State of New York A. I and II only B. III and IV only C. II, III, and IV D. I, II, III, IV D

If the agent wishes to sell to a customer in a neighboring State, both the broker-dealer and agent must be registered in that State, as well as in their "home" State unless an exemption is available.

An elderly client is visiting an Investment Adviser Representative (IAR) in the IA's office. He tells the IAR that he is going to have major surgery and is concerned about the safety of his stock certificates that he keeps at home in a small fireproof box. The Investment Adviser Representative wishes to help the client out. Which of the following should the IAR NOT do? StatusA A. Drive the client to his house to retrieve the stock certificates and then take him to the bank used by the Investment Adviser where the client rents a safe deposit box in the client's name and deposits the securities StatusB B. Ask the client for the name of his attorney and then call him to ask for his opinion of what should be done in this situation Correct C. Drive the client to his house to retrieve the stock certificates and then take him to the Investment Adviser's bank and place the certificates in the Investment Adviser's safety deposit box, making sure to write down all of the certificate numbers and other pertinent information StatusD D. Drive the client to his house to retrieve the stock certificates and then take him to his bank where the client rents an existing safe deposit box and deposit the securities

If the investment adviser were to put the certificates in its own safe deposit box, it would be taking custody, and all securities kept in custody must be kept by a qualified custodian - not by the IA. Taking the client to his bank, where he deposits the securities to his existing safe deposit box is OK. (Choice D). The client can rent his own safe deposit box at any bank - even the one used by the IA - so Choice A is OK. Calling the client's attorney for advice (Choice B) is fine as well.

Which of the following is (are) violations of the Uniform Securities Act that can result in civil liability? I An investment adviser recommends the purchase of a non-exempt security that was unregistered, even though an exemption is not available II An investment adviser recommends the purchase of an exempt security that was unregistered to a customer III An investment adviser recommends a non-exempt security that is unregistered to a customer after being informed by his manager that the security was registered StatusA A. I only Correct Answer B. I and III StatusC C. II and III Incorrect Answer D. I, II, III B

In Choice I, the security was supposed to be registered in that State, yet the investment adviser recommended the purchase of this unregistered security. The investment adviser made a recommendation of this security that is not in compliance with State registration requirements - and this is a violation of the Uniform Securities Act. An "unknowing action" only results in civil liability - not criminal penalties, and Choice I does not mention whether the adviser "knew" of this, so we will give the guy the benefit of the doubt! Choice III clearly meets this test - the registered representative believed that he (or she) was recommending a registered security to the customer - when, in fact, the security was unregistered. This results in civil liability only. Choice II is perfectly acceptable - since the security is exempt from registration in the State, the fact that the security is not registered in the State is irrelevant.

Under the Uniform Securities Act, which transaction is allowed for exempt unregistered securities? StatusA A. Primary offerings StatusB B. Secondary offerings Correct C. Both primary and secondary offerings StatusD D. Neither primary nor secondary offerings C

In a nutshell, since it is an EXEMPT unregistered security, both primary and secondary offerings are allowed without filing a registration statement in the state. If the security were non-exempt, then to offer that security in the state, registration would be required.

For initial registration as an agent in a State, all of the following are required EXCEPT: StatusA A. Consent to Service of Process StatusB B. Filing Fee StatusC C. Registration Application Correct D. Government Issued Photo I.D. D

In an initial registration with the State, a consent to service of process must be filed, in addition to the registration application (which can include fingerprints) and any filing fees designated by the Administrator. There is no requirement for a Government issued photo ID to be registered.

Which of the following is (are) prohibited in a margin account? StatusA A. A customer buying a security without the intention to pay on settlement StatusB B. A customer selling a security without the intention to deliver on settlement StatusC C. A customer selling short a security that cannot be borrowed and delivered on settlement Correct D. All of the above

In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.

It is an unethical business practice for an investment adviser to borrow money from a: StatusA A. bank that is the adviser's client StatusB B. broker-dealer that is the adviser's client Correct C. pension fund that is the adviser's client StatusD D. any of the above C

Investment advisers and their agents are prohibited from borrowing money from customers - unless the customer is in the business of lending money (which is the case with banks and broker-dealers).

Which statement is TRUE about the delivery of a final prospectus to the purchaser of a non-exempt new issue security? StatusA A. No final prospectus delivery is required if the investor is a substantial investment adviser StatusB B. No final prospectus delivery is required if the customer received the preliminary prospectus and is provided with the final pricing amendment StatusC C. A final prospectus must be delivered, at, or prior to, confirmation of sale, to any person that gave an indication of interest Correct D. A final prospectus must be delivered, at, or prior to, confirmation of sale, to any person who purchases the issue D

In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions!

Under NASAA rules, any recommendation made to a client by a broker-dealer is permitted only if the: Incorrect Answer A. broker-dealer's research department, or an outside third party research firm, is the source of the recommendation Correct Answer B. recommendation is based upon the client's investment objectives, investment experience, financial situation and financial needs StatusC C. broker-dealer does not sell the customer the recommended security in a principal transaction StatusD D. broker-dealer does not have a control relationship with the issuer whose security is being recommended to the customer B

In order to make a recommendation to a customer, it must be determined that the investment is suitable for the customer, based on investment objectives, investment experience, financial situation and financial needs. Because a broker-dealer is not a fiduciary, unlike an investment adviser, it is permitted to sell securities out of its inventory to customers that wish to buy that security. If a broker-dealer has a control relationship with an issuer whose securities it is recommending, this fact must be disclosed to the customer. There is no rule requiring that recommendations come from a broker-dealer's research department or a third party research firm.

Which statements are TRUE about the retention of customer account records for broker-dealers under Uniform State Law? I Customer trade confirmations must be retained for 3 years II Customer trade confirmations must be retained for 6 years III Customer account statements must be retained for 3 years IV Customer account statements must be retained for 6 years StatusA A. I and III Correct Answer B. I and IV StatusC C. II and III Incorrect Answer D. II and IV B

In the absence of a specific rule by the Administrator, Uniform State Law requires that records be kept in accordance with the requirements of the Securities Exchange Act of 1934. Under the '34 Act, customer confirmations must be retained for 3 years; but customer account records (statements of account) must be retained for 6 years.

An Investment Adviser that does not take custody of customer funds receives a check from a customer to buy $10,000 of a mutual fund made payable to the Adviser instead of the Fund Custodian. The Investment Adviser should: StatusA A. deposit the check to its account and write a check from that account in the same amount made payable to the Plan Custodian StatusB B. endorse the back of the check with the Investment Adviser name and, below the endorsement, write in the Fund Custodian's name Correct C. return the check to the customer and ask for a new check made payable to the Fund Custodian StatusD D. cash the check and use the funds to buy a money order in the same amount made payable to the Fund Custodian C

In this case, the check has been made out to the Adviser in error. As long as the adviser returns the check to the customer within 3 business days, then the adviser is not deemed to have taken "custody." If the adviser were to deposit the check, cash it or endorse it, then the adviser would be taking custody.

A car dealership located in State A has been experiencing a period of slow sales and wants to increase business. The general manager wants to do the following promotion: "Buy a new car from us and we will give you 100 shares of our parent company's stock." Which statement is TRUE about this promotion? Correct A. This promotion constitutes an offer to sell securities in the State StatusB B. This promotion does not constitute an offer to sell securities because no payment is being made for the securities StatusC C. This promotion does not constitute an offer to sell securities because car dealerships are only subject to State franchise laws, not State securities laws StatusD D. This promotion is illegal and unethical under State law A

In this example, the securities are being given as an inducement to get the customer to buy a car. This is not a gift, since the payment made for the car includes a component for the value of the securities. An offer of securities is being made. The car dealer is viewed as an agent acting for the issuer of these securities, and registration with the State is required (unless an exemption is available).

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is: Incorrect Answer A. permitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed StatusB B. permitted only if the IAR charges a lower advisory fee to the client StatusC C. permitted only if the Investment Adviser does not charge an advisory fee Correct Answer D. prohibited D

Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

A director of a broker-dealer that is registering for the first time in a State: StatusA A. is not permitted to register as an agent in that State StatusB B. must apply separately for registration as an agent Incorrect Answer C. must request that the broker-dealer file a registration for the individual to be agent Correct Answer D. will be automatically registered as an agent at the time that the broker-dealer is registered D

Included in a State registration application are the names, addresses and background of the officers of the broker-dealer, and these individuals become automatically registered when the broker-dealer entity becomes registered in the State. This is part of State law because the qualifications and business history of the officers and directors is disclosed in the application for the BD registration, so there is no need to have the same information filed twice with a separate registration for these persons to be agents of the BD. The way that most States handle this is when the registration application for the BD is processed, the officers are automatically registered as agents at the same time in CRD (Central Registration Depository); the fees for registration as an agent in the State are automatically deducted; and a window is opened for them to take the appropriate exams as needed (e.g., #63 or #66). Thus, the State gets its money up front! If the officer or director will not be acting as an agent of the BD (e.g., that person has no sales responsibility), he or she can "opt out" of automatic registration (which happens after the fact) and the BD will be refunded the fee.

Prior to licensing an agent in a State, the Administrator may require the agent to do all of the following EXCEPT: StatusA A. pass a qualifying examination StatusB B. certify that the individual has reviewed that State's Blue Sky laws StatusC C. certify that the individual understands his responsibilities Correct D. maintain a minimum Net Worth requirement D

Individuals are not required to maintain a minimum Net Worth requirement to be registered in a State - this requirement is imposed only on broker-dealers and investment advisers. The State can require the individual to pass a qualifying examination; can require the individual to certify that he understands the State's Blue Sky laws; can require the individual to certify that he or she understands his or her responsibilities; and can require the individual to post a Surety Bond.

An officer of an issuer is engaged in the sale of that issuer's securities to the public. The issuer's securities are federal covered. The officer is: A. excluded from the definition of an agent because the securities involved are federal covered B. not defined as an agent because officers of issuers are excluded C. defined as an agent who must register in the State D. defined as an issuer and is not required to register in the State C

Individuals representing issuers in the sale of certain "specified" securities are excluded from the definition of an agent. These include individuals who represent issuers selling: Treasury, Agency and Municipal securities; Bank issues; Money market instruments; Contracts issued in connection with pension plans; To employees of that issuer if no compensation is paid; and To qualified (wealthy) purchasers. In these transactions, either the security being sold is extremely safe (such as governments, agencies or municipals); or the sale is not being made to the general public. Note that there is no exclusion for the sale of federal covered securities by an individual. An individual who sells either federal or non-federal covered securities for an issuer is defined as an agent who must register in the State. This makes sense because the State wants to "capture" and register as many agents as it can! (Remember, it gets an annual fee for each registered agent.)

A client of an investment adviser representative has enjoyed excellent returns on his portfolio over the past 5 years. The client needs $25,000 of cash, but does not want to sell securities from his portfolio since it is performing so well. He asks the investment adviser representative for a loan, which the investment adviser representative gives. The investment adviser representative is guilty of a: Correct A. fiduciary violation StatusB B. churning violation StatusC C. selling away violation StatusD D. failure to supervise violation A

Investment adviser representatives cannot borrow from, or lend money to, a customer. They have a fiduciary duty to the customer and cannot take an opposite position to that customer - both the customer's and the investment adviser representative's interests must be aligned.

An IAR has a customer with $1 million under management. The customer is experiencing a cash flow shortfall but does not want to liquidate part of the portfolio because it is performing so well. The client calls the IAR and asks for a short-term loan of $25,000. What should the IAR do? StatusA A. The IAR should lend the customer the money because the client has sufficient assets under management to ensure that the loan will be repaid Incorrect Answer B. The IAR should arrange for the customer to rehypothecate a sufficient amount of securities to a bank to secure the loan StatusC C. The IAR should co-sign a loan with the client at a bank Correct Answer D. The IAR should refuse the client's request D

Investment adviser representatives cannot lend money to customers - no exceptions! Note that if the employing advisory firm is a unit of a bank or brokerage firm, there is nothing stopping the bank or brokerage firm from lending money to the customer, as long as the terms and conditions of the loan are no different than that offered to anyone else.

A CPA who acts as a solicitor for an investment adviser, referring clients to that adviser for a fee: StatusA A. must be registered with the SEC Correct B. must be registered in the State StatusC C. must be registered with both the SEC and the State StatusD D. is not required to be registered with either the SEC or the State B

Investment adviser solicitors are not registered with the SEC - the SEC only requires registration of Federal Covered advisers. However, these solicitors are contacting potential customers in a given State. The State requires that the solicitor be registered to do so. The solicitor can either register as an investment adviser or can affiliate with an advisory firm and register through that firm as an investment adviser representative.

Under the Uniform Securities Act, an investment adviser may be formed as which of the following? I Corporation II Partnership III Association IV Broker-dealer A. I and II B. III and IV C. I, II, III D. I, II, III, IV C

Investment advisers (and broker-dealers) can be formed as any legal operating entity, such as a corporation, partnership, sole proprietorship, association, etc. Investment advisers cannot be formed as broker-dealers; nor can broker-dealers be formed as investment advisers. Each is a legally separate entity, and each is regulated separately.

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is: StatusA A. permitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed StatusB B. permitted if the Administrator is notified that the Investment Adviser is taking custody StatusC C. permitted only if the Investment Adviser does not charge an advisory fee Correct D. prohibited D

Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

An investment adviser may receive a percentage of gains and losses in a client's account: A. under no circumstances B. only if specifically agreed in writing by both the customer and adviser C. only if a written agreement is approved in advance by the Administrator D. without restriction A

Investment advisers are prohibited from being compensated based on a percentage of gains and losses in an account. They may be compensated based on a percentage of all assets under management.

An investment adviser may NOT be compensated with which of the following? StatusA A. Wrap fees charged to customers for all services rendered by the adviser Incorrect Answer B. Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviser Correct Answer C. Bid-Ask spreads earned when position trades are executed StatusD D. Commissions paid to an affiliated broker-dealer on trades recommended by the adviser C

Investment advisers can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations, asset allocation and trade execution - so all services are "wrapped" into a flat annual fee. Investment advisers can receive "soft dollar" compensation. In return for directing full commission trades to an executing broker, the executing broker gives the adviser research, recommendations, trading algorithms, and similar items of value. The SEC permits these "soft dollar" items to be given by the broker-dealer to the adviser as long as they ultimately benefit the adviser's investors. Investment advisers cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract. Bid-ask spreads are earned by securities dealers that buy securities into their inventory and sell securities out of their inventory. These are called "position trades" because the broker-dealer is taking positions in its inventory account. Broker-dealers earn these; investment advisers are prohibited from receiving these.

An investment adviser may be compensated with which of the following? I Wrap fees charged to customers for all services rendered by the adviser II Soft dollars paid by an executing broker to the adviser in return for trades sent to the broker by the adviser III Bid-Ask spreads earned when position trades are executed IV Commissions paid to an affiliated broker-dealer on trades recommended by the adviser StatusA A. I and II StatusB B. III and IV Correct C. I, II, IV StatusD D. I, II, III, IV C

Investment advisers can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations, asset allocation and trade execution - so all services are "wrapped" into a flat annual fee. Investment advisers can receive "soft dollar" compensation. In return for directing full commission trades to an executing broker, the executing broker gives the adviser research, recommendations, trading algorithms, and similar items of value. The SEC permits these "soft dollar" items to be given by the broker-dealer to the adviser as long as they ultimately benefit the adviser's investors. Investment advisers cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract. Bid-ask spreads are earned by securities dealers that buy securities into their inventory and sell securities out of their inventory. These are called "position trades" because the broker-dealer is taking positions in its inventory account. Broker-dealers earn these; investment advisers are prohibited from receiving these.

Investment advisers are prohibited from doing all of the following EXCEPT: StatusA A. assigning a customer's contract without permission Correct B. charging a retainer fee StatusC C. charging commissions on trades effected for the client StatusD D. changing partnership management without notifying clients B

Investment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this conflict of interest is disclosed to the client when the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.

An investment adviser charges a 1% annual management fee to all clients. The adviser also says that if he does not produce a 20% annual return on the client's investment, he will refund the management fee. This action is: StatusA A. permitted because it has been offered to all clients StatusB B. permitted because the clients are not being charged an incentive fee Correct Answer C. prohibited because the adviser cannot make fee charges contingent on performance Incorrect Answer D. prohibited because the adviser cannot share in portfolio gains and losses C

Investment advisers cannot make their fees contingent upon earning a minimum investment return. They can only charge a fee based on a flat annual dollar amount or a percentage of annual net assets. Advisers cannot be compensated based on gains (Choice D), unless the clients are all wealthy (at least $1 million invested or $2 million net worth).

Which statements are TRUE about an adviser offering discounted rates? I An investment adviser is permitted to offer a discount from standard rates to selected categories of customers II An investment adviser is permitted to offer a discount from standard rates only if all customers are given the discount III The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable IV The investment adviser can offer the discount as long as the fact that discounts are offered is disclosed in the Form ADV Part 2A StatusA A. I and III Correct Answer B. I and IV StatusC C. II and III Incorrect Answer D. II and IV B

Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue additional business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount - for example, the discounted fee might apply only to members of a local Rotary Club; or the discount might only apply to customers that invest at least $200,000 with the adviser. The adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the Brochure") that is given to clients.

An investment adviser wishes to offer all of the medical professionals at a local hospital a reduced advisory fee in the hopes of attracting new assets to manage. Which statement is TRUE about an adviser offering discounted rates? StatusA A. The investment adviser is permitted to offer a discount to any potential customer in order to attract new business StatusB B. The investment adviser is not permitted to offer the discount unless the Administrator is notified that a discount may be offered StatusC C. The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable Correct D. The investment adviser can offer the discount as long as the fact that non-medical professionals that are unaffiliated with the hospital pay a higher fee is disclosed in the Form ADV Part 2A D

Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue group business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount (in this case, they must be medical professionals at the hospital); and the adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the brochure") that is given to clients.

An Investment Adviser must inform a client about all of the following EXCEPT: StatusA A. Change of address StatusB B. Addition of new partners to the advisory partnership StatusC C. Change of phone number Correct D. Addition of client accounts from another advisory firm that was "bought out" D

Investment advisers must inform their clients about a change of address or a change of phone number (this is common sense). It is also a requirement to inform clients about the addition of new partners to an advisory partnership. There is no requirement to notify customers of the addition of new advisory clients, since this has no impact on the customer.

Which of the following investment advisers are NOT required to register in a State? I An investment adviser with at least $100,000,000 of assets under management registered with the SEC under the Investment Advisers Act of 1940 II An investment adviser with no place of business in the State who deals solely with financial and institutional investors III An investment adviser with no place of business in the State who deals solely with broker-dealers IV An investment adviser with no place of business in the State who has no more than 5 clients in that State over the last 12 months A. II and III only B. I, II, and III only C. II, III and IV only D. I, II, III, IV D

Investment advisers that are exempt from registration include advisers with no place of business in the State who deal solely with other advisers, broker-dealers, insurance companies, investment companies, financial and institutional investors, and government agencies. Also, advisers with no place of business in the State that have no more than 5 clients in a 12 month period are exempt. Investment advisers with at least $100,000,000 of assets under management must register with the Securities and Exchange Commission but are excluded from state registration (to avoid duplicate regulation). Advisers with less than $100,000,000 under management must register with the State, but are not required to be registered with the SEC. The idea is that the big advisers are regulated by the Feds; while the little advisers are regulated by the local police. Note that, in contrast, broker-dealers that are registered with the self-regulatory organization under the Securities Exchange Act of 1934, such as FINRA, must still register in each State.

Which of the following investment advisers are NOT required to register in a State? I An investment adviser that has no place of business in the State and which has no more than 5 clients in that State within a 12 month period II An investment adviser with at least $100,000,000 of assets under management registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 III An investment adviser that has no place of business in the State that deals solely with Investment Companies as defined under the Investment Company Act of 1940 IV An investment adviser that has no place of business in the State that deals solely with other investment advisers StatusA A. II and III only StatusB B. III and IV only StatusC C. I, III, and IV Correct D. I, II, III, IV D

Investment advisers that are exempt from registration include advisers with no place of business in the State who deal solely with other advisers, broker-dealers, insurance companies, investment companies, financial and institutional investors, and government agencies. Also, advisers with no place of business in the State that have no more than 5 clients in a 12 month period are exempt. Investment advisers with at least $100,000,000 of assets under management must register with the Securities and Exchange Commission but are excluded from state registration (to avoid duplicate regulation). Advisers with less than $100,000,000 under management must register with the State, but are not required to be registered with the SEC. The idea is that the big advisers are regulated by the Feds; while the little advisers are regulated by the local police. Note that, in contrast, broker-dealers that are registered with the self-regulatory organization under the Securities Exchange Act of 1934, such as FINRA, must still register in each State.

A customer opens an account at a brokerage firm to purchase securities in an offering. The customer must receive the disclosure document/prospectus: Correct Answer A. no later than the confirmation of the sale Incorrect Answer B. no later than the settlement of the transaction StatusC C. within 7 days of the transaction StatusD D. within 90 days of the transaction A

NASAA states that "failing to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus," is an unethical practice.

To be exempt from registration in a State, an investment adviser must: I be registered with the SEC under the Investment Advisers Act of 1940 II be registered in another State III have at least $100,000,000 of assets under management IV have less than $100,000,000 of assets under management A. I and III B. I and IV C. II and III D. II and IV A

Investment advisers with at least $100,000,000 of assets under management must register with the Securities and Exchange Commission but are exempt from state registration (to avoid duplicate regulation). Advisers with less than $100,000,000 under management must register with the State, but are not required to be registered with the SEC. The idea is that the big advisers are regulated by the Feds; while the little advisers are regulated by the local police. Note that, in contrast, broker-dealers that are registered with the self-regulatory organization under the Securities Exchange Act of 1934, such as FINRA, must still register in each State.

Which of the following investment advisers with no place of business in the State is exempt from registration? Investment Advisers whose only clients are: I other investment advisers II broker-dealers III investment companies IV insurance companies A. I only B. I and III only C. II and IV only D. I, II, III, IV D

Investment advisers with no place of business in the State who do not deal with the general public are exempt from registration. Thus, advisers with no office in the State who deal solely with other advisers, broker-dealers, and financial and institutional investors are exempt from registration in the State. Note that if an adviser has an office in the State, no matter who its clients are, it must register in the State.

All of the following are defined as securities under the Uniform Securities Act EXCEPT: A. Variable Annuity Contracts B. Investment Contracts C. Mortgage Bonds D. Mortgages D

Investment contracts are defined as securities. Variable annuities are defined as securities; fixed annuities are not. Mortgage bonds are defined as securities; mortgages are not.

Under the Uniform Securities Act, which of the following practices by an investment adviser is permitted? Correct A. Being compensated based upon the total value of funds being managed StatusB B. Assigning the advisory contract to another investment adviser without the customer's prior consent StatusC C. Changing the management of an investment adviser formed as a partnership without notifying each customer StatusD D. Taking custody of customer funds without giving prior notice to the Administrator C

It is permitted for an investment adviser to be compensated based upon the total value of all assets under management (e.g., an annual fee of ½% of asset value, averaged over the year). Sharing in the capital gains of an account under management would be prohibited. Other prohibited practices are: o assigning the advisory contract to another investment adviser without the customer's prior consent o changing the management of an investment adviser formed as a partnership without notifying each customer promptly; and o taking custody of customer funds without giving prior notice to the Administrator.

Which statements are TRUE regarding investment advisory contracts under the Uniform Securities Act? I Assignment of the contract is not permitted unless the customer consents II If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment III If the investment adviser is a partnership, the death or withdrawal of a minority of the partners constitutes an assignment IV If the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time StatusA A. I only StatusB B. II and IV only Correct C. I, II, and IV StatusD D. I, II, III, IV C

It is true that assignment of an investment advisory contract is not permitted unless the customer consents (after all, the customer hired a specific firm as the adviser for that firm's expertise; he does not want someone else to manage his funds unless he approves!). If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment. However, the death or withdrawal of a minority of the partners does not constitute an assignment. Finally, if the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time.

Federal covered advisers

MUST register with SEC, not reqd to register in the State; if adviser is NOT "federal covered adviser" - MUST register in State, not reqd to register w/ SEC

Which statement is TRUE regarding registration requirements under the Uniform Securities Act? StatusA A. Minimum net capital can be required for agents, broker-dealers and investment advisers StatusB B. Minimum net capital and a surety bond can be required for agents, broker-dealers and investment advisers Correct C. Minimum net capital can be required for broker-dealers and investment advisers StatusD D. Minimum net capital and an examination can be required for agents, broker-dealers and investment advisers C

Minimum net capital can be required for registration as a broker-dealer or investment adviser; it is not required for registration as an agent of a broker-dealer or investment adviser. Surety bond coverage can be required for registration of broker-dealers, their agents, and investment advisers. Note that there is no surety bond requirement for investment adviser representative registration.

Registration by Coordination in a State would MOST likely be used for which securities offering? A. Mutual fund shares registered under the Investment Company Act of 1940 B. Secondary offering of a company that is NASDAQ listed C. An initial public offering made under a Rule 147 Intrastate exemption D. Initial public offering of an issue that will be listed in the OTCBB D

Mutual fund shares and securities that are listed on a stock exchange or NASDAQ are "federal covered" securities that cannot be required to be registered at the State level (of course, the State can require a notice filing and the payment of fees - but that is not a registration!) Securities offerings made under a Rule 147 exemption are exempt from SEC registration, but still must be registered in the State. Since this is an IPO, the issuer must "qualify" for registration in the State and would use Registration by Qualification. An IPO of a security that will be listed on the OTCBB (Over-The-Counter Bulletin Board) cannot meet NASDAQ listing standards. It will be registered with the SEC; and since there will be an SEC filing, the easiest State registration method is to register the issue by coordination - where the State "coordinates" State registration with SEC registration by accepting the SEC registration document as the State filing (plus pay a registration fee, of course).

Under NASAA recordkeeping rules for investment advisers, any advertisement, circular or other communication must be retained: I if it is circulated to 2 or more persons II if it is circulated to 10 or more persons III for a minimum of 3 years IV for a minimum of 5 years Incorrect Answer A. I and III Correct Answer B. I and IV StatusC C. II and III StatusD D. II and IV B

NASAA does not set recordkeeping rules for broker-dealers and for federal covered advisers, because these are set under federal law. NASAA does set recordkeeping rules for state-registered advisers. Under the NASAA model rule, advertisements, circulars, bulletins or other communications circulated by the adviser to 2 or more persons must be retained for 5 years.

Which statements are TRUE about the applicability of recordkeeping rules to investment advisers? I SEC recordkeeping rules apply to Federal Covered advisers II SEC recordkeeping rules do not apply to Federal Covered advisers III NASAA recordkeeping rules apply to State-registered advisers IV NASAA recordkeeping rules do not apply to State-registered advisers Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! Federal covered advisers are those with $100 million or more of assets under management and advisers to investment companies. NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).

In relation to NASAA's Statement on Records Retention for Registered Investment Advisers, an RIA: A. must retain both personal and business e-mails B. must retain business e-mails for 3 years, but personal e-mails may be discarded C. must retain outgoing e-mails, both business and personal, for a period of 6 years D. does not have to retain any e-mails as they are not considered to be correspondence under NASAA rules A

NASAA has a recordkeeping rule for investment advisers that are State-registered; in contrast, the recordkeeping rules for broker-dealers are set under the Securities Exchange Act of 1934. NASAA requires retention of both personal and business e-mails. It does this because agents often send e-mails to clients, or receive e-mails from clients, while at home (note that Federal law for broker-dealer records is the same on this point.) NASAA requires that all such records be retained for 5 years, not 6 years, making Choice C incorrect. (Also note that on this point, federal law for broker-dealers differs, only requiring that e-mails be retained for 3 years.)

When is an investment adviser deemed to have custody of client funds? StatusA A. When the adviser holds a check payable to the client from the client's broker-dealer StatusB B. When the adviser holds a full power of attorney over the client's account StatusC C. When the adviser acts as a trustee where the client is the beneficiary of the trust Correct D. All of the above D

NASAA has specific rules to be followed if an adviser takes custody of client funds. "Custody" does not only include accepting client funds or securities, but also includes: accepting prepaid advisory fees of $500 or more, 6 months or more in advance of rendering services (note that the IA Act of 1940 sets this at $1,200 for Federal Covered Advisers); an account that gives the adviser a full power of attorney, which allows the adviser to withdraw funds and trade (but not an account that gives the adviser a limited power of attorney where the adviser can trade only); a trustee for the client - by definition, a trustee has custody, since the trustee has full control over the assets in the account; and inadvertent receipts of customer funds or checks that are not returned within 3 business days.

To satisfy the requirements of the NASAA brochure delivery rule, customers who wish to buy advisory services must receive a copy of the brochure: Correct A. at least 48 hours prior to entering into an advisory contract StatusB B. at, or prior to, entering into an advisory contract StatusC C. within 48 hours of entering into an advisory contract StatusD D. within 10 days of entering into an advisory contract A

NASAA obligates an investment adviser to give a potential customer the disclosure document (Parts 2A and 2B of Form ADV) at least 48 hours prior to entering into a written or oral contract to provide advisory services. Alternatively, if the "2 Day Free Look" is not given, a contract may be signed, as long as it provides for a 5 day right of termination without cause by the customer. Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

An Investment Adviser prepares a 4-color glossy brochure to be given to potential customers instead of the ADV Form Part 2A. The brochure includes all of the information found in the ADV Part 2A, but is much livelier in its presentation. An Investment Adviser Representative uses the brochure to solicit a new client, who signs a contract with the firm that includes a clause giving the customer 2 business days to back out of the contract without incurring any penalty. Which statement is TRUE? Incorrect Answer A. This procedure complies with the requirements of NASAA regarding the use and delivery of investment adviser brochures StatusB B. This procedure violates NASAA rules because only the Form ADV Part 2 can be delivered to customers Correct Answer C. This procedure violates NASAA rules because the customer must be given 5 business days to back out of the contract without penalty StatusD D. This procedure violates NASAA rules because a written receipt must be obtained from the customer indicating that the brochure was delivered C

NASAA requires that new customers be delivered the investment adviser brochure. It is OK to prepare a customer brochure that includes all of the ADV Part 2 information. The rule on delivery of the brochure is that either: o the brochure must be delivered 48 hours prior to entering into either a verbal or written contract with the customer to provide advisory services; or o if the brochure is delivered at the time that the contract is signed, the customer has 5 business days to terminate the agreement without penalty. In this case, the customer signs a contract that gives him or her 2 business days to rescind the deal. The rule requires that the customer be given 5 business days to rescind the deal when the customer is receiving the brochure at the time that the contract is signed. Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

NASAA has the power to set record retention rules for a State-Registered Adviser that cover which of the following records? I Communications to 2 or more persons II E-mails to clients III Trial balances IV General ledger StatusA A. I and II only StatusB B. III and IV only StatusC C. I and IV only Correct D. I, II, III, IV D

NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management). NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies!

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: I 5 business days II 10 business days III following the end of the month in which the transaction was effected IV following the end of the quarter in which the transaction was effected Incorrect Answer A. I and III StatusB B. I and IV StatusC C. II and III Correct Answer D. II and IV D

NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: StatusA A. 10 business days following the end of the month in which the transaction was effected StatusB B. 20 business days following the end of the month in which the transaction was effected Correct C. 10 business days following the end of the quarter in which the transaction was effected StatusD D. 20 business days following the end of the quarter in which the transaction was effected C

NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Which records MUST be retained in a state-registered investment adviser's principal office? I Customer securities positions II Correspondence with customers III Investment adviser's bank statements IV Records of customer purchase and sales orders StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

NASAA rules require that State-registered advisers keep, in their principal office, records of: customer purchases and sales; and customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.

Which records MUST be retained in a state-registered investment adviser's principal office? Incorrect Answer A. Financial reports StatusB B. Client advisory contracts StatusC C. Investment adviser's bank statements Correct Answer D. Records of customer purchases and sales orders D

NASAA rules require that State-registered advisers keep, in their principal office, records of: customer purchases and sales; and customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator. Also note that NASAA sets detailed rules for records to be retained by State-registered advisers. Federal law already covers the recordkeeping rules for broker-dealers (where the recordkeeping rules are set under the Securities Exchange Act of 1934) and for investment advisers (where the recordkeeping rules are set under the Investment Advisers Act of 1940).

Under NASAA rules, within 120 days of fiscal year end, each customer must be sent a(n): StatusA A. brochure StatusB B. updated brochure StatusC C. brochure and brochure supplement Correct D. an updated brochure and brochure supplement D

NASAA rules require that within 120 days of fiscal year end, the adviser must send each customer a revised Brochure (Form ADV Part 2A) and Brochure Supplement (Form ADV Part 2B) if there are material changes. Instead of sending the entire Brochure, the adviser can simply send the "Summary of Material Changes" section to the Brochure, along with an offer of the revised Brochure. Also note that this annual procedure is not required if there are no material changes to the Brochure.

A Registered Investment Adviser that trades securities on the behalf of customers is required to keep a record of the transaction that includes all of the following information EXCEPT the name of the: StatusA A. Investment Adviser Representative (IAR) who placed the order StatusB B. broker-dealer to which the order was sent for execution Incorrect Answer C. person at the Investment Adviser who recommended the transaction Correct Answer D. agent at the broker-dealer who executed the transaction D

NASAA states that Investment Adviser order tickets must contain: o Name of the person at the IA who recommended the transaction; o Name of the person who placed the order; o Date of order entry; o Name of account for which order was entered; o Name of broker-dealer or bank to which the order was sent for execution; o Whether the order was discretionary.

Under NASAA rules, a customer must sign and return the margin agreement: Correct A. promptly after the initial transaction in the account StatusB B. prior to settlement of the first trade in the account StatusC C. within 1 day of the first transaction in the account StatusD D. within 3 days of the first transaction in the account A

NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!

Under the NASAA Model Rule covering Investment Adviser records, the adviser's articles of incorporation must be retained for: StatusA A. 3 years StatusB B. 5 years Correct C. for the life of the firm plus an additional 3 years StatusD D. for the life of the firm plus an additional 5 years C

NASAA's recordkeeping rule for investment advisers requires that "partnership articles and any amendments, articles of incorporation, charters, minute books and stock certificate books of any investment adviser be preserved for at least 3 years after termination of the enterprise."

Which of the following items would be included in the computation of an investment adviser's net capital? I Business reputation II Furniture and fixtures III Automobiles IV Organizational expenses StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

Net capital is really a firm's "liquid net worth." It is liquid assets minus all liabilities. Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business ARE included in the computation if the adviser is NOT an individual. The question does not state whether the adviser is an individual, so we cannot assume this. All intangibles are automatically excluded, so goodwill, marketing rights and copyrights are all deducted, However, conference room furniture is included for an adviser that is a corporation or a partnership, so this is the best choice. Finally, note that if the adviser were an individual, any "personal" assets that are not readily marketable such as home, home furnishings and automobiles, ARE excluded.

Which one of the following items would be included in the computation of an investment adviser's net capital? Correct Answer A. Sofa in the investment adviser's office StatusB B. Business reputation (goodwill) of the investment adviser StatusC C. Copyright held by the investment adviser for a finance book Incorrect Answer D. Franchise right held by the investment adviser A

Net capital is really a firm's "liquid net worth." It is liquid assets minus all liabilities. Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Also excluded are advances or loans to officers or owners of the adviser, since it is unlikely that these would be repaid if the adviser were liquidated. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business ARE included in the computation if the adviser is NOT an individual. The question does not state whether the adviser is an individual, so we cannot assume this. All intangibles are automatically excluded, so goodwill, marketing rights and copyrights are all deducted, However, conference room furniture is included for an adviser that is a corporation or a partnership, so this is the best choice. Finally, note that if the adviser were an individual, any "personal" assets that are not readily marketable such as home, home furnishings and automobiles, ARE excluded.

For offers of pre-organization certificates to be exempt under the Uniform Securities Act, the number of subscribers is limited to how many people? StatusA A. 1 person Correct B. 10 people StatusC C. 20 people StatusD D. 35 people B

Offers of pre-organization certificates are exempt under the Uniform Securities Act if no commissions are paid for soliciting potential subscribers; the number of subscribers is limited to 10 persons; and no payment is made by any subscriber. (This generally parallels the private placement exemption under State law, except that advertising is allowed for pre-organization certificates -but not for private placements.) Note that advertisements for such offerings are permitted because the intent of this law is to enable a new enterprise to obtain the minimum number of subscribers required to form the business under corporate law.

An agent omits to state material facts which are needed by an investor to make an informed decision. Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, this action is fraudulent: StatusA A. only if the statements refer to non-exempt securities StatusB B. only if the statements refer to exempt securities Correct C. for both exempt and non-exempt securities StatusD D. only if the customer can prove damages C

Omission of material facts that a customer needs to make an informed investment decision is fraudulent for both exempt and non-exempt securities. Remember that fraud applies to everything.

n agent omits to state material facts which are needed by an investor to make an informed decision. Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, this action is fraudulent if the statements refer to: I U.S. Government bonds II Municipal bonds III Corporate bonds IV Corporate stock StatusA A. I and II only Incorrect Answer B. III and IV only StatusC C. I, II, III Correct Answer D. I, II, III, IV D

Omission of material facts that a customer needs to make an informed investment decision is fraudulent for both exempt and non-exempt securities. Remember that fraud applies to everything.

Regarding the use of material facts when effecting customer transactions, which statement(s) is(are) TRUE? I Omission of material facts is fraudulent II If all known facts cannot be presented, the agent must decide which facts are "material" and must be presented III Material facts must only be disclosed if they would have a negative impact on the security's value IV Material facts must be disclosed when making either an offer to buy or sell StatusA A. I only StatusB B. II and III Correct C. I, II, IV StatusD D. I, II, III, IV C

Omitting material facts when effecting customer trades is fraudulent; agents must present all "material" facts about a transaction to customers; it makes no difference whether material facts might have either a negative or positive impact - they must be disclosed; and material facts must be disclosed when making an offer to buy or sell securities.

Under the Uniform Securities Act, which statements are TRUE about an agent's registration? I Once an agent is registered in one State, that agent is registered in all 50 States II Once an agent has filed a registration application in a State, it is effective within 10 days of application III Unless the State adopts another rule, registration expires on December 31st of each year IV If an agent terminates employment with a broker-dealer, the agent's registration is terminated StatusA A. I and II only Correct B. III and IV only StatusC C. II, III, IV StatusD D. I, II, III, IV B

Once an agent completes a registration application that is accepted by the State, the license does not become effective for 30 days, making Choice II incorrect. The license is only granted for that State; for example, to be licensed in 6 different States, 6 different applications must be submitted. In most states, the license expires on December 31st of each year - therefore an annual renewal is required. If the agent leaves a broker-dealer, the agent's license is revoked. To reactivate the license, the agent must associate with another registered broker-dealer.

Which statement(s) is (are) TRUE? I An agent may guarantee a customer account against loss II A broker-dealer may guarantee a customer account against loss III A customer may guarantee another customer account against loss IV An investment adviser may guarantee a customer account against loss StatusA A. I and II only StatusB B. III and IV only Correct C. III only StatusD D. I, II, III, IV C

One customer may guarantee another customer's account - this is not prohibited. For example, a parent may guarantee the account of a child in college who is of legal age to open the account; but who has no credit history. It is prohibited for broker-dealers, investment advisers and their agents, to guarantee an account against loss.

Under the provisions of the Uniform Securities Act, net capital requirements for broker-dealers must be kept in accordance with the provisions of the: StatusA A. Securities Act of 1933 Correct Answer B. Securities Exchange Act of 1934 StatusC C. Investment Advisers Act of 1940 Incorrect Answer D. Uniform Securities Act as adopted in that State B

Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer net capital rules under the Securities Exchange Act of 1934, the State can only have a rule requiring net capital standards that are in conformity with the Act of 1934's requirements.

Under the provisions of the Uniform Securities Act, required records for broker-dealers must be kept in accordance with the provisions of the: StatusA A. Securities Act of 1933 Correct B. Securities Exchange Act of 1934 StatusC C. Investment Advisers Act of 1940 StatusD D. Uniform Securities Act as adopted in that State B

Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer recordkeeping rules under the Securities Exchange Act of 1934, the State can only have a rule requiring that records be kept in conformity with the Act of 1934's requirements.

Under the Uniform Securities Act, the registration application of an investment adviser must include: StatusA A. a listing of the adviser's customers and their financial holdings StatusB B. a copy of the adviser's policies and procedures manual Correct C. the adviser's financial condition and business history StatusD D. a copy of the adviser's Code of Ethics C

Part of the registration application with the State is information covering the investment adviser's financial condition and history. There is no requirement to include a client listing, copy of the firm's procedures manual or copy of the firm's Code of Ethics.

A password-protected website is defined as: StatusA A. advertising Correct B. sales literature StatusC C. correspondence StatusD D. public forum B

Password protected websites are only seen by a specific audience, so they are defined as sales literature. In contrast, a non-password-protected website is defined as advertising, because it is seen by the general public.

Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act? I Investment advisers are subject to post-registration requirements II Investment advisers are not subject to post-registration requirements III Agents of investment advisers are subject to post-registration requirements IV Agents of investment advisers are not subject to post-registration requirements StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

Post-registration requirements cover such things as maintaining books and records; making required filings with the Administrator; giving reports to customers; and filing advertising and sales literature with the State. These are requirements for both broker-dealers and investment advisers. This portion of the Uniform Securities Act does not apply to their agents, however.

Prior to the effective date of a securities offering made pursuant to an underwriting whose registration is pending in a State, an agent may sell the issue: StatusA A. only to accredited investors StatusB B. only to investors if the agent discloses that the securities are not yet registered StatusC C. only if the purchaser signs an acknowledgment of the unregistered status of the securities Correct D. under no circumstances D

Prior to the effective date of registration of a non-exempt security in that State, the issue cannot be offered or sold to investors. Remember that agents are prohibited from offering or selling unregistered non-exempt securities in a State. It makes no difference if the purchaser signs a statement that he knows that the securities are unregistered; nor if the purchasers are accredited investors.

A customer holds 52% of ABCD Corp. common stock, a thinly traded stock listed in the OTCBB. The customer wishes to sell 1% of her holding and requests that the broker display her offering quote. Which statement is TRUE? StatusA A. The quote cannot be shown since only dealer offerings are listed in the OTCBB StatusB B. The dealer cannot enter the quote unless the State Administrator approves Correct Answer C. The dealer can enter the quote only if it is bona-fide Incorrect Answer D. The dealer can enter the quote without restriction C

Quotes shown in any public market can reflect either a dealer or customer position. As long as this customer is making a bona-fide offering of the shares, the quote can be displayed.

The Administrator, in regards to the registration of securities, may: I impound the proceeds from the sale of the securities until the issuer receives a specified dollar amount II require the filing of original copies of confirmed subscription agreements III require the delivery of a prospectus IV require that the issuer file quarterly reports of sales of the issue StatusA A. I and II only StatusB B. III and IV only StatusC C. II, III, IV Correct D. I, II, III, IV D

Regarding registration of securities in a State, the Administrator is empowered to impound the proceeds of the sale of the securities until a specified dollar amount is sold (this is typical for so-called "all or none" underwritings, where, if the entire issue is not sold, the deal is canceled). The Administrator can require the filing of original copies of confirmed subscription agreements (these are completed by customers who wish to "subscribe" to the new offering of securities); and can require that a disclosure document (prospectus) be provided to customers. Finally, the Administrator can require that the issuer file quarterly progress reports regarding the sale of the issue.

A person makes an initial application for State registration on April 30th. Which statement is TRUE regarding the filing fee? StatusA A. The fee will be pro-rated and only 4/12ths of the annual fee must be paid StatusB B. The fee will be pro-rated and only 8/12ths of the annual fee must be paid Correct C. The annual fee is not pro-rated and the full year filing fee must be paid StatusD D. No filing fee is due until the annual December 31st renewal C

Registration applications for broker-dealers, investment advisers, and agents expire on December 31st of each year, unless the Administrator changes that date. If a new application is filed at any point during the year, there is no pro-rating of the annual filing fee amount.

A broker-dealer is registering a security in a State by coordination. In doing so, the broker-dealer files the necessary paperwork with the SEC and is compliant with the: A. Securities Act of 1933 B. Investment Advisers Act of 1940 C. Investment Company Act of 1940 D. ERISA of 1974 A

Registration by Coordination allows an issuer to use its SEC-registration documents under the Securities Act of 1933 as its registration documents in the State. When the SEC registration is effective, registration in the State is effective as well (as long as the required State filing fees are paid.) Also note that ERISA stands for the Employee Retirement Income Security Act of 1974, which sets the rules for corporate pension plans.

An issuer has filed in a State to register a new issue by coordination. The registration has been stopped by the Administrator. Now the Administrator has vacated the stop order. This situation could occur if: StatusA A. the offering is being made in violation of State law and the SEC has granted effectiveness to the Federal registration StatusB B. the Administrator serves upon all named parties a copy of the order and notifies the parties of their right to request a hearing Correct C. the registrant has failed to pay required filing fees but the registrant has remedied the situation StatusD D. it is in the public interest for the Administrator to vacate the stop order C

Registration by Coordination in a State coordinates the SEC federal registration with registration in the State. The SEC filing is used as the State filing document. As long as the SEC filing and final SEC price amendment are filed in the State, along with the payment of the filing fee, then the Administrator cannot deny registration in the State. However, if the fee is not paid, then the Administrator can issue a stop order (remember, States really like the $$$ that they get from all of these fees!). Once the fee is paid, the stop order will be lifted. The other choices are verbal garbage.

To use Registration by Coordination, an issuer must file a registration statement with: I the Securities and Exchange Commission II the Administrator of that State III FINRA A. I only B. I and II C. II and III D. I, II, III B

Registration by Coordination of a securities issue in a State allows the Federal registration document required under the Securities Act of 1933 (the Prospectus filed with the Securities and Exchange Commission) to be the basis for registering the issue in that State. There is no filing of registration documents with FINRA.

To use Registration by Coordination, an issuer must file a registration statement with the: A. Administrator of another State B. Securities and Exchange Commission C. Both of the above D. Neither of the above B

Registration by Coordination of a securities issue in a State allows the Federal registration document required under the Securities Act of 1933 (the Prospectus filed with the Securities and Exchange Commission) to be the basis for registering the issue in that State. There is no provision in Uniform State Law that allows a registration statement filed in one State to be the basis for filing a registration in another State.

Registration by Coordination permits simultaneous State registration of securities when the SEC registration: A. filed under the provisions of the Securities Act of 1933 becomes effective B. filed under the provisions of the Securities Exchange Act of 1934 becomes effective C. filed under the provisions of the Investment Company Act of 1940 becomes effective D. filed under the provisions of the Uniform Securities Act becomes effective A

Registration by Coordination permits simultaneous State registration of securities when the SEC registration filed under the provisions of the Securities Act of 1933 becomes effective.

A company that has never previously issued securities registered with the Securities and Exchange Commission, can register in a State by: I Filing II Coordination III Qualification A. I only B. II only C. II and III D. I, II, III C

Registration by Filing is only available to "seasoned" companies that have previously registered securities with the SEC. If a company has never issued securities before, this method cannot be used. Registration by Coordination coordinates State registration with a current Federal registration. This method is available to a company that has never registered securities in the State, as long as a current SEC filing is being made. Registration by Qualification is a detailed filing in that State for any issuer and is also available for first time registrants.

Registration by Filing would be used by which of the following? I A new company that is registering securities for the first time in the State II An established company that has previously registered securities with the Securities and Exchange Commission III An officer of a publicly held company selling unregistered shares of that company under SEC Rule 144 A. I only B. I and II C. II and III D. I, II, III C

Registration by Filing is used by established "seasoned" companies for which there is already substantial trading activity and marketplace information. Essentially, this method lets established companies use the prospectus filed with the SEC under the Securities Act of 1933, as the filing document with the State. This is the easiest and least costly State registration method. In addition, this is a method commonly used by non-issuers to offer shares in the State. As an example, an officer of a company holds unregistered shares of that company. If the company has registered shares outstanding, and is current in its SEC filings, the officer can sell the shares under SEC Rule 144, which registers the shares federally. To register the shares in the State, the officer would use this Registration by Filing procedure.

Registration by Filing would NOT be permitted for which of the following reasons? I An Administrator in another State has issued a stop order relating to this issue II The issue is only going to be offered in one State III The Securities and Exchange Commission denies effectiveness to the Federal registration statement IV The Administrator has not received a copy of the latest prospectus A. I and III only B. II only C. I, II, III D. I, II, III, IV D

Registration by Filing is used for "seasoned" companies to register securities in a State, when these companies have previously registered securities with the Securities and Exchange Commission. It is not available if another Administrator has issued a stop order against selling the issue (this would be the case with any securities registration); It is not permitted if the issue is only going to be sold in one State, since there is no Federal registration for intrastate issues; it is not available if the SEC does not allow the Federal registration to become effective; and it is not available unless the issuer files a copy of the latest prospectus used in the Federal registration with the State Administrator.

Which of the following securities can be registered by qualification in a State? I Direct Participation Program II Fractional Interest in an Oil and Gas Program III Voting Trust Certificates IV Pre-organization Certificates StatusA A. I and II only StatusB B. III and IV only StatusC C. II, III, IV Correct D. I, II, III, IV D

Registration by Qualification in a State is the most difficult method and can be used for ANY security - and all of the choices listed are defined as securities. It is typically used for a company's initial public offering where there is no Federal SEC registration, so the State has no other information about the issuer and the issuer must "qualify" to have its securities registered in the State. In contrast, if an issuer is registering with the SEC, it can use the Federal SEC registration as its State registration document under "Registration by Coordination." If an issuer has previously registered securities with the SEC and State, it is a "seasoned issuer" and the State knows who the issuer is. Then the issuer can use the simpler method of Registration by Filing (Notification) in the State.

Registration by Qualification would most likely be used for a(n): A. issue that is being registered in another State B. issue that is being registered with the SEC C. secondary offering from an established company D. primary offering from a new company D

Registration by Qualification would be used by a first time issuer in a state that has never previously registered securities with the state. Since the state knows nothing about the registrant, the registrant must "qualify" in the state. Registration by coordination allows the coordination of an SEC registration with the state registration (Choice B). Registration by filing would be used by an issuer that has already registered issues in that state - since the state "knows" the issuer, it can simply register a subsequent securities offering in that state by "filing" (Choice C).

If a corporation has NOT previously filed a Federal registration statement for an initial offering of securities solely in its home state, registration in that state must be completed by: A. coordination B. qualification C. notification D. administration B

Registration by qualification is used by a first time issuer of securities in a State that is not concurrently registering the issue with the SEC. Because the State does not know the issuer, the issuer must "qualify" the issue for registration in the State. If the issuer previously registered securities in the State, then the State knows this issuer. Then, the issuer can register by the simpler method of "Registration by Filing." If the issuer is registering the issue with the SEC, it can use the SEC documents as the registration application in the State under the "Registration by Coordination" method.

Registration by qualification becomes effective: A. concurrent with the registration statement filed with the SEC becoming effective B. on a date set by the Administrator C. 10 days after filing D. 30 days after filing B

Registration by qualification is used by issuers for their first time registration in that State when no SEC registration is required (that is, they must "qualify" their issue for registration in the State). Registration becomes effective when the Administrator so determines (which is normally 30 days after filing, if there are no "problems" with the filing). Please note that of the choices offered, Choice B is best, since registration is not automatically effective 30 days after filing.

An investment adviser representative would be denied registration for all of the following reasons EXCEPT the IAR: A. is insolvent B. failed to pay registration filing fees C. was convicted of a securities misdemeanor 11 years ago D. is not affiliated with an investment adviser C

Registration can be denied to those convicted of misdemeanors involving the securities business; or any felony; occurring within the past 10 years. After 10 years have elapsed, that person can re-enter the business. If the representative is insolvent; does not pay filing fees; or is not affiliated with an investment adviser; registration will be denied.

The Administrator can deny registration of an applicant for all of the following reasons EXCEPT the applicant: A. was convicted of a securities misdemeanor within the past 10 years B. has been convicted of a securities felony within the past 10 years C. is insolvent D. is inexperienced D

Registration cannot be denied due to inexperience alone. It can be denied if the applicant is insolvent; or if the applicant has been convicted of a securities misdemeanor; or any felony; within the past 10 years.

Registration of a security in a State means all of the following EXCEPT: StatusA A. disclosure documents have been filed with the Administrator StatusB B. the Administrator has reviewed the content and accuracy of the filing Correct C. the Administrator has approved of the securities being offered StatusD D. the appropriate filing fees have been paid to the state C

Registration of a security does not mean that the Administrator approves of the issue. Registration means that required papers have been filed and reviewed by the Administrator; and that the appropriate filing fees have been paid to the state.

A Registered Investment Adviser (RIA) is formed and registers in the State on October 15th. The RIA would be required to re-register in the State by: Correct A. December 31st of the year of registration StatusB B. January 1st of the year following the year of registration StatusC C. April 1st of the year following the year of registration StatusD D. January 1st of the second year following the year of registration A

Registration of broker-dealers, investment advisers, agents and investment adviser representatives all expire on December 31st of each year. These must be renewed by the December 31st date (accompanied by payment of a fee), otherwise they expire. The fact that the adviser first registered earlier in the year does not change the renewal date or pro-rate the renewal amount.

A registration statement which has been filed for a security: I is effective for 1 year II remains in effect if the issuer cancels the sale of the issue III remains in effect if a "stop" order is issued by the Administrator Correct A. I only StatusB B. I and II StatusC C. II and III StatusD D. I, II, III A

Registration statements for securities are effective for 1 year. If the issuer cancels the sale of the issue, that registration becomes void. If a stop order is entered, the registration ceases to be effective and sale of the issue must stop.

Unless varied by the Administrator, each registration application expires: Correct A. December 31st of each year StatusB B. December 31st of every second year StatusC C. December 31st of every third year StatusD D. December 31st of every fifth year A

Registrations expire on December 31st of each year, unless the Administrator changes this date.

Which of the following individuals employed by a Federal Covered Adviser would be required to register in the State? StatusA A. An individual employed by the adviser to write research reports distributed to customers StatusB B. An individual whose clients consist of 8 mutual funds and 8 individuals, 5 of whom are officers of the adviser Correct C. An individual whose clients consist of 5 mutual funds and 8 individuals StatusD D. An individual whose clients consists of 15 mutual funds and 3 individuals C

Remember that there is no Federal registration of the representatives of Federal Covered Advisers - only the Adviser registers with the SEC. The representatives of Federal Covered Advisers still must register in the State where they are physically located; and in any State where they solicit advisory business. However, if the adviser has no office in the State and its only customers are institutions (such as mutual funds), then the agents do not have to register in that State; and if the adviser has no office in the State, and it effects business with 5 or fewer clients in the State, it does not have to register under the "de minimis" exemption. When counting clients under the "de minimis" exemption, clients that are officers of the adviser itself, are excluded. So in Choices B, C, and D, the number of mutual fund clients is irrelevant. If the adviser has more than 5 clients in the State, it would have to register. Choice B has 8 individual clients, 5 of whom are officers of the adviser, so there really are only 3 individual clients here. Choice C, with 8 individual clients, is the one that must register.

If a broker-dealer is registered in a State, the State Administrator would NOT be permitted to: StatusA A. require the broker-dealer to post a surety bond with the State Correct B. require the broker-dealer to maintain a greater net capital amount than required under Federal law StatusC C. require the broker-dealer to file advertising with the State Administrator StatusD D. require the officers of the broker-dealer to pass a licensing exam, even if they do not deal with customers B

Remember that when there is both a Federal and State law covering the same thing, the Federal law has "supremacy." Thus, the Administrator cannot compel a broker-dealer to maintain a higher level of net capital than that required under Federal law (the Securities Exchange Act of 1934 covers net capital for broker-dealers). As a condition of registration in a State, the Administrator can require the posting of a surety bond; can require the filing of advertising; and can require the officers of the broker-dealer to pass a licensing exam.

A written customer complaint is received by mail about an error made by the firm that the firm resolves to the customer's satisfaction. The customer asks the member firm for a copy of the complaint letter along with a written apology letter. The member firm should: I retain the original complaint along with its resolution in the agent's file and send the customer a photocopy of the complaint II retain a photocopy of the original complaint along with its resolution in the agent's file and send the customer the original complaint copy III send the customer a written apology letter and retain a copy in the agent's file IV not send the customer a written apology letter and retain a note to this effect in the agent's account file Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways: o The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; or o Instead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original." And in this example, since it was the firm's error that was corrected, send the customer the apology letter!

Under the Uniform Securities Act, for an agent to share in the gains and losses of a customer account, which statements are TRUE? I The customer must agree to the arrangement in writing II The broker-dealer must agree to the arrangement in writing III The Administrator must agree to the arrangement in writing IV Sharing is permitted only in direct proportion to capital contributed to the account StatusA A. I and IV only StatusB B. II and III only Correct Answer C. I, II, and IV Incorrect Answer D. I, II, III, IV C

Sharing in the gain or loss in a customer account by an agent is prohibited unless: o the customer agrees in writing (this is evidenced by the customer signing a joint account agreement with the agent); o the broker-dealer approves of the account in advance; and o any sharing is in direct proportion to capital contributed. There is no requirement for the Administrator's approval of the account.

Which statement is TRUE regarding the Administrator's ability to deny or revoke an exemption? StatusA A. An exemption from registration for a non-profit issuer may not be revoked by the Administrator StatusB B. The revocation order can cover a period of time prior to the date that the order was issued Correct Answer C. The order can be issued without giving prior notice to the affected parties Incorrect Answer D. If the order is appealed, the Administrator has the burden of proving that the exemption should have been revoked C

Since "affinity fraud" is a hot button topic for Administrators, they do have the right to reject the exemption of a not-for-profit issue such as a church bond, so Choice A is false. An exemption cannot be revoked retroactively, so Choice B is false. *** A revocation order can be issued without giving prior notice, so Choice C is true. Finally, if the Administrator's revocation order is appealed, the burden of proof to show that the exemption should be permitted is on the issuer - not the Administrator, making Choice D false.

An investment adviser has a soft dollar arrangement with DEF Brokerage Company. An investment adviser representative brings a big new account to the RIA and the account owner tells the IAR to direct 50% of his trades to XYZ Brokerage Company. If execution is not an issue, then the IAR should: StatusA A. send 50% of the customer's trades to the DEF Brokerage Company Correct B. send 50% of the customer's trades to the XYZ Brokerage Company StatusC C. send 25% of the customer's trades to the DEF Brokerage Company and 25% of the customer's trades to the XYZ Brokerage Company StatusD D. close the customer's account because of the conflict of interest between the DEF Brokerage Company and the XYZ Brokerage Company B

Since "execution" is not an issue, we must presume that the quality of trade execution and cost of trade execution at XYZ Brokers is as good as that received from DEF Brokers. Since the customer wants 50% of his trades directed to XYZ Brokers instead of to DEF Brokers (which has the "soft dollar" arrangement with the adviser), follow the customer's instructions!

Two companies, Company A and Company B, are involved in a securities offering. Company B is selling its stock. Company A's employees help sell the shares. Company A receives commissions from Company B and pays the commissions to its staff. Therefore, the employees of Company A are: A. agents of a broker-dealer B. their own broker-dealer C. independent contractors D. agents of an issuer A

Since Company A's employees are being compensated for selling the shares of Company B, Company A is defined as a "broker-dealer" and Company A's employees are agents of the broker-dealer. Both Company A and its employees would be required to register in the State. Also note that Company B would be defined as an "issuer" in this transaction, but this is not part of the question.

If a customer of a broker-dealer fails to pay for a securities purchase by the 5th business day from trade date, the customer's account must be: StatusA A. restricted Correct B. frozen StatusC C. liquidated StatusD D. terminated B

The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 5th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 5 business days from trade date.

A person who renders advice on fixed annuities for a fee; and who then sells the annuities, charging a commission, must register as a(n): I investment adviser in that State II broker-dealer in that State III agent in that State A. I only B. I and II C. I and III D. None of the above D

Since a fixed annuity is not defined as a security (instead it is defined as an insurance product), State securities law does not apply! (However, State insurance laws do apply, but they are outside of the scope of this examination.) There is no requirement for this person to be registered as an investment adviser since no advice is being rendered on securities. There is no requirement for this person to register as a broker-dealer or agent, since no securities transactions are occurring. Please note that if this were a variable annuity, then it is defined as a security. To take a fee for recommending a variable annuity product, registration as an investment adviser would be required. To charge a commission when selling this product, registration as a broker-dealer would be required as well.

A person who renders advice on fixed annuities for a fee; and who then sells the annuities, charging a commission: A. must register as an investment adviser in that State B. must register as a broker-dealer in that State C. must register as an agent in that State D. is not required to register as a broker-dealer, investment adviser or agent D

Since a fixed annuity is not defined as a security (instead it is defined as an insurance product), State securities law does not apply! (However, State insurance laws do apply, but they are outside of the scope of this examination.) There is no requirement for this person to be registered as an investment adviser since no advice is being rendered on securities. There is no requirement for this person to register as a broker-dealer or agent, since no securities transactions are occurring. Please note that if this were a variable annuity, then it is defined as a security. To take a fee for recommending a variable annuity product, registration as an investment adviser would be required. To charge a commission when selling this product, registration as a broker-dealer would be required as well.

A broker-dealer's agent that is registered in State A, wishes to sell a security in State B. Which of the following may be sold in State B without the agent being registered in State B? I U.S. Government Agency Issues II Commodity Futures III Fixed Annuities IV Limited Partnership interests investing solely in securities of U.S. Government Agencies A. I only B. II and III only C. I and IV only D. I, II, III, IV B

Since commodity futures and fixed annuities are not defined as securities, they are not regulated by the Uniform Securities Act. If an agent registered in State A, wishes to sell securities in State B, the agent must be registered in State B unless an exemption is available. Individuals (agents) who represent broker-dealers selling either exempt or non-exempt securities must be registered in that State. Thus, the agent selling U.S. Governments (an exempt security) in State B must be registered in State B. The individual selling limited partnership units (a non-exempt security) in State B must be registered in State B. Do not confuse these with the following exemptions: Individuals who represent issuers (not broker-dealers) selling exempt securities are not required to be registered; or Investment advisers who only give advice on U.S. Government securities are not required to be registered.

An IAR (Investment Adviser Representative) is employed by a Registered Investment Adviser in a State. The IAR has a young, wealthy, client with an investment objective of aggressive growth. To meet the objective, the IAR engages in active trading strategies, using an outside broker to effect the trades at a discounted rate. The IAR receives a small payment from the broker for these trades. Which statement is TRUE? StatusA A. Because the payment received by the IAR is small, there is no requirement to notify the client of the payment arrangement with the executing broker StatusB B. Because the client has an investment objective of aggressive growth, requiring an active trading strategy, there is no requirement to notify the client of the payment arrangement with the executing broker Correct C. The IAR must notify the client of the payment arrangement with the executing broker StatusD D. The IAR must notify RIA of the payment arrangement with the executing broker C

Since the IAR has a fiduciary obligation to the client and is already earning an advisory fee (presumably, it is not stated in the question), it is a breach of fiduciary duty for the adviser to accept payment from an executing broker for directing the client's portfolio trades to that broker. The basis for selecting a broker must be "best trade execution" along with "lowest fees" for getting best execution. However, if the fee arrangement, along with the fact that this is a conflict of interest, is disclosed to the client in writing, then it is permitted.

An individual who lived in State B is an existing client of Broker-Dealer. She has temporarily relocated to State A. She contacts her agent located in State B to buy securities. Which statement is TRUE? A. The Broker-Dealer and the agent must be registered in State A only B. The Broker-Dealer and the agent must be registered in State B only C. The Broker-Dealer and the agent must be registered in both States A and B D. The Broker-Dealer is only required to be registered in State B and the agent must be registered in both States A and B C

Since the agent is located in State B, the broker-dealer and agent must be registered in State B, regardless of who the clients are. This customer has "temporarily relocated" to State A. This is a longer time frame than a "vacation" - so the vacationing customer exemption does not apply. As a general rule, spending more than 30 days in a location is no longer considered to be a vacation. Thus, both the broker-dealer and the agent must be registered in State A as well, since the customer is residing there.

Surety bonds may be required by the State Administrator for the licensing of: I Agents II Broker-Dealers III Investment Advisers IV Investment Adviser Representatives StatusA A. I only StatusB B. I and IV only Incorrect Answer C. II and III only Correct Answer D. I, II, III only D

The State Administrator can require surety bond coverage for broker-dealers, their agents and investment advisers that wish to register. Note that there is no surety bond requirement for investment adviser representative registration.

An established customer of yours has a joint account with his wife. While on the phone with you, he discusses a specific NASDAQ stock and wants to buy shares of that stock when it declines to $50 a share or lower. The customer leaves for a 3-week vacation traveling to a third world country where he cannot be contacted. During this time, the stock declines to the level at which the customer wanted to buy the shares. What is an appropriate action to take? Incorrect Answer A. Buy the stock in the customer's account since he wanted to buy the shares at that price StatusB B. Buy the stock in the customer's account as long as the branch manager or compliance officer approves of the transaction StatusC C. Buy the stock in your own account and when the customer returns, transfer the shares to his account with his approval Correct Answer D. Attempt to contact the customer's wife, and if this is possible, obtain authorization from her to buy the shares D

Since this is a joint account, both the customer and his wife can trade in the account. Thus, after obtaining authorization from the customer's wife, you would be able to buy the shares of stock.

A customer has a joint account with her husband. She discusses with you a specific NYSE stock in which she wants to invest. She wants to wait for it to move lower before making a purchase. One week later, the stock begins to rise in price and you try, unsuccessfully, to contact the customer. You are concerned that the stock may keep increasing in value, thereby losing an opportunity for your customer. Which action is appropriate? StatusA A. Purchase the stock since this is what the wife expressed in the phone conversation with you Correct B. Purchase the stock upon verbal authorization from the customer's husband StatusC C. Purchase the stock in own account and transfer the shares to the customers' joint account upon her approval StatusD D. Do nothing unless approval to purchase the shares is obtained from both the husband and the wife B

Since this is a joint account, both the wife and the husband can trade in the account. Thus, after obtaining authorization from the husband, you would be able to buy the shares of stock.

The Uniform Securities Act prohibits: Correct Answer A. the solicitation of an order for an unregistered non-exempt security StatusB B. the acceptance of a discretionary power of attorney Incorrect Answer C. charging a higher than normal commission in a securities transaction StatusD D. effecting trades for customers that are not given in writing A

Soliciting orders for unregistered non-exempt securities is prohibited. For instance, common stock is a non-exempt security. If the security is not registered, orders cannot be solicited. Discretionary power of attorney can be accepted from clients. A higher than normal commission may be charged, but only in the case of an "odd-ball" trade (such as buying a 2 share odd lot) and the extra cost must be disclosed. A customer can give trading instructions verbally to an agent; there is no requirement for the customer to put them in writing.

Under the Uniform Securities Act, which of the following are EXCLUDED from the definition of an investment adviser? I Teacher II Engineer III Lawyer IV Accountant A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV D

Specifically excluded from the definition of an investment adviser under the Uniform Securities Act are lawyers, accountants, teachers, and engineers who give advice about securities that is incidental to their professional practice.

The term "blue skying" a new issue refers to: StatusA A. distributing a preliminary prospectus to give information about the offering to potential customers StatusB B. filing a registration statement with the SEC so it can review the filing for full and fair disclosure Correct C. registering the issue in each State where the securities will be offered to customers StatusD D. prospecting for potential customers that might wish to purchase the new issue C

State "blue sky" laws predated the Securities Act of 1933. The larger states had their own state registration laws to stop swindlers from selling their citizens securities that represented just a piece of the "big blue sky" (i.e. crap). Thus, state securities registration laws are commonly known as the "blue sky" laws.

Which statement is TRUE about an individual seeking a waiver from taking the Series 65 exam? StatusA A. A waiver cannot be granted Correct B. A waiver will be granted to anyone with a CFA designation StatusC C. A waiver will be granted to anyone with a Series 63 license StatusD D. A waiver will be granted if the individual files a consent to service of process in the State B

State Administrators will grant a waiver from taking the Series 65 exam to anyone holding a: CFP - Certified Financial Planner (granted by the CFP Board of Standards); CIC - Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC - Chartered Financial Consultant (granted by the American College); PFS - Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA - Chartered Financial Analyst (granted by the Chartered Financial Analyst Institute). However, that individual must still register in the State and pay annual State registration fees.

State registration of non-exempt securities is a requirement of the: StatusA A. Securities Act of 1933 Incorrect Answer B. Securities Exchange Act of 1934 Correct Answer C. Blue Sky Laws StatusD D. Uniform Transfer of Securities Act C

State Blue Sky laws actually pre-date the Federal securities acts, and require registration of securities offered in each State (unless an exemption is available). In addition, Blue Sky laws require the registration of broker-dealers, investment advisers, and their agents in each State (unless an exemption is available).

State "blue sky" laws provide for registration of all of the following EXCEPT: A. broker-dealers B. agents C. investment advisers D. issuers D

State blue sky laws provide for registration of broker-dealers and agents; registration of investment advisers and investment adviser representatives; and registration of securities issues. Note that the issuer itself is not registered in the state under the Uniform Securities Act - only the securities that it issues are registered.

Under the Uniform Securities Act, investment advisory contracts: StatusA A. can be oral Correct B. must be in writing StatusC C. must include a clause that customer statements will be sent periodically StatusD D. must give a complete description of the investment adviser's prior performance B

The Uniform Securities Act requires that investment advisory contracts be in writing. There is no requirement that customer statements be sent periodically unless the adviser takes custody of customer funds or securities (in which case, statements must be sent quarterly). There is no requirement to give a complete description of the adviser's prior performance in such contracts - this has no bearing on the contractual agreement.

Which of the following are generally required to be included in the State registration application of a broker-dealer or investment adviser? I Consent to service of process II Business history of applicant III Fingerprints of the officers IV Books and records of the broker-dealer used by the applicant StatusA A. I and II only StatusB B. III and IV only Correct Answer C. I, II, III Incorrect Answer D. I, II, III, IV C

State registration applications for a broker-dealer or investment adviser must include: The applicant's form and place of organization; The applicant's proposed method of business; The qualifications and business history of the applicant and each of its officers or partners; Any injunction, administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business and any conviction of a felony; The applicant's financial condition and history; and Any information to be furnished to a client (the "brochure") if the applicant is an investment adviser. Also note that the initial application must be accompanied by a consent to service of process, which appoints the Administrator as attorney for the applicant. Any lawsuits filed in court against a broker-dealer or investment adviser will result in a subpoena sent to the Administrator; who will then forward it to the registrant (broker-dealer or investment adviser) that is being sued. As part of the registration application, fingerprints are required by most states (Choice III). However, if the applicant already has fingerprints on file with FINRA as part of a U-4 filing, then the State will not require an additional fingerprint filing. Note that there is no requirement for filing of the books and records of the broker-dealer as part of the application, making Choice IV incorrect. (Note, however, that the Administrator has the power to inspect books and records of a BD or IA at will.)

Which of the following statements by an agent are prohibited under the Uniform Securities Act? I "All securities registered for trading on an exchange are suitable for you to invest in" II "All securities registered for trading on NASDAQ are speculative" III "All small capitalization securities that are not listed on NASDAQ are unregistered" IV "Some securities are traded in more than one market" StatusA A. I and III only StatusB B. II and IV only Correct C. I, II, III StatusD D. I, II, III, IV C

Stating that "All securities registered on an exchange are suitable investments" is untrue and unethical. Stating that all NASDAQ securities are speculative (Choice II) is also untrue - there are many large capitalization NASDAQ issues that are "safe" - such as Microsoft. Small capitalization issues included on NASDAQ are registered, so Choice III is untrue. It is true that some securities may be traded in more than one market (e.g., dual listings on both the NYSE and NASDAQ), making Choice IV true.

What is a good definition of "suitability"? StatusA A. When, in a securities transaction for a customer, a representative chooses the security to be traded, the amount to be traded, and the price and time of execution Incorrect Answer B. When, prior to recommending a securities transaction to a customer, information is obtained concerning the customer's financial status, tax status, investment objectives and investment needs Correct Answer C. When a representative has reasonable grounds for believing that his or her recommendation is appropriate for the client, based on the client's financial situation and needs, investment objectives, risk tolerance and other security holdings StatusD D. When the representative considers the client's risk tolerance, financial situation, financial needs, investment objectives and other security holdings in relation to the firm's list of recommended securities C

Suitability means that a recommendation is "suitable" for the client. In Choice C, the representative is using the client information to make a suitable recommendation - this is the best answer. In Choice A, the representative is exercising discretion. In Choice B, the representative obtains the customer account profile, but has not used to information to make an appropriate recommendation. Choice D is "close" but is not the best answer. It implies that suitable recommendations must come from the firm's recommended list - which is not true. A firm's recommended list usually includes recommended stocks or mutual funds, but does not include bonds. A customer that seeks preservation of capital and income should be recommended bond investments, and these would not be on the list.

A registered representative would ask a potential client which of the following when doing a suitability determination? Correct Answer A. "With the funds that you have available, is it better for you to buy a new car or put the funds into an IRA?" Incorrect Answer B. "Do you need to set aside funds to take a vacation this year? If this is the case, you will have less to invest." StatusC C. "Do you want me to select the investments in the account? If so, you must sign a power of attorney giving me discretion." StatusD D. "Do you own your own home and if so, do you have adequate homeowner's insurance" A

Suitability means that the recommended security meets the customer's investment objective, risk tolerance level, and investment time horizon. It also means that it makes sense within the customer's existing portfolio of investments. Only Choice A makes a recommendation of a security - the IRA investment. Choice B impacts the amount available for investment - but it does not recommend one. Choice C asks whether the customer wants the agent to exercise discretion when selecting investments - again, it is not recommending a security. Finally, Choice D has nothing to do with recommending a security.

Under the Uniform Securities Act, which of the following persons must register as a broker-dealer in a state? I A firm with no place of business in the state that has no clients in the state II A firm with no place of business in the state that has 25 clients in the state over the preceding 12 months III A firm with no place of business in the state that deals exclusively with issuers IV A firm with no place of business in the state that deals exclusively with financial institutions A. I and II only B. II only C. II, III, IV D. I, II, III, IV B

The Act excludes from the definition of a "broker-dealer" any firm that has no place of business in the State that does not have clients in the State; or that deals solely with issuers, broker-dealers, or financial institutions. Note that if a broker-dealer has an office in a State, then it must register in that State, regardless of who its customers may be. The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State, so Choice II does not qualify for the exemption and must register.

An investment adviser is considered to "take custody" of funds or securities from a customer if it: Incorrect Answer A. exercises discretionary authority by placing trades of securities for that customer StatusB B. accepts a check from the customer made payable to the fund custodian to buy a mutual fund StatusC C. accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer Correct Answer D. receives quarterly management fees from the custodian by direct deduction with client consent D

Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

Which State-registered investment adviser MUST report that it takes custody on Form ADV? StatusA A. An adviser that is affiliated with a parent bank or trust company Correct Answer B. An adviser that directly deducts management fees each quarter from client accounts StatusC C. An adviser that has discretionary authority over client accounts under a limited power of attorney Incorrect Answer D. An adviser that receives payments from clients at the time that services are rendered B

Taking custody means that the adviser is holding customer funds or securities or has the ability to access customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition. A limited power of attorney limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody.

Which State-registered investment advisers MUST report that they take custody on Form ADV? I An adviser that is affiliated with a parent bank or trust company II An adviser that directly deducts management fees each quarter from client accounts III An adviser that has discretionary authority over client accounts under a limited power of attorney IV An adviser that acts as a trustee for a client where the grantor of the trust is the client StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV D

Taking custody means that the adviser is holding customer funds or securities or has the ability to access customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition. Securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. A limited power of attorney limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody.

A broker-dealer has a client who is a transient oil rig worker. The client has spent the last year on an oil rig in the Gulf of Mexico off the coast of Louisiana and has just gotten a job for 6 months on an oil rig in North Dakota. After completing the job, the client intends to move back to Louisiana. The broker-dealer is registered in the State of Louisiana but not in the State of North Dakota. Which statement is TRUE about the broker-dealer doing business with the client in the State of North Dakota? A. The broker-dealer can do business with the client in North Dakota without registering there because it is registered in Louisiana B. The broker-dealer can do business with the client in North Dakota without registering there because the client is not a permanent resident of North Dakota C. The broker-dealer must register in the State of North Dakota D. The broker-dealer must register in the State of North Dakota only if it makes recommendations to the client C

The "vacationing" customer exemption only applies to customers who are temporarily in another State, which, though not defined by State law, is generally viewed as a stay of less than 30 days. A client who is in North Dakota for 6 months is not vacationing. He or she is viewed as a resident of the State and the broker-dealer (and agent) must register in the State to continue doing business with the client.

A Registered Investment Adviser uses a solicitor to refer clients and pays the solicitor for each client referred. Under the Uniform Securities Act of 1956 as amended, the solicitor: Incorrect Answer A. must register as an agent in the State StatusB B. is not required to register as an agent in the State Correct Answer C. must register as an investment adviser representative in the State StatusD D. is not required to register as an investment adviser representative in the State C

The Act defines an "investment adviser representative" as any partner, officer, director, or other individual employed by an investment adviser, who: Makes recommendations or renders advice regarding securities; Manages accounts or portfolios of clients; Determines which recommendations or advice regarding securities should be given; Solicits, offers, or negotiates for the sale of investment advisory services; or Supervises employees who perform any of the functions listed above. This individual is selling advisory services for the investment adviser and must register in the State as an IAR (Investment Adviser Representative).

All of the following are unlawful activities under the Uniform Securities Act EXCEPT: StatusA A. making an untrue statement of material fact to a customer StatusB B. deliberately failing to follow a customer's instructions StatusC C. omitting to state material facts about a security or transaction to a customer Correct D. soliciting customer orders for unregistered exempt securities D

The Act prohibits the solicitation of customer orders for unregistered non-exempt securities. There is no prohibition on the solicitation of customer orders for unregistered exempt securities such as U.S. Governments and municipals. Making an untrue statement of material fact; deliberately failing to follow a customer's instructions; and omitting to state material facts about a security or transaction are all unlawful activities.

The Administrator can require the filing of sales literature related to which of the following transactions? StatusA A. An underwriter purchasing the stock of an issuer in a firm commitment underwriting Correct B. A for-profit company issuing securities that are not exchange listed StatusC C. An investment company that is making purchases of listed stock in the secondary market StatusD D. An offer of bonds made by a State government that guarantees payment of interest and principal B

The Administrator can require the filing of sales literature, unless the security, or transaction, is exempt. Transactions between an underwriter and an issuer are exempt; secondary market transactions of listed securities are exempt; and municipal securities are exempt. A corporation issuing securities that are not exchange listed is a non-exempt transaction where the securities must be registered, so the Administrator can require the filing of sales literature used in connection with the offer of these securities.

The Administrator CANNOT require which of the following regarding federal covered securities offered in a State? StatusA A. Filing of documents relating to the issue in the State StatusB B. Notice filing for the issue in the State StatusC C. Payment of a filing fee in the State Correct D. Registration of the issue in the State D

The Administrator cannot require registration of federal covered securities in the State (unless the issuer fails to comply with State requirements for these issues). The State can require a notice filing; can require that the documents filed with the SEC for federal registration (or federal exemption) of the issue be filed in the State; and can require that a filing fee be paid to the State.

Under the provisions of the Uniform Securities Act, the Administrator, in connection with a securities registration, is prohibited from revoking a: StatusA A. registration prior to providing an opportunity for a hearing Correct B. registration retroactively StatusC C. statutory exemption in a specific sale of securities to a bank StatusD D. statutory exemption in a specific sale of securities to a broker-dealer B

The Administrator cannot revoke a registration retroactively; and cannot revoke a registration in the future; based upon facts known at the time that the registration was granted. The Administrator can revoke a registration as long as an opportunity for a hearing is provided within 15 days. The Administrator can modify the definition of an exempt transaction; or can deny an exempt transaction. The Administrator cannot deny the registration in a State of an exempt security, such as a U.S. Government bond or a municipal bond. The Administrator can, however, require the person selling the securities in the State to be registered.

The Administrator is empowered to inspect the books and records of a registrant: A. that are physically located in that State, but it cannot inspect books and records located in other States B. only if a court of law in the State issues an order compelling the registrant to provide access to its books and records C. only during regular business hours at a location and time agreed to by the registrant D. in any location where the registrant maintains records, either inside or outside that State D

The Administrator has the power to inspect the books and records of a broker-dealer that has registered in that State in any location and in any State.

If the State Administrator determines that a securities offering has been made on unfair terms, he or she may do all of the following EXCEPT: Correct A. suspend the registration statement without providing an opportunity for a hearing StatusB B. suspend the registration statement only if an opportunity for a hearing is provided StatusC C. notify the issuer of any proposed action StatusD D. take any actions based on findings of fact and conclusions of law A

The Administrator is allowed to deny or revoke the registration of a securities offering by order. The order cannot be entered unless appropriate prior notice is given to all interested parties; an opportunity for a hearing is provided; and written findings of fact and conclusions of law are provided.

The Administrator is empowered to revoke the registration of an investment adviser if the investment adviser has: I ceased operating as a business in that State II been judged to be mentally incompetent III relocated, and has not notified the Administrator of the new business location A. I only B. III only C. I and II D. I, II, III

The Administrator is empowered to revoke the registration of an investment adviser if the Administrator determines that the firm is no longer in business; if the adviser is judged in a court of law to be mentally incompetent; or if the Administrator cannot find the adviser after a reasonable search.

The Administrator may issue a stop order for a securities issue "in registration" for which of the following reasons? I The spread taken by the underwriters is excessive II The sale of the securities tends to work a fraud on investors III The issuer's business is illegal in that State IV The issuer's business is unproven in that State StatusA A. I and II only StatusB B. III and IV only Correct C. I, II, III StatusD D. I, II, III, IV C

The Administrator may issue a stop order for an issue "in registration" if it is in the public interest and the sale works a fraud on investors; or the underwriter's compensation (spread) is excessive; or the issuer's business is illegal in the State. The issuer's business being unproven in the State has no bearing on halting registration.

Under NASAA rules, the "Brochure" must be: I provided to clients at least 48 hours prior to entering into a written advisory contract II provided to clients at least 48 hours prior to entering into an oral advisory contract III filed with NASAA at least 48 hours prior to entering into a written or oral advisory contract Incorrect Answer A. I only Correct Answer B. I and II StatusC C. II and III StatusD D. I, II, III B

The Brochure Rule under NASAA rules requires that the brochure be given to customers 48 hours prior to entering into a written or verbal contract to provide advisory services. Alternatively, the customer can sign a contract without being given the "Brochure" as long as the customer can cancel without penalty within 5 business days of signing. There is no requirement to file the "Brochure" with NASAA 48 hours in advance. As a matter of fact, they already have a copy, since they have the Form ADV Parts 2A and 2B on file - that is the "Brochure" and "Brochure Supplement." Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

An individual wishes to form a broker-dealer as a sole proprietorship. Which of the following MUST be filed with the State? I Form BD II Consent To Service of Process III Surety Bond IV Filing Fee StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III only Correct D. I, II, III, IV D

The Form BD is the broker-dealer application that is used for both Federal and State registration. A consent to service of process appoints the State Administrator as attorney for the broker-dealer so that if anyone wants to sue the firm, they can serve the court papers ("service of process") to the State Administrator, who, in turn, will forward them to the registered broker-dealer. A filing fee must be paid and the Administrator can require the posting of a surety bond (an insurance policy or a cash bond required to operate a business in the State), which the State Administrator can draw on if the registrant violates State law. Finally, to register as a broker-dealer, the State can require that a broker-dealer (not an agent) maintain a minimum amount of net capital.

Jack Jones has been an IAR with a registered investment adviser for 10 years. He is leaving to start his own advisory business as a sole proprietor. He has hired an advertising firm to create a radio spot for his new firm. The account manager recommends that they use one of his largest clients - the managing partner of a prominent law firm in town - to give a testimonial about Jack. The lawyer agrees and records the following: "I have been a client of Jack Jones for the past 10 years. My investments with Jack have reliably produced superior returns and he has always acted ethically and with integrity." The use of this testimonial in a radio advertisement is: StatusA A. permitted since it is being made by a person that is unaffiliated with Jack Jones StatusB B. permitted because it is true and not misleading Correct C. prohibited under the provisions of the Investment Advisers Act of 1940 StatusD D. prohibited because the lawyer cannot express an opinion on the performance of an investment adviser C

The Investment Advisers Act of 1940 prohibits the use of customer testimonials in advertising - with no ifs, ands or buts. Because of federal supremacy, this prohibition applies at the State level.

All of the following are unethical practices of investment advisers under the NASAA Statement of Policy EXCEPT: StatusA A. charging a customer an advisory fee that is extremely high relative to fees charged by other advisers for similar services Correct B. exercising discretion for a short time period upon oral instruction of a customer StatusC C. failing to disclose sources of compensation received from anyone other than that customer relating to rendering advisory services to that customer StatusD D. telling a customer to buy or sell a security based upon a rumor heard about that security B

The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. (Please note that if the investment adviser is also a registered broker-dealer, the rules of FINRA would not permit this - FINRA requires written power of attorney from the customer prior to exercising discretion in the customer's account). Charging a customer an advisory fee that is excessively high relative to the fees charged by other advisers for similar services; failing to disclose sources of compensation received by the adviser in connection with rendering advisory services to that client (such as taking commissions on recommended trades); and inducing a customer to trade a security based upon a rumor; are all unethical and prohibited practices.

Which statements are TRUE about the filing of the annual surprise audit results with the Administrator by investment advisers? I Only advisers that take custody must be audited II All advisers must be audited III Audit results must be filed with the Administrator within 60 days of completion of the audit IV Audit results must be filed with the Administrator within 120 days of completion of the audit StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV B

The NASAA custody rule requires that each adviser that takes custody be audited on a "surprise" basis annually, so the actual date of the audit is only known to the CPA. There is no audit requirement for advisers that do not take custody. After the CPA shows up for the audit and completes the examination, a copy of the auditor's report and financial statements must be filed with the Administrator within 120 days of completion.

Federal securities laws supersede the provisions of the Uniform Securities Act in which of the following? I Registration requirements applicable to securities offerings II Registration requirements applicable to investment advisers III Broker-dealer capital, custody, financial responsibility and recordkeeping requirements IV Investigation and bringing enforcement action against broker-dealers for unlawful conduct A. I and II B. III and IV C. I, II, III D. I, II, III, IV C

The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

An investment adviser directs its trades to a broker-dealer paying non-discounted rates. In return, the broker-dealer provides the adviser with proprietary investment analysis software that it has developed. This is: I a soft dollar arrangement II a quid pro quo arrangement III permitted under the Uniform Securities Act IV prohibited under the Uniform Securities Act Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

The SEC and State Administrators permit so called "soft dollar" arrangements. An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients.

Which statement is FALSE regarding the powers of the State Administrator over a new investment adviser opening an office in that State? The Administrator: Correct A. cannot audit a new investment adviser if the Securities and Exchange Commission has audited that investment adviser within the preceding 6 months StatusB B. can inspect the office of an investment adviser in that State, even if the investment adviser's headquarters are located in another State StatusC C. can require that additional records be kept by the investment adviser StatusD D. can require that a larger surety bond be posted due to the nature of the investment adviser's business A

The State Administrator is empowered to conduct an inspection of an investment adviser that opens an office in that State at any time. It makes no difference whether or not the SEC has recently audited that firm. The Administrator can inspect any office of the investment adviser in that State, even if the investment adviser is headquartered in another State; can require the keeping of any records so designated; and can require a larger surety bond to be posted if the adviser takes custody of client funds or securities; or accepts discretionary accounts.

The State Administrator is supervised by: Correct A. Secretary of State StatusB B. Governor of the State StatusC C. NSMIA StatusD D. NASAA A

The State Administrator is part of the Secretary of State's office in the majority of States. Also note in some States, the State Administrator is part of the Attorney General's office, or the State Department of Corporations, Commerce, Business Services, or the State Securities Commission, none of which are offered as choices.

The State Administrator is supervised by: StatusA A. the State governor Correct Answer B. the State secretary Incorrect Answer C. NASAA StatusD D. the State treasurer B

The State Administrator is part of the Secretary of State's office in the majority of States. Also note in some States, the State Administrator is part of the Attorney General's office, or the State Department of Corporations, Commerce, Business Services, or the State Securities Commission, none of which are offered as choices.

A registration application is considered to be "complete" when the proper documents: StatusA A. are sent to the Administrator StatusB B. and the filing fee are sent to the Administrator StatusC C. are received by the Administrator Correct D. and the filing fee are received by the Administrator D

The State will define a registration application as "complete" when the proper documents and payment are received (not sent). Remember, they want their money!!!

If an adviser's registration filing is made electronically with the State, the requirement to affix a signature to an application is met by the applicant: Correct A. typing his or her name in the appropriate fields and submitting the filing electronically to IARD StatusB B. signing a separate written document in the presence of a notary public, evidenced by the notary's seal StatusC C. faxing an application that has been signed by the applicant in ink, with the same return fax phone number as that given on the application StatusD D. validating his or her identity by telephoning the State Securities Administrator's office and answering questions correctly A

The States are attempting to streamline the registration process by requiring electronic registration filing and payment of fees. They don't want any more paper! Paper forms are only accepted for reasons of "hardship." Typing of one's name into the required field on the electronic form constitutes a proper filing. The electronic database for investment adviser filing at the State level is "IARD" - Investment Adviser Registration Depository.

The Administrator can be under the obligation to file a U-6 Form for all of the following EXCEPT: StatusA A. a cease and desist order entered by the Administrator against an investment adviser representative StatusB B. an injunction entered by a court of law in the State against an investment adviser representative Correct C. written complaint received about an investment adviser representative from a whistleblower StatusD D. written complaint received from a client of the investment adviser alleging that the adviser stole $150,000 C

The U-6 Form is filed by regulators when they take disciplinary or legal action against a broker-dealer, agent, investment adviser or investment adviser representative. This information goes into the CRD (Central Registration Depository) or IARD (Investment Adviser Registration Depository) and is available for viewing by the general public and customers on BrokerCheck. One of the required U-6 reports is for written (not oral) customer complaints that allege a felony like theft or embezzlement. This goes into the BrokerCheck file and is made public, with a notation that this is an allegation and is not yet proven. If it is proven, then the resulting disciplinary action is reported on the U-6 and shown in BrokerCheck; if it is dismissed, then this is reported as well so that the allegation is removed from the agent's or IAR's BrokerCheck report.

A Canadian agent has an existing client who goes on vacation to Seattle, Washington. The agent wishes to contact the customer in Seattle about an investment that he wishes to recommend. The agent: A. is required to register in the State of Washington, as must the employing broker-dealer B. need not register in the State of Washington because the customer is on vacation C. is able to do business in the State of Washington as long as the agent is registered in Canada D. is required to register in the State of Washington, but the broker-dealer is not required to do so B

The Uniform Securities Act addresses Canadian broker-dealers and investment advisers, since their customers often travel extensively in the United States. As long as a Canadian broker-dealer or investment adviser does not have a place of business in the United States, it is exempt from registration (as are its agents) when effecting trades for pre-existing customers who are temporarily residing in the United States for less than ½ year and who intend to return to Canada. Regarding Choice C, the agent cannot do business in the State of Washington unless he or she is registered there. For example, the agent cannot solicit new clients in the State of Washington and cannot solicit existing clients who spend too much time in the State of Washington (more than ½ year) without being registered in the State of Washington. The exception only applies to Canadian BDs and IAs (and their agents) with no place of business in a State whose existing clients temporarily visit the U.S.

Which term is NOT defined under the Uniform Securities Act? A. Investment Adviser B. Investment Adviser Representative C. Broker-Dealer D. Broker-Dealer Representative D

The Uniform Securities Act defines a "broker-dealer;" it defines an "agent" of a broker-dealer (which is a representative, but this is the federal name, not the State name); it defines an "investment adviser;" and it defines an "investment adviser representative" (the agent of an investment adviser). Note the inconsistency here!

All of the following individuals are defined as "sales representatives" under the Uniform Securities Act EXCEPT an individual employed by a broker-dealer who: A. effects securities transactions only in non-exempt securities B. effects securities transactions only in exempt securities C. performs the function of giving securities quotations over the phone D. performs the function of accepting orders from customers of the firm C

The Uniform Securities Act defines an "agent" as an individual who represents a broker-dealer or issuer in effecting securities transactions. "Agents" are also known as sales representatives, and must register in each State in which they wish to perform trades. It makes no difference if the securities that this person trades or sells are exempt or non-exempt - these individuals are still defined as "agents" under the Act. An example of an exempt security is a municipal bond. It is exempt from the Act's registration requirements. However, the individual who sells these securities must still be registered as an agent in the State. Please note that clerical employees who do not effect trades are excluded from the definition of an agent.

Which of the following securities are EXEMPT under the Uniform Securities Act? I Industrial Loan Association Issues II Insurance Company Issues III Federal Credit Union Issues IV Bank and Savings and Loan Issues StatusA A. I and II only StatusB B. III and IV only StatusC C. I, III, and IV Correct D. I, II, III, IV D

The Uniform Securities Act exempts Industrial Loan Association issues; Insurance Company issues; Federal Credit Union issues; and Bank and Savings and Loan issues (among others).

An institutional buyer is defined under the Uniform Securities Act as any person: A. so designated by the Administrator by rule or order B. with over $100 million of assets under management C. defined under Section 4(6) of the Securities Act of 1933 D. that solely effects transactions using the mails or other means of interstate commerce A

The Uniform Securities Act exempts from registration in a State, any broker-dealer or investment adviser that does not have an office in the State and that only deals with "institutional buyers." These institutional buyers include banks, savings and loans, trust companies, insurance companies, investment companies, pension and profit sharing plans, other financial institutions, and anyone so defined by the State Administrator by rule or order. The Uniform Securities Act does not set a minimum "assets under management" standard to be defined as an institutional buyer.

An institutional buyer is defined under the Uniform Securities Act as: A. an institution with at least $100 million of assets available for investment B. an accredited investor as defined under Rule 506 of Regulation D of the Securities Act of 1933 C. any person defined by the Administrator by rule or order D. any institution that is regulated by the Federal Reserve, SEC, or State Insurance or Banking Commissioners C

The Uniform Securities Act exempts from registration in a State, any broker-dealer or investment adviser that does not have an office in the State and that only deals with "institutional buyers." These institutional buyers include banks, savings and loans, trust companies, insurance companies, investment companies, pension and profit sharing plans, other financial institutions, and anyone so defined by the State Administrator by rule or order. The Uniform Securities Act does not set minimum capital standards to be defined as an institutional buyer.

The provisions of the Uniform Securities Act include: I Anti-fraud II Common law deceit III Registration of securities IV Registration of broker-dealers, investment advisers, and their agents A. I and II B. III and IV C. I and IV D. I, II, III, IV D

The Uniform Securities Act is adopted in each State to prevent fraud in the sale of securities to the public. Aside from the anti-fraud statutes, it also prohibits deceptive practices when offering securities to the public ("common law deceit provisions"). The Act requires that securities offerings be registered in the State (unless an exemption is available); and that broker-dealers, investment advisers, and their agents register in the State (unless an exemption is available).

The person who is designated to enforce the provisions of the Uniform Securities Act is known as the: StatusA A. Secretary of State StatusB B. Governor StatusC C. Commerce Secretary Correct D. Administrator D

The Uniform Securities Act is enforced by the "Administrator" in each state.

An agent of a broker-dealer has her office in State A and has customers in States B and C, in which she is also registered. She has a group of customers who are dual citizens of the U.S. and Chile and has been referred business in Chile by some of these clients. To sell securities to these clients in Chile, she files a registration application with the Chilean securities regulator, who denies the application. Which statement is TRUE? A. The action of the Chilean securities regulator has no bearing on this individual's State agent registrations B. The action of the Chilean regulator can cause the Administrator of State A only to revoke her registration C. The action of the Chilean regulator can cause the Administrators of States B and C only to revoke her registration D. The action of the Chilean regulator can cause the Administrators of States A, B and C only to revoke her registration D

The Uniform Securities Act permits the Administrator to deny registration to an applicant or to revoke the registration of an agent based on actions taken by another securities or banking regulator, including foreign regulators.

A Registered Investment Adviser that is headquartered in State A has offices in States A, B and C. The IARs in each State only solicit clients in that State. The RIA must comply with the recordkeeping rules of: Correct Answer A. State A only Incorrect Answer B. States A, B and C respectively covering the transactions occurring in each State StatusC C. the most restrictive State only StatusD D. the Securities and Exchange Commission A

The Uniform Securities Act provides that State-registered advisers with offices in many States only have to comply with the recordkeeping rules set forth by the Administrator of the State in which the Adviser is headquartered.

A new broker-dealer has filed a registration application in the State. One of the officers listed in the application suddenly dies and another officer is appointed. This is: StatusA A. not a material event and no amendment need be filed with the Administrator Correct B. a material event that requires a prompt amendment filing with the Administrator StatusC C. a material event that requires an amendment filing with the Administrator within 30 days of occurrence StatusD D. an event that only requires filing with the Administrator if the broker-dealer has been formed as a partnership B

The Uniform Securities Act requires that if the information contained in any document filed with the Administrator becomes inaccurate or incomplete in any material respect, the registrant shall file a correcting amendment "promptly." A change in the officers of the BD is a material event.

A BD application is received by the State Administrator for a new broker-dealer subsidiary of a British securities firm. The application includes the disclosure that the parent firm was suspended from membership on the London Stock Exchange 4 years ago because of unauthorized trading by its Singapore branch. The State Administrator A. cannot deny registration based on a suspension that was imposed by a foreign regulator B. can deny registration based on the suspension by the foreign regulator C. must grant registration because the U.S. subsidiary is a legally separate entity from the parent company that is based in Britain D. can deny registration only if the actions of the parent company were a criminal offense B

The Uniform Securities Act sets a 10 year statute of limitations for securities related violations as a cause for denial of registration. This is based on violations of U.S. law. It also includes a provision regarding violations of the law of a foreign jurisdiction. In this case, it sets a 5 year statute of limitations. (Why? - Who knows!) The wording includes willfully violating the law of a foreign jurisdiction governing any aspect of the securities or banking business within the past 5 years; or being the subject of an action by a foreign regulator in the past 5 years denying, revoking or suspending the right to engage in the securities business as a broker-dealer, investment adviser or agent.

Under the Uniform Securities Act, which methods of storage are permitted to retain required records? I Microfilm II Microfiche III Digital Storage IV Computer Tapes B. III and IV C. II, III, IV D. I, II, III, IV D

The Uniform Securities Act states that any records that must be retained must be kept in compliance with SEC rules on recordkeeping. The SEC updated its recordkeeping rules to allow electronic recordkeeping (but paper records, as well as microfilms or microfiches, are still permitted). Electronic storage is permitted on computer disks, computer tapes, or any other digital storage medium.

All of the following media can be used to store data under Uniform State Law EXCEPT: A. Microfiche B. Digital storage C. CD-ROM D. Audio tape D

The Uniform Securities Act states that any records that must be retained must be kept in compliance with SEC rules on recordkeeping. The SEC updated its recordkeeping rules to allow electronic recordkeeping (but paper records, as well as microfilms or microfiches, are still permitted). Electronic storage is permitted on computer disks, computer tapes, or any other digital storage medium. Audio tape is NOT an electronic storage medium.

An investment adviser has its principal office in State A. It also has offices in States B, C, and D. The net worth requirements of States C and D are more stringent than that required by State A and the net worth rules of State B are the most stringent of all. The investment adviser is required to maintain minimum net worth in accordance with the rules of: Correct Answer A. State A Incorrect Answer B. State B StatusC C. State C StatusD D. State D A

The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.

An investment adviser has its principal office in State A. It also has offices in States B, C, and D. The recordkeeping requirements of States C and D are more stringent than that required by State A and the recordkeeping rules of State B are the most stringent of all. The investment adviser is required to maintain its records in accordance with the rules of: Correct A. State A StatusB B. State B StatusC C. State C StatusD D. State D A

The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.

An investment adviser would be considered to have custody of client funds if it: I received a check from a customer made payable to the custodian that was sent inadvertently and the adviser immediately forwards it to the custodian II received a check from a customer made payable to the adviser, who deposits it and opens an account for the client III received a power of attorney from a customer authorizing it to buy and sell securities on the customer's behalf IV received a power of attorney from a customer authorizing it to withdraw client funds or securities maintained with the custodian StatusA A. I and II StatusB B. III and IV Correct Answer C. II and IV Incorrect Answer D. I, II, III, IV C

The adviser "custody" rules of both the SEC and NASAA state that an adviser is considered to have custody if it holds, directly or indirectly, client funds or securities or has the authority to obtain possession of them. This includes: o receiving checks from clients made out to the name of the adviser (but not to the name of third parties), unless they are received inadvertently and returned within 3 business days of receipt; o any arrangement under which the adviser is permitted to withdraw client funds or securities from a custodian; or o any capacity, such as being a general partner, that gives the adviser access to client funds or securities. The rule also states that if an adviser inadvertently receives a check made out to a third party, as long as the check is forwarded to the third party within 3 business days, the adviser has not taken custody. Thus, in Choice I, the adviser has not taken custody because the check was made payable to a third party (the custodian) and then forwarded immediately to the custodian. In Choice II, the adviser has taken custody because it deposited the check. In Choice III, the adviser can only trade and cannot withdraw cash, so it does not have custody. In Choice IV, the adviser can withdraw customer funds and securities, so it does have custody.

Which of the following is NOT required to be in an investment advisory contract under NASAA rules? StatusA A. The formula for computing the advisory fee StatusB B. A clause prohibiting the adviser from assigning the contract without customer consent Correct C. A list of the states in which the adviser is registered StatusD D. Disclosure of whether the contract gives the adviser discretionary authority

The advisory contract, under NASAA rules, must include: o Description of services provided; o Term of contract; o Formula for computing fees; o Amount of prepaid fees to be returned if contract is terminated early; o Assignment of the contract is not permitted unless the customer approves; o Whether the contract grants discretionary authority to the adviser; and o Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

An agent overhears non-public sensational information of a negative nature while riding in an elevator. The agent is permitted to: StatusA A. tell the information to the broker-dealer's research department Correct B. tell the information to the broker-dealer's legal department StatusC C. sell short the stock in the agent's personal account StatusD D. sell short the stock in a customer account B

The agent appears to have overheard "inside information." It is appropriate to tell the information to the firm's legal department. The information cannot be told to the firm's research or trading departments, since they might act (trade) on the inside information. The agent cannot trade on the information in his or her own account or in a customer account.

An agent of a broker-dealer has been spending his spare time, at night and on weekends, on the Internet. The agent has been trading a thinly traded stock listed in the Pink Sheets, and has accounted for more than 50% of the trading volume in the stock. The agent has also been sending out e-mails to potential investors, recommending the stock. The agent has not informed his broker-dealer of these activities, since they only occur when the broker-dealer is closed. Which statement is TRUE regarding the applicability of the Uniform Securities Act to these activities? A. The agent is defined as a statutory broker-dealer and must register in the State B. Activities effected through the Internet are exempt from the provisions of the Uniform Securities Act C. A violation of the Uniform Securities Act will occur only if there is a customer complaint lodged against the agent with the Administrator D. The State Administrator can issue a stop order against the agent's broker-dealer for these actions A

The agent is operating outside the scope of his authority as the employee of the broker-dealer and the broker-dealer is not aware of his activities. The agent should have notified his broker-dealer of these "work" activities and followed any instructions of the broker-dealer (which would not have permitted this). Because the agent is trading such a large volume of the stock, he or she would be considered to be a "statutory broker-dealer" under Uniform State Law and must register as such. Remember, a broker-dealer is a person that is in the business of trading securities for others or for its own account (this individual is trading for his own account as a business). Furthermore, an unregistered broker-dealer cannot solicit orders in the State - which this individual is doing by sending out e-mails recommending the stock. The State Administrator can issue a stop order against the individual in this case, but would not issue a stop order against the broker-dealer (since the broker-dealer is not the one trading these securities) - making Choice D incorrect!

A customer contacts her IAR (Investment Adviser Representative) and tells her to: "Sell my 1,000 share XYZZ stock position if the price falls to $35 per share." After receiving this customer's order, the IAR stumbles across an XYZZ company press release that has not yet been distributed stating that the company has lost an extremely large government contract. The press release occurs 3 days later, at which point the stock's price dives and becomes worthless. The IAR was able to sell the customer's stock at $35 when the price was falling. Which statement is TRUE about this? StatusA A. This is an insider trading violation because the trade was based on non-public information StatusB B. This is not an insider trading violation because the customer was attempting to avoid a loss and was not trading to make a profit Correct C. This is not an insider trading violation because the customer placed the order before the IAR knew of the non-public information StatusD D. This is not an insider trading violation because the IAR did not solicit the customer to place the sell order C

The customer placed the sell order before the negative information was known to the IAR. The IAR had no inside information at that point, and there is no mention of the customer knowing this information prior to placing the order. Thus, there is no insider trading violation. Note that Choice B is incorrect because an insider trading violation can occur if a trade is made based on non-public information either to make a profit or avoid a loss. Choice D is incorrect because it makes no difference if a trade is solicited or unsolicited, when determining if an insider trading violation occurred.

Which transaction is included in the definition of "sale" under the Uniform Securities Act? A. An unsuccessful attempt to dispose of a security for value B. A gift of a non-assessable security C. A security given to a person as a "gift" with the sale of another security D. An unexecuted contract to sell a security (an open order) C

The definition of a sale is a contract to sell a security, or an interest in a security, for value. Choice C is considered to be a sale since the security was "given" with the sale of another security. Therefore, the value of that gift was included as part of the sale price, so the "gift" was actually sold for value. An unsuccessful attempt to sell a security for value is not a "sale" - rather it is defined as an "offer." A gift of a non-assessable security is a "gift" - not a sale. A gift of an assessable security is a "sale," since the seller is relieved of any future liability. An open order is not a sale until the order is executed.

Under the Uniform Securities Act, a "sale" of a security has occurred if a: I stock dividend is paid II listed option is exercised III gift of assessable stock is made IV loan of stock is made to a short seller StatusA A. III only StatusB B. I and IV Correct C. II and III StatusD D. I, II, III, IV C

The distribution of a stock dividend is not a "sale" - there is no ownership change. If a listed option is exercised, then a "sale" of stock is occurring at the strike price. A gift of an assessable security is not a gift - it is a "sale" because the seller is relieved of future obligations to pay into the venture. A loan of stock is not a sale; it is a loan that must be repaid by replacing the securities at a future date

If an agent wishes to withdraw his registration, all of the following statements are true EXCEPT: StatusA A. both the agent and the broker-dealer must notify the Administrator StatusB B. notification to the Administrator of the withdrawal must be made promptly StatusC C. the withdrawal does not become effective for 30 days Correct D. if there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 5 years from the withdrawal date D

The first 3 the statements are true regarding an agent's request for a withdrawal of registration in a State. Both the agent and the broker-dealer must notify the Administrator promptly of the withdrawal. The withdrawal does not become effective for 30 days. Finally, if there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 1 year (not 5 years) from the withdrawal date.

Which of the following would be defined as either an "offer to sell" or a "sale" of a security? I The gift of an assessable security II The gift of a non-assessable security III The giving of a security as a bonus in consideration for the purchase of securities IV The pledge of securities, creating a security interest as collateral for a loan A. I and II only B. I and III only C. II and IV only D. I, III, and IV B

The gift of an assessable security or the giving of a security as a "bonus" in consideration for buying another security are both defined as "offers to sell" under the Act. The gift of a non-assessable security is simply a gift - it is not an offer to sell. The pledge of securities for a loan is also not defined as an offer to sell.

TechnoCorp is a small cap technology stock that is quoted in the OTCBB. Under the provision of the Uniform Securities Act, the common stock of TechnoCorp is a(n): StatusA A. federal covered security that is exempt from State registration StatusB B. exempt security as defined under the Uniform Securities Act Correct C. non-exempt security that must be registered in the State StatusD D. exempt transaction that does not require registration in the State C

The major non-exempt securities under State law are securities that are not listed on an exchange or NASDAQ (since these are given a "blue chip" exemption from State registration). Thus, the securities that are non-exempt are OTC securities of corporations - this would be common and preferred stock of companies quoted in the OTCBB or Pink Sheets, as well as corporate bonds of these companies.

An investment adviser with its principal office in the State of Kentucky has 3 branch offices in Ohio and 4 branch offices in Tennessee. The State of Kentucky has a minimum net worth requirement for Investment Advisers of $30,000. The net worth requirement for the State of Ohio is $40,000 and the net worth requirement for the State of Tennessee is $35,000. Under the Uniform Securities Act, the minimum net worth that must be maintained by the Investment Adviser is: Correct A. $30,000 StatusB B. $35,000 StatusC C. $40,000 StatusD D. $0, since this is a Federal Covered Adviser A

The minimum Net Worth requirement is only required in the State where the adviser has its principal place of business. If the adviser has "out of state" branches, there is no additional Net Worth requirement based on those locations. Only the net worth requirement of the adviser's State where it has its principal office applies. The information in the question does not tell us if this is a Federal Covered Adviser, so this choice is basically a "throw away."

All of the following real estate investments would be defined as a "security" under the Uniform Securities Act EXCEPT: A. a condominium time share unit that will be rented for 50 weeks per year by an outside manager and will be used personally for 2 weeks per year B. a condominium apartment that will be used as a vacation home by the purchaser for 2 weeks per year and will be held open for rental by the purchaser for the remaining 50 weeks per year C. shares of a real estate investment trust that buys rental apartment complexes to generate income using third party management D. promissory notes issued by a borrower secured by real estate investments

The most basic definition of a security is "an enterprise entered into for profit managed by a third party." Under this definition, condominium time shares that are being managed by a third party are defined as a security in many States. On the other hand, the purchase of a condominium that will be held out for rent (a business purpose), but that will be managed by the purchaser (not by a third party), is simply a real estate investment - it is not a "security." Shares of stock (in this case, in an REIT) are a security; as are bonds and notes.

A limited partnership unit was initially sold to an investor for $25,000. The unit is illiquid and there is no current market for the security. As part of the partnership agreement, the general partner has the right to assess the limited partners if the partnership suffers a cash shortfall. The investor wishes to give the partnership unit to a close friend as a birthday present. This action is: A. prohibited under the Uniform Securities Act B. permitted and will allow the investor to take a $25,000 charitable deduction C. permitted and is considered to be an offer of a security D. an unethical practice C

The offer of the gift of an assessable security is not a gift - the issuer has the right to assess the holder for more monies, if they are needed to run the business. This gift relieves the giver of a liability to pay; which is the same thing as the recipient of the "gift" - the buyer - actually paying for the security. Thus, a buyer paying for a security; or relieving the seller of a liability; is a "sale" of that security. In this case, the final contract sale has not occurred, since the investor "wishes" to give this gift, so this is an offer to sell.

An investment adviser wants to charge a monthly fee to customers that engage in frequent options trading, equal to 6% of monthly options transaction volume. The adviser includes the options transaction fee in the brochure filed with the Administrator and discusses the fee with each customer that engages in options transactions. Which statement is TRUE? Incorrect Answer A. The monthly options transaction fee can be charged to customers because it has been disclosed to both the adviser's customers and to the State Administrator Correct Answer B. The monthly options transaction fee cannot be charged to customers because it is excessive StatusC C. The charging of a monthly options transaction fee is permitted without restriction StatusD D. The monthly options transaction fee is not permitted because such fees can only be charged quarterly or annually B

The overriding issue here is the fact that charging excessive fees is a prohibited practice - and a fee equal to 6% of options transactions is excessive. You could make an argument that because the fee was discussed with the customers and disclosed in the adviser's brochure, that makes it OK - but this is not the case.

An Investment Adviser with many years of investment experience has just finished developing proprietary software that, based on the customer input of parameters, creates an individualized strategic asset allocation plan, along with an algorithmic model to tactically overweight or underweight specific asset classes based on price movements of the investments in that class. This sophisticated program has been backtested and shown to provide 30% returns based on historical inputs. The Investment Adviser wants to market the program, charging an annual 20% fee to clients. The Investment Adviser: StatusA A. can market the program to potential clients because it has been backtested StatusB B. can market the program to potential clients if notice is given to the Administrator StatusC C. can market the program to potential clients if the fee structure is disclosed to potential clients Correct D. cannot market the program to potential clients because the fee is unreasonable D

The problem here is that the investment adviser appears to have created a good product, but a 20% fee is clearly excessive. Investment advisers, as fiduciaries, are only permitted to charge fees that are comparable to those charged by other IAs providing comparable services, and a 20% annual fee is excessively high.

Arrange the following in proper sequence when opening a new account for a customer: I Completing the new account form II Executing the first transaction III The manager signing the new account form IV Completing the order ticket for first order StatusA A. I, II, III, IV StatusB B. IV, I, II, III Correct C. I, IV, III, II StatusD D. I, IV, II, III C

The procedure to open a new account is to complete the new account form, qualifying the customer and then completing the first order ticket. The manager receives both of these and must approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

E-mail required to be retained by an investment adviser under the Uniform Securities Act: A. must be kept in printed form in a readily accessible location B. only applies to e-mail sent to customers, but does not apply to e-mail received from customers C. applies to e-mails sent or received from customers, relating to the offer, sale, trading, and custody of securities and funds D. applies to any electronic communication sent from, or received by, the investment adviser, regardless of whether the e-mail is personal in nature or business related D

The recordkeeping rules require the retention of e-mail. Both FINRA and SEC rules require the retention of BOTH business and personal emails, since representatives will often send business related e-mails from home computers and personal electronic devices.

At the initial registration of a broker-dealer, which of the following individuals would automatically be registered as an agent of that broker-dealer? I Officer of the broker-dealer II Director of the broker-dealer III Partner of the broker-dealer StatusA A. I only StatusB B. III only StatusC C. I and II Correct D. I, II, III D

The registration of a broker-dealer automatically constitutes the registration of that firm's officers, partners, and directors as agents since all of these individuals are named in the registration document.

An 80-year old client wishes to have his certified public accountant place trades in his securities account on his behalf. What should the broker-dealer (BD) do? StatusA A. Have the account owner give verbal authorization to the BD to accept orders on his behalf Correct B. Wait until the account owner gives written authorization to the accountant to place orders on the account owner's behalf StatusC C. Because the accountant has a fiduciary obligation to his client, orders can be placed by the accountant on the account owner's behalf without any further action needed StatusD D. The registered representative servicing the account must get a copy of the accountant's state certification before trades can be accepted from the accountant B

The rule for broker-dealers, written by FINRA, requires a written power of attorney before discretionary trades can be accepted. Note, in contrast, that the NASAA rule for investment advisers is that verbal discretion can be exercised, as long as the written power of attorney is obtained from the customer within 10 business days.

Under the Uniform Securities Act, the sale of securities to financial and institutional investors is known as a(n): Correct A. exempt transaction StatusB B. blue chip exemption StatusC C. de minimis exemption StatusD D. private placement exemption A

The sale of securities to financial institutions is an exempt transaction - therefore, the securities do not have to be registered. However, the agent and broker-dealer handling the transaction must be registered unless they are excluded from the definition of "agent" or "broker-dealer."

An investment adviser is "bought out" by another advisory firm. Which statement is TRUE? StatusA A. The sale must be approved by the State Administrator prior to the accounts being moved to the acquiring firm Correct B. Each customer of the "bought out" investment adviser must give prior approval for his or her account to be moved to the acquiring firm StatusC C. A majority of the customers of the "bought out" investment adviser must give prior approval for all of the accounts to be moved to the acquiring firm StatusD D. There is no requirement for approval from either the State Administrator or the customers B

The sale of the advisory firm is a transfer of each customer's account to another adviser. This is an assignment of the account that requires prior customer approval on each transferred account.

The term "broker-dealer" EXCLUDES which of the following? I A person in the business of trading securities for his own account II A person in the business of trading securities for the account of others III Financial Institutions IV Issuers of securities A. I only B. I and II C. III and IV D. I, II, III, IV

The term "broker-dealer" is defined as a person who: o Engages in the business of effecting securities transactions for the account of others o Engages in the business of trading for his own account (known as "proprietary trading") Persons NOT considered to be "broker-dealers" include: o Agents: These are individuals who represent the broker-dealer when performing securities transactions, basically sales representatives o Banks, Savings Institutions, and Trust Companies: These firms are separately regulated under State and Federal banking laws. o Issuers: (except when an issuer effects transactions other than with respect to its own securities)

Under Uniform State Law, an agent is permitted to sell securities for more than 1 broker-dealer: A. only if the types of securities offered by each broker-dealer are mutually exclusive B. only if the agent is separately registered with each broker-dealer C. only if one broker-dealer solely offers exempt securities and the other broker-dealer solely offers non-exempt securities D. under no circumstances B

The typical arrangement is that an agent is only registered with one broker-dealer, both at the Federal and State level. However, in rare cases, an agent may be "dual registered." This occurs most often if one broker-dealer sells a very limited product range (say limited partnerships only) and the individual wants to be licensed to sell another type of product (say mutual funds) to his customers. He or she can associate with another broker-dealer that only sells mutual funds. To do so, the dual affiliation is disclosed on both the Federal and State registration applications submitted by each of the broker-dealers to register that agent.

An investment adviser purchases a research report from a bank's research department. This report may be distributed to the RIA's clients: StatusA A. under no circumstances StatusB B. verbally only; printed copies may not be distributed Correct C. if the adviser discloses to his clients that the report was prepared by a third party StatusD D. if the adviser pays the bank for each person to whom the research report is distributed C

The use of "third party research reports" is permitted only if it is disclosed to the recipient of the report that someone else was the report's preparer.

An investment adviser representative is preparing a comprehensive investment plan for a customer. After completing the plan, the representative finds out that, unless precautions are taken, implementation of the plan could have severe tax consequences for the client. The investment adviser representative should: Correct Answer A. refer the client to a tax consultant StatusB B. refer the client to a new investment adviser Incorrect Answer C. create a new investment plan for the client StatusD D. present the plan as created to the client A

This question is very judgmental. Investment adviser representatives cannot give tax advice, so after preparing the plan, it should be reviewed by a tax professional. If, in the opinion of the tax professional, there is no way around the adverse tax consequences, then a new plan would have to be created that avoids this tax consequence.

An agent is soliciting customer orders for a new non-exempt issue that has been registered. The top officers of this company were previously associated with XYZ Company, a highly successful firm in the same industry. That firm's success was attributed to these individuals. Under the Uniform Securities Act, which statements by the agent are permitted? I "The top officers of this new firm were previously at XYZ Company" II "These top officers were responsible for the rapid growth of XYZ Company over the past 3 years" III "The top officers are experts in the field who made XYZ Company, their previous firm, into a gold mine" Correct Answer A. I and II StatusB B. II and III StatusC C. I, II, III Incorrect Answer D. None of the above A

The use of flamboyant or exaggerated language to induce a sale is prohibited. It is perfectly acceptable to state that the officers were associated with the other company and were responsible for its growth, as long as the statements are true.

Under the provisions of the Uniform Securities Act, all of the following statements are true about an investment adviser's initial registration EXCEPT: StatusA A. if no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after an application is filed StatusB B. the Administrator may, by rule or order specify an earlier effective date than the thirtieth day after an application is filed StatusC C. the Administrator may, by order defer the effective date until noon of the thirtieth day after the filing of any amendment Correct D. if no denial order is in effect and no proceeding is pending, the Administrator must give immediate effectiveness to the application if the registrant is transacting business in the state as a registered broker-dealer D

The wording in the Uniform Securities Act is that: "If no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after an application is filed." It then goes on to say that: "The Administrator may by rule or order specify an earlier effective date and may by order defer the effective date until noon of the thirtieth day after the filing of any amendment." Choice D is a bunch of nonsense!

All of the following are "critical" pieces of information that must be collected from a customer to open a new account EXCEPT: StatusA A. Name StatusB B. Date of Birth Correct C. Telephone Number StatusD D. Social Security Number C

There are 4 critical pieces of information that must be collected to open a new account: o Customer Name o Address o Date of Birth o Social Security Number These 4 pieces of information must be used to independently verify the customer's identity (a requirement put in place after September 11th, 2001). There is no requirement for a customer phone number, though, honestly, how would an account be opened without a way to reach the customer? Actually, there might be a situation where a phone number is not needed - for example, an account opened for a military serviceman who is stationed overseas.

Which form(s) MUST be signed by the customer in order to open a margin account? StatusA A. New Account Form Correct Answer B. Hypothecation Agreement StatusC C. Loan Consent Agreement Incorrect Answer D. All of the above B

There is no customer signature required on a new account form - this allows cash accounts to be opened over the phone, if a firm so desires. However, a customer signature is required on the hypothecation agreement - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer. There is no legal requirement for the customer to sign a loan consent agreement (where the customer agrees to permit the lending of the securities held in the account to someone else who wishes to effect a short sale). The customer can choose to sign the loan consent; or can choose not to sign.

All of the following may be required by the Administrator to be licensed as a broker-dealer EXCEPT: StatusA A. Minimum Net Capital StatusB B. Minimum Surety Bond Coverage StatusC C. Minimum Competency As Demonstrated By Passing An Examination Correct D. Minimum Time Periods Of Securities Business Experience D

There is no minimum time period requirement for a person to have been in the securities business to be licensed as a broker-dealer. The State Administrator can require that a broker-dealer maintain a minimum dollar amount of Net Capital; Minimum Surety Bond Coverage; and can require that the officers of the broker-dealer pass a qualifying examination.

The amount of commission charged to a customer to effect a securities transaction must be disclosed: StatusA A. prior to executing the transaction Correct B. on the trade confirmation StatusC C. on the account statement StatusD D. on the Form 1099

There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade. There is no disclosure of commissions on account statements; nor is there disclosure of commissions on Form 1099s (reports of dividends and interest paid to the security holder for tax reporting).

The President of an investment advisory firm is also a registered representative of a broker-dealer. This fact is disclosed in the adviser's disclosure document. The President buys 50 partnership units for his clients who are suitable. The President does not disclose to the clients that he receives a commission on each partnership unit purchased by his clients. Under NASAA Rules on Unethical Business Practices for Investment Advisers and Federal Covered Advisers, is this permitted? StatusA A. Yes, because the President is properly registered as an agent of a broker-dealer and this fact is disclosed in the adviser's disclosure document StatusB B. Yes, because the adviser determined the suitability of the investment for each of his clients Correct Answer C. No, because the adviser should have specifically informed each client that he would earn a commission on each limited partnership unit sold Incorrect Answer D. No, because officers of investment advisers are not permitted to receive commissions on recommended transactions in addition to collecting an advisory fee C

There is no suitability issue here, but there is a conflict of interest issue. The adviser is earning a commission on each partnership unit recommended and sold to his customers. This is a conflict of interest that must be disclosed to customers.

An investment adviser in State A has an investment adviser representative who gives advice to his client, a bank, in State B. When would the investment adviser representative (IAR) be required to be registered in State B? A. The investment adviser representative would never be required to register in State B because the investment adviser representative is already registered in State A B. The investment adviser representative would have to register in State B when the firm has 3 other clients in State B C. The investment adviser representative would have to register in State B when the investment adviser opens an office in State B D. The investment adviser representative would have to register in State B if he or she has 3 clients in State A and 3 clients in State B C

This IAR is physically in State A, so he or she must be registered there. Since the investment adviser (the firm) has no office in State B, and the IAR's client is a bank (an institutional investor), neither the IA nor the IAR are required to register in State B. If the IA opens an office in State B, then it has a physical presence there and both the IA and IAR would be required to register. The "de minimis" exemption allows an adviser with no office in a State, that has 5 or fewer non-institutional clients in a State, to do business without registration. Thus, this IA and IAR would also be required to register in State B if the firm had no office in the State, but the adviser had more than 5 non-institutional clients in State B. In both Choices B and D, this threshold is not met.

An investment adviser has been asked by many of his customers to help with preparation of their tax returns. The adviser does not have much experience with tax preparation. The adviser: StatusA A. can take on the tax preparation work if he discloses his lack of competence to the client StatusB B. can take on the tax preparation work if he educates himself in the applicable tax laws Correct C. should refer the client to a qualified tax preparer StatusD D. can take on the tax preparation work if he includes this service in his advertising

This adviser is not qualified to do tax returns. He should refer the clients to a qualified tax preparer. He or she can accept referral fees from the tax preparer for this, as long as this is disclosed to the clients. The wording in Choice B makes it almost a good choice, but "educating" yourself about the tax laws is not the same as being qualified. If Choice B said instead that this adviser studied and passed the CPA exam, then this would be a good choice.

An individual acts as a finder, facilitating mergers and acquisitions of companies that are both publicly and privately held. The individual searches for companies that appear to be compatible and that will either enjoy a revenue enhancement or cost reduction benefit from the transaction. The individual just introduces the parties to the proposed transaction, but has no involvement in the agreements or valuation. Upon the closing of the deal, the individual is paid a percentage of the transaction. Under NASAA rules, this individual A. needs to register as a broker-dealer in the State because he or she is receiving transaction based compensation B. needs to register as an investment adviser in the State because he or she is giving advice about investing in securities C. does not need to register as a broker-dealer in the State because the clients involved are institutional investors D. does not need to register as an investment adviser in the State because he or she has no involvement in the agreements or valuation A

This is a bit vague, but NASAA's (and the SEC's) stance on finders is that if they receive compensation that is "transaction based" - such as in this case because the finder will be paid a fee contingent on the closing of the deal - then the finder is a "statutory broker-dealer" that must be registered. This individual is not an investment adviser, because investment advisers do not earn transaction-based compensation. They earn an advisory fee, that is either a flat fee or a percentage fee - but they cannot earn a fee on each transaction (otherwise they become broker-dealers).

All of the following actions by an investment adviser are violations of the Uniform Securities Act EXCEPT the adviser: StatusA A. makes misleading statements to a client, but the client profits from the advice StatusB B. makes misleading statements to a client, but no transaction results from the advice Correct C. discloses the risks of the investment, but the client loses as a result of the advice StatusD D. makes misleading statements to a client, but the client is an accredited investor C

This is a common sense question. Making misleading statements to a customer is an unethical practice. Choice C is a fine, ethical practice - a client should be informed of the risks of an investment; and if the investment results in a loss - oh, well, - the customer knew what he or she was getting into!

An elderly customer in Florida wishes to open a securities account with an agent that is located and registered only in the State of New York. The customer's adult children have their primary residence in the State of New York. The agent tells the customer that he can only open the account if the customer uses his children's New York address. This is: A. permitted since the customer has a valid New York address B. permitted if the parent signs an affidavit that he or she is a legal resident of the State of New York C. prohibited because the adult children must have an account with the agent in New York in order for an account to be opened for the parent who resides in Florida D. prohibited because the agent is aware that the customer is not a New York resident and the agent must be registered in the State of Florida for the account to be opened D

This is a situation that is not uncommon. The elderly parent lives in Florida; the adult kids live in New York. In order for the agent who is only registered in New York to open an account for the parent, the agent must be registered in Florida. The parent cannot use the kids' New York address to make it appear that the parent is a resident of New York - since this is a lie!

An agent who works for a broker-dealer has a customer who works near-by who frequently comes into the office to get advice in person and place trades. One day, when returning from lunch, she finds a written note from the client stating that he had stopped by to talk and that he would come by later. The note also said that he was very unhappy with the performance of the agent's latest recommendations. Each of these recommendations was made by the agent from the firm's "Recommended List." Which statement is TRUE about this? StatusA A. Because the customer is returning later that day to talk, the agent need not take any action until after the face-to-face meeting with the customer StatusB B. Because the recommendations were from the firm's "Recommended List," the agent need not take any further action StatusC C. Because the note does not meet the definition of a complaint, the agent need not take any further action Correct D. The agent must forward the note to a supervisor for resolution D

This is a written note from the customer complaining about recommendations made by the agent. It must be forwarded to a supervisor for resolution.

A member firm is negotiating with an issuer to underwrite an add-on common stock offering and a registration statement has not yet been filed. A research analyst at the firm has been following the company for the past 5 years and now wishes to change the broker-dealer's rating from "Hold" to "Buy." The member firm should: StatusA A. issue the report in its normal fashion StatusB B. issue the report only to its best customers StatusC C. buy the stock in the market before issuing the report Correct D. not issue the report until at least 3 days after the effective date D

This one is a bit sticky. During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue research reports on that stock (except under very specific rules where the issuer has always previously been publishing reports about that company; and the new report is NO more favorable than the old reports). The issue here is that a favorable report would tend to influence that issuer's price upward; and then if the underwriter gets the deal, the underwriter could then sell the issuer's shares at a higher price and earn a larger underwriting spread. This is a conflict of interest. Member firms doing underwritings are prohibited from issuing research reports for 10 days following the effective date for IPOs; and 3 days following the effective date for add-on offerings.

An agent tells a customer: "Since I am not registered in your State, I cannot contact you and ask you to buy a security. However, you can call me and ask me to sell it to you, since then I am not soliciting you." Under the Uniform Securities Act: I The agent is soliciting an offer to sell from the customer II The agent is soliciting an offer to buy from the customer III The agent's actions are permitted IV The agent's actions are prohibited StatusA A. I and III Incorrect Answer B. I and IV StatusC C. II and III Correct Answer D. II and IV D

This one is interesting. If an agent is not registered in a given State, then that agent cannot solicit orders to buy or sell securities in that State. The agent appears to believe that if the transaction is unsolicited, then it is OK to take an order from that customer. However, this exemption only applies to the registration of securities and not to the registration of agents. The agent has attempted to induce an offer to buy (purchase) from the customer. This would be unethical if the agent were not registered in the customer's State.

Which of the following can cause the Administrator to deny an application for registration? A. The applicant was convicted of a Driving Under the Influence misdemeanor 4 years ago B. The applicant plead guilty to a minor traffic violation 2 years ago C. The applicant is the subject of an order from a Canadian court suspending registration as a securities representative D. The applicant declared bankruptcy in another State 5 years ago C

This one is pretty easy to get down to a 50/50 question. Choices A and B are not reasons for denying registration. The only DUI that can result in a denial of registration is a "felony" DUI conviction within the past 10 years - not a "misdemeanor" DUI conviction or a minor traffic violation. The key to determining whether Choice C or Choice D is the answer is based on whether we are talking in the "present tense" or "past tense." Because the applicant in Choice C is (present tense) under suspension by another "court of competent jurisdiction" (Canada has a robust legal system), this individual will be denied registration in the State. Regarding Choice D, the applicant must currently be insolvent to be denied registration. This person declared bankruptcy 5 years ago (past tense), so maybe he or she cleaned up his or her act and is now solvent (we don't know). If that applicant is currently solvent, then registration would not be denied.

A broker-dealer is a subsidiary of a company that is listed on the New York Stock Exchange. An agent of the broker-dealer believes that the parent company's stock is a good investment and wants to recommend it to her customers. Which statement is TRUE about this? StatusA A. This is permitted without restriction because the parent company is publicly traded StatusB B. This is permitted because the parent company qualified for a blue chip exemption as it is NYSE-listed StatusC C. This is permitted only if the agent opens a joint account with the customer to purchase the recommended stock of the parent company Correct D. This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation and it is disclosed in writing on the confirmation D

This question does not address reality! As an internal policy, most broker-dealers prohibit their agents from recommending the stock of their publicly traded parent company - because of the inherent conflict of interest. For example, an agent for Merrill Lynch cannot recommend the purchase of Bank of America stock (B of A owns Merrill). However, let's move to the theoretical and, evidently, the test world. This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).

A brokerage firm was founded 5 years ago by 3 partners - John, Joe and Mary. John and Joe supervise sales and trading; while Mary is responsible for the firm's back-office operations and financial reporting. The firm has been very successful and operates in all 50 States. John dies suddenly and Mary assumes his responsibilities. Which statement is TRUE? StatusA A. Mary is not required to register as an agent in each State because she was registered when the Form BD was filed StatusB B. Mary is not required to register as an agent in each State because the broker-dealer is federal covered Correct C. Mary must register as an agent in each of the 50 States StatusD D. Mary is not required to register as an agent because she is only supervising sales and not actually selling securities herself C

This question gets at a "fine" point in the law. The partners that are named in a registration application in each State become automatically registered as agents (once they pass the appropriate exam, e.g., 63/65/66) - but these are only partners that have sales or trading responsibilities. While Mary is included in the registration application, because she does not deal with the investing public, she would have had her automatic registration "turned off" and was not required to take the 63/65/66 exam. (It would be nice if the question mentioned this, but it doesn't and this is typical of exam-type questions.) If she takes a sales supervision job, then she becomes an agent and now must be registered in each State and must pass the appropriate exam! So this is really a question about who must take the 63/65/66 exams! Also note that there is no such thing as a federal covered broker-dealer; there are only federal covered advisers and federal covered securities.

A corporation listed on the American Stock Exchange (NYSE-MKT) wishes to distribute a stock dividend to its shareholders. Which statement is TRUE? StatusA A. The issuer must register the shares in the State by Filing StatusB B. The issuer must register the shares in the State by Coordination StatusC C. The issuer must register the shares in the State by Qualification Correct D. The transaction is exempt and the shares do not have to be registered in the State D

This transaction falls under 2 exemption provisions - and the issuer could rely on either one. Because the company is American Stock Exchange listed (the AMEX has been renamed the NYSE-MKT, but this is unlikely to show on the exam), its shares are exempt from registration in the State (the "blue chip" exemption). Because no commissions or other remuneration are paid when a stock dividend is distributed to shareholders, the issuer could rely on this exemption provision as well.

Which of the following information MUST be recorded on an executed order ticket? I Time of execution II Time of receipt III Account number IV Solicited or unsolicited StatusA A. I and II StatusB B. III and IV StatusC C. I, III, IV Correct D. I, II, III, IV D

Time of order receipt is recorded on the order ticket, as is time of order execution, assuming that the order was filled (which is the case here). Both of these are required to permit regulators to be able to detect "front running" violations. They are also needed to resolve customer complaints about possible execution errors. The account name and/or number must be on the order ticket. Finally, it must be recorded whether the trade was solicited or unsolicited.

Which order for a customer's account can be accepted by an agent of a broker-dealer? StatusA A. The order is placed by the customer's attorney, who assures the agent that the customer has given him trading authority StatusB B. The order is placed by the customer's accountant, who recommended the security to the customer StatusC C. The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written power of attorney signed by the deceased customer Correct D. The order is placed by the customer's attorney in an account where the customer is deceased, and the attorney provides a written copy of the will appointing the attorney as executor over the estate D

To accept trading orders in a customer account from anyone other than the customer, there must be a written trading authorization signed by that customer. In Choices A and B, there is no written authorization, so orders cannot be taken. Choice C is more subtle - the written power of attorney from the customer becomes void if the customer dies (it dies with the customer), so the attorney could not place the order. In Choice D, the written copy of the will signed by the customer and witnessed, where the attorney is appointed as executor, is the written authorization for that attorney to trade the deceased's account.

Under the Uniform Securities Act, an investment adviser is any person who is compensated for rendering advice about which of the following? A. Investment contracts B. Endowment policies C. Annuity contracts that periodically pay a fixed amount D. Bank issued certificates of deposit A

To be an investment adviser, advice must be given about securities - and an investment contract is a security (e.g., a contractual monthly investment plan that requires a fixed payment amount monthly for a minimum time period to buy a designated mutual fund). Endowment policies and fixed annuities are insurance products, not securities. A bank issued certificate of deposit is a bank product and is not a security.

Under the Uniform Securities Act, a security cannot be offered in a state unless it: I has been registered in the state II is an exempt security, in which case no registration is required III is offered in an exempt transaction IV is a federal covered security, in which case no registration is required StatusA A. I only StatusB B. II only StatusC C. I and II Correct D. I, II, III, IV D

To offer a security in a State, if it is non-exempt, it must either be registered, federal covered, or must be offered in an exempt transaction. If the security is exempt, there is no requirement for registration and it can be freely offered. Please note that the broker-dealer and agent offering the securities must still be registered unless these persons are excluded from the definitions of "agent" and "broker-dealer."

To qualify for the private placement exemption, all of the following are required EXCEPT: StatusA A. any purchases must be made with investment intent StatusB B. no more than 10 persons can purchase the issue during a 12 month period StatusC C. no commissions can be paid for soliciting individuals to purchase the issue Correct D. all purchasers must reside in one state D

To qualify for a private placement exemption, no more than 10 persons can purchase the issue within a 12 month period under the Act. All purchases must be made with investment intent; and no commissions can be paid to anyone except for solicitations of financial and institutional investors. There is no requirement that all of the purchasers reside in one state - the limitation is 10 purchasers of the issue per year. The purchasers can reside anywhere within the United States.

To be registered as an agent in a State, the Administrator can require which of the following? I Minimum Net Capital II Minimum Surety Bond Coverage III Minimum grade on a qualification examination IV Payment of filing fees StatusA A. I and II only Incorrect Answer B. III and IV only Correct Answer C. II, III, IV StatusD D. I, II, III, IV C

To register as an agent in a State, the Administrator can require the passing of a qualification examination; the payment of filing fees; and the posting of a surety bond. The minimum Net Capital (or Net Worth) requirements are only imposed for registration as a broker-dealer or investment adviser.

A customer has an individual account with a broker-dealer. The customer's wife calls and instructs the agent handling the account to "Sell out all positions and forward a check immediately; my husband is traveling and he needs a wire transfer." Under the Uniform Securities Act, the agent: StatusA A. should follow the wife's instructions StatusB B. may follow the wife's instructions only after getting written approval of the branch manager Correct C. may follow the wife's instructions only if the husband had completed a third party trading authorization for the wife StatusD D. must open a separate account for the wife to perform the transaction C

Trades may not be entered by a Third Party in an account unless the customer has signed a Third Party Power of attorney, authorizing that individual to trade. It makes no difference that the Third Party in this case is the customer's wife. (Please note that if this account were a Joint Account, the wife would be authorized to trade).

An Investment Adviser Representative enters into a contract with a new client for advisory services and provides the client with a glossy copy of Form ADV Part 2 (the "Brochure") and the Brochure Supplement. When he gets back to the office, he realizes that he forgot to have the client sign that the Brochure was received. The IAR: StatusA A. is not required to do anything because the customer received the Brochure and Brochure Supplement StatusB B. must have the customer sign within 48 hours that the Brochure was received Correct C. must have the customer sign the contract and give the customer 5 business days to terminate the contract without penalty StatusD D. must rescind the contract immediately C

Under NASAA Rules, the Form ADV Part 2A ("Brochure") and Part 2B ("Brochure Supplement") must be delivered to customers: no less than 48 hours prior to entering into either an oral or written advisory contract with a customer (a "2 day free look") - meaning the customer gets the Brochure and Supplement 48 hours prior to signing the contract; or alternatively the customer can sign the contract and be given the Brochure and Supplement, and then has 5 business days to terminate without penalty. In this case, because the customer did not receive the brochure 48 hours to signing the advisory contract, the customer must be given 5 business days to rescind. (Note: This is the NASAA rule - the SEC rule under the Investment Advisers Act of 1940 is NOT the same - it simply requires delivery of the Brochure and Supplement, at or prior to, entering into any advisory contract.)

Under NASAA rules, investment advisers must annually: Correct A. update the Form ADV disclosure document and send it to existing customers if there is a material change StatusB B. compute the total fees charged to each customer and disclose them in writing StatusC C. send customers account statements, if the adviser takes custody, or intends to take custody, of client assets StatusD D. update customer account profiles and suitability information and change investment allocations accordingly A

Under NASAA rules, investment advisers must update their Form ADV annually within 90 days of fiscal year end to reflect current and accurate information, and must send the updated Form ADV to its existing clients, if there is a material change. The Form ADV is stored in the IARD (Investment Adviser Registration Depository) system. It is used to register both State registered advisers and Federal covered advisers, and to send notice filings to States by Federal covered advisers. Account statements must be sent quarterly if the adviser takes custody. Annual updating of suitability information makes sense, but is not a rule.

An investment adviser is ready to open an account for a new customer. In the advisory contract, the adviser has included a clause that the customer has 48 hours to rescind the contract. The adviser gives the customer the brochure, takes payment from the customer, but forgets to have the customer sign the contract. Which statement is TRUE? Incorrect Answer A. Even though the customer did not sign the contract, he or she still has 48 hours to rescind the contract Correct Answer B. Even though the customer did not sign the contract, he or she has 5 business days to rescind the contract StatusC C. The contract is null and void StatusD D. The contract is binding and the customer cannot rescind the contract Record your answer Review this concept Print this question Listen to audio B

Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer was not given the brochure 48 hours prior to entering into the contract. By giving the adviser a check, the customer has "entered into a contract" to buy the advisory services. So this customer has 5 business days under NASAA rules to rescind the contract.

An investment adviser would be allowed to lend money to a customer in which of the following situations? StatusA A. The customer informs the adviser that he has been fired from his job and needs the funds on an emergency basis to meet his monthly living expenses until he finds a new job StatusB B. The customer is an old college buddy of the adviser and is going through a nasty divorce and he needs the funds to pay for court- ordered child support StatusC C. The customer has received a margin call in his brokerage account maintained at an unaffiliated broker-dealer and does not wish to sell those securities since they are likely to appreciate in the near future Correct D. The customer is a partner in the advisory firm who needs a cash distribution from the firm to meet required minimum tax payments due D

Under NASAA rules, the prohibition on borrowing money from customers or lending money to customers is completely straightforward. If a customer is in "financial hardship" or the customer is an "old friend" or the customer "needs money," these are not reasons that allow the rule to be ignored. However, a partner of an advisory firm could borrow money from the firm - this is done all the time. Firms lend money routinely to their officers and partners (and often to their employees too). An officer or partner is not a "customer" for purposes of this rule. These are owners of the advisory firm, not customers.

If a new securities issue is being registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the easiest method of State registration is Registration by: A. Coordination B. Qualification C. Filing D. Certification A

Under Registration by Coordination, the filing information given to the Securities and Exchange Commission for Federal registration is filed with the State. When the Federal registration becomes effective, the State registration is effective. Note that registration by filing (or notification) cannot be used for new issues. It is only available for issuers that have already registered securities in the State.

An Investment Adviser Representative is terminated. Under the Uniform Securities Act, which statement is TRUE about the records that must be retained by the Investment Adviser relating to this? StatusA A. The copy of the original U-4 signed by the registrant must be filed with the State Administrator StatusB B. The copy of the original U-4 signed by the registrant must be destroyed Correct C. The copy of the original U-4 signed by the registrant must be retained for a period of time specified by the State StatusD D. The copy of the original U-4 signed by the registrant must be given to the terminated representative C

Under the NASAA Model Rule on Recordkeeping for Investment Advisers, one of the records that must be kept is: "Copies, with original signatures of the investment adviser's appropriate signatory and the investment adviser representative, of each initial Form U-4 and each amendment to Disclosure Reporting Pages (DRPs U-4) must be retained by the investment adviser (filing on behalf of the investment adviser representative) and must be made available for inspection upon regulatory request." These must be retained for the period of time that the employee stays with the IA firm, and then for an additional 5 years after termination.

When a security is being registered in a State by coordination alongside a federal registration for that security being performed under the Securities Act of 1933, what information must be filed in the State? A. A consent to service of process, copies of the prospectus, and a copy of the articles of incorporation and bylaws B. A disclosure document that details the names and background of the company's directors covering the past 5 years, along with their salaries C. A copy of the prospectus in final form D. A notice filing A

Under Registration by Coordination, the issuer can coordinate State registration with an SEC registration being performed under the Securities Act of 1933. Essentially, the filing of the SEC information with the State will satisfy the State registration requirement. To Register by Coordination, the issuer must file, in addition to the consent to service of process, the following with the State: o 3 copies of the proposed Prospectus filed with the SEC under the Securities Act of 1933; o A copy of the issuer's Articles of Incorporation and By-Laws; o A copy of any Agreement Among Underwriters; o A copy of any Indenture governing the issuance of the security; and o A specimen of the security to be issued. If no stop order is in effect, when the Federal registration becomes effective, the State registration becomes effective. Any purchaser of the security in that State must get a prospectus copy, at or prior to confirmation of sale. Note that a "notice filing" could only be used in the State if the security being registered with the SEC were "federal covered" - meaning it is exchange or NASDAQ listed. If the security was not "federal covered," for example, a smaller company that will be listed in the Pink Sheets, then State registration is still required.

Under the provisions of the Uniform Securities Act, the determinant of whether an investment adviser can take custody of client funds is whether the RIA: StatusA A. is named as the trustee of a client trust account Correct B. has taken out a surety bond StatusC C. has a signed power of attorney StatusD D. has at least $25 million of assets B

Under State law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement. However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000.

An issuer has filed a registration statement in a State for a new issue of securities that is effective and sale of the issue has started. The issuer finds that there is great demand for the offering and wishes to increase the offering size. In order to do this, which statement is FALSE? A. A registration amendment must be filed with the State, if it is within 6 months of the date of sale B. The offering price can be increased C. An additional filing fee must be paid D. A late registration fee must be paid B

Under USA, a registration statement for a securities offering may be amended after its effective date to increase the amount of securities to be sold (this would be done if there was greater demand than expected). The offering price and underwriter's compensation cannot be changed. To do this, it must be within 6 months of the original sale date (the effective date) and both a filing fee for the additional securities being offered and a late registration fee must be paid to the State. (Of course, you might wonder why this bit of trivia must be known for the exam, but it must!) The amendment becomes effective when the Administrator so orders.

An issuer has filed a registration statement in a State for a new issue of securities that is effective and sale of the issue has started. The issuer finds that there is great demand for the offering and wishes to increase the number of shares being issued. In order to do this: I a new registration statement must be filed with the State, if it is within 6 months of the date of sale II an amendment must be filed, as long as it is within 6 months of the date of sale III an additional filing fee must be paid, but no late registration fee is required IV both an additional filing fee and a late registration fee must be paid A. I and III B. I and IV C. II and III D. II and IV D

Under USA, a registration statement for a securities offering may be amended after its effective date to increase the amount of securities to be sold (this would be done if there was greater demand than expected). The offering price and underwriter's compensation cannot be changed. To do this, it must be within 6 months of the original sale date (the effective date) and both a filing fee for the additional securities being offered and a late registration fee must be paid to the State. (Of course, you might wonder why this bit of trivia must be known for the exam, but it must!) The amendment becomes effective when the Administrator so orders.

Under the Uniform Securities Act, if an agent hears material inside information, the agent: I should not transmit the information to others II should not trade based upon the information III must wait 1 year before trading that security IV must notify the Federal Bureau of Investigation within 1 business day Correct A. I and II StatusB B. III and IV StatusC C. I, II, III StatusD D. I, II, III, IV A

Under Uniform State Law, the use of "inside information" as the basis for recommending or trading a security is prohibited. If material inside information is received by an agent, this information should not be told to others; nor should it be traded upon. There are no requirements to notify the FBI about the information; nor are there requirements to wait 1 year before trading the security that was the subject of the information. (Please note, however, that FINRA has a rule, requiring that such information, if received, be given to FINRA itself. This is not a State law, and thus, is not covered on this exam.)

Which of the following is NOT defined as a security under the Uniform Securities Act? StatusA A. Variable annuity contract StatusB B. Unit investment trust Correct C. Individual retirement account StatusD D. Commodity option contract C

Under the Act, IRAs and Keoghs are not defined as securities. Variable annuities are securities under the Act (since the purchaser bears the investment risk), as are unit investment trusts and commodity option contracts.

Administrators can require minimum Net Capital and Net Worth for: Correct A. Investment Advisers StatusB B. Investment Adviser Representatives StatusC C. Issuers StatusD D. Agents A

Under the Act, minimum Net Capital and Net Worth requirements can be set by the Administrator to register broker-dealers and investment advisers. There is no such requirement for agents or investment adviser representatives. Issuers do not register under the Act; only the non-exempt securities that they issue must be registered. Registration of non-exempt securities is covered in the following section.

Under NASAA recordkeeping rules for investment advisers, any advertisement, circular or other communication: I must be retained if it is circulated to 2 or more persons II must be retained if it is circulated to 5 or more persons III cannot recommend the purchase or sale of a specific security IV can recommend the purchase or sale of a specific security and if it does not state the reasons for the recommendation, a memo must be retained indicating the reasons for the recommendation Incorrect Answer A. I and III Correct Answer B. I and IV StatusC C. II and III StatusD D. II and IV B

Under the NASAA model rule, advertisements, circulars, bulletins or other communications circulated by the adviser to 2 or more persons must be retained for 5 years. Such communications can recommend the purchase or sale of a specific security and if the communication does not state the reasons for the recommendation, a memo must be retained indicating the reasons for the recommendation.

Under the Uniform Securities Act of 1956, as amended, an issuer is defined as any person: A. engaged in the sale of new issue offerings to the public B. who issues or proposes to issue a security. C. engaged in the sale of non-exempt securities offerings to the public D. engaged in the sale of secondary offerings to the public B

Under the Uniform Securities Act of 1956, as amended, an issuer is defined as any person who issues or proposes to issue a security. This is just a pure regurgitation of the definition.

Under the provisions of the Uniform Securities Act, all of the following persons with no office in the State are NOT required to register in a State as an investment adviser EXCEPT: A. an adviser that renders advice solely to banks in the State B. an adviser managing less than $100,000,000 of assets held by State residents C. an adviser that renders advice to no more than 5 clients in the State within a 12 month period D. an adviser that renders advice to employee benefit plans in the State with assets of at least $1,000,000 B

Under the Uniform Securities Act, advisers with no office in the State, that render advice solely to banks, broker-dealers, investment companies, insurance companies, governmental agencies and employee benefit plans with at least $1,000,000 of assets are exempt from State registration. In addition, an adviser with no office in the State, that has no more than 5 clients in the State in the past 12 months, is exempt. The adviser with less than $100,000,000 of customer assets in the State would be required to register.

Which of the following is NOT defined as a "broker-dealer" under the Uniform Securities Act? A. An agent of a broker-dealer who effects securities transactions B. A person who effects securities transactions for its own account C. A person who effects securities transactions for the account(s) of others D. An agent of a broker-dealer who effects securities transactions that are not recorded on the books of the broker-dealer A

Under the Uniform Securities Act, an "agent" of a broker-dealer is an individual associated with a broker-dealer, who represents the broker-dealer in effecting securities transactions. An agent is not a broker-dealer. A "broker-dealer" is defined as a person that engages in the business of effecting securities transactions for the account of others; or a person that engages in the trading of securities for its own account. If an agent of a broker-dealer engages in so-called "private securities transactions," a prohibited practice has occurred. All securities transactions effected by agents must be known to the broker-dealer; must be recorded on the books of the broker-dealer; and must be supervised by the broker-dealer. If the agent performs a "private securities transaction" that is not known to the broker-dealer, then that agent has, himself, become a broker-dealer under this definition (a so-called "statutory" broker-dealer). As such, he or she would have to register in the State as a broker-dealer before effecting such a transaction.

Which of the following are defined as an "agent" under the Uniform Securities Act? An individual who represents: I ACME Broker-Dealer effecting trades in preferred stocks II the City of New York selling the City's general obligation bonds to New York residents III ACCO Broker-Dealer effecting trades in private placements exempted under Regulation D IV the Federal Reserve effecting trades of U.S. Government securities in its open market operations A. I and III B. II and IV C. I, II, III D. I, II, III, IV A

Under the Uniform Securities Act, an agent is an individual who represents a broker-dealer in effecting securities trades with the public (I and III). It makes no difference if the security is exempt or not. Individuals who represent issuers (not broker-dealers) in effecting securities trades in specified securities (basically exempt securities) or specified transactions (basically trades with sophisticated investors) are excluded from the "agent" definition. An individual who represents New York City selling its bonds is excluded; as is an individual representing the Federal Reserve trading U.S. Government securities (the Federal Reserve acts as the fiscal agent for the U.S. Government when it issues debt).

To be registered as a broker-dealer, the Administrator typically requires the posting of a surety bond in the amount of: StatusA A. $1,000 Correct B. $10,000 StatusC C. $100,000 StatusD D. $1,000,000 B

Under the Uniform Securities Act, the Administrator typically requires the posting of a $10,000 surety bond to be registered as a broker-dealer (though each state administrator can set this amount).

Which of the following information MUST be included on an investment adviser's registration application under the Uniform Securities Act? I Administrative orders entered against persons associated with the investment adviser II Misdemeanor securities convictions of persons associated with the investment adviser III Felony securities convictions of persons associated with the investment adviser StatusA A. I only StatusB B. III only StatusC C. I and II only Correct D. I, II, III D

Under the Uniform Securities Act, the registration applications of persons associated with the investment adviser must disclose any administrative orders entered against them by a State Administrator (e.g., suspension or revocation of a registration); and must disclose any prior misdemeanor convictions for securities or "money" related offenses; and any felony convictions.

Which of the following notifies the Administrator if an agent changes employment from one broker-dealer to another broker-dealer? I Agent II Former Employer III New Employer IV FINRA A. III only B. I and IV only C. I, II, III D. I, II, III, IV C

Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him an agent; both the agent and the broker-dealer must notify the State Administrator promptly. FINRA has nothing to do with State registration requirements; it is only concerned with Federal registration requirements under the Securities Exchange Act of 1934.

Which of the following MUST notify the Administrator if an agent of a broker-dealer is terminated? I Agent II Ex-employer III FINRA A. I only B. II only C. I and II D. I, II, III C

Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him an agent; both the agent and the broker-dealer must notify the State Administrator promptly. Note, in contrast, that if an agent of an investment adviser is terminated, only the adviser is required to notify the Administrator; and if an agent of a federal covered adviser is terminated, only the agent is required to notify the Administrator.

If an agent terminates his employment with a broker-dealer, when must the agent and the broker-dealer notify the State Administrator? A. Promptly B. Within 5 days C. Within 10 days D. Within 30 days A

Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him an agent; both the agent and the broker-dealer must notify the State Administrator promptly. The effective date of the association or termination does not occur for 30 days (or earlier, if the state Administrator so allows).

Which of the following MUST notify the Administrator if an agent of a broker-dealer is terminated? I Agent II Ex-employer III FINRA IV SEC A. II only B. I and II only C. I, II, III D. I, II, III, IV B

Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him or her an agent; both the agent and the broker-dealer must notify the State Administrator promptly.

Under the Uniform Securities Act, if a broker-dealer receives an unsolicited customer order to buy a security for a customer, this is an: Correct Answer A. exempt transaction, whether the security involved is exempt or non-exempt Incorrect Answer B. exempt transaction only for transactions in exempt securities StatusC C. exempt transaction only for transactions in non-exempt securities StatusD D. exempt security A

Unsolicited customer orders are defined as an "exempt transaction" under the Act, whether the securities involved are exempt or non-exempt.

Which of the following statements are TRUE about unsolicited customer transactions effected through a broker-dealer? I The Administrator may require that the customer acknowledge the transaction with a written statement II The transaction is exempt under State law III No commissions may be paid to the broker effecting the transaction IV The transaction is defined as a "non-issuer" transaction StatusA A. I and II only StatusB B. III and IV only Correct C. I, II and IV StatusD D. I, II, III, IV C

Unsolicited customer transactions effected through a broker-dealer are exempt under State law. Note that this only means that there is no requirement that the security involved be registered; the broker-dealer effecting the trade must still be registered in the State or must be eligible for an exemption/exclusion if it is not registered in the State. This is a "non-issuer" transaction, since the issuer does not receive the proceeds of the sale. The State may require that the broker-dealer have the customer sign a "non-solicitation" letter proving that the trade was, indeed, unsolicited. There is no restriction on the paying of commissions in unsolicited trades. This restriction only applies to the private placement exemption; and the exemption that is given to sales where no commissions are paid.

A Registered Investment Adviser (RIA) tells his customers that they can analyze his performance by reviewing charts that he has presented. The RIA must: Correct A. tell the customers that charts can be difficult to interpret and there may be hazards in viewing only charts StatusB B. explain that performance charts cannot be used to compare the past performance of one adviser against the performance of other advisers StatusC C. explain that current fund performance is predicted by prior years' performance charts StatusD D. tell the customers that the use of performance charts to assess prior results is approved by the SEC because the Investment Advisers Act of 1940 dictates the content of these charts A

Using performance charts alone is not the best way to analyze an adviser's performance. In their financial statements, advisers also disclose their investment methods, investment objectives, expenses, etc. and these should be considered as well. If an adviser tells a customer to just look at his or her charts to analyze performance, the adviser should also disclose that charts alone do not give the "full" picture, and that making decisions solely on this basis is not really in the customer's best interest.

All of the following information must be included on a customer confirmation EXCEPT: Correct Answer A. whether the transaction was solicited or unsolicited Incorrect Answer B. whether a payment for order flow was made StatusC C. the customer name and account number StatusD D. the price of execution A

Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of commission charged and if a payment was made for order flow must be disclosed. Finally, the customer name, account number, size of the trade, and price of execution must all be on the confirmation.

charges to customers

o b/d commission charges MUST be "fair and reasonable" o commission disclosed only on confirmation - not req'd t/b disclosed at the time the trade is placed o disclosure of unusual costs and fees o b/ds can charge for clerical services but NOT for recommendations, if they do, they b/come "statutory" IAs that m/ register as such and that are subj to all of the IA rules o invest advisers canNOT charge excessive fees - m/b comparable to other IAs who operate in sim situs o failing to disclose the availability of discounts to all customers (m/b disclosed in Form ADV Part 2A)

Which individual is defined as an agent under the Uniform Securities Act? A. An individual representing a broker-dealer who takes phone messages from clients that wish to purchase or sell listed stocks B. An individual representing a broker-dealer who takes unsolicited orders for partnership units C. An individual representing an investment adviser who provides advice to clients about investing in securities D. An individual who works for an issuer selling that issuer's stock to the issuer's employees B

We can quickly eliminate Choices C and D. Choice C defines an Investment Adviser Representative (IAR), while Choice D is an individual that is excluded from the definition of an agent because he or she is representing the issuer, selling that issuer's securities to the issuer's employees (e.g., stock option plan securities). Note that this exclusion requires that the employee not receive commissions, which the question does not address. So we are down to either Choice A or Choice B. The Act defines an "agent" as an individual who represents a broker-dealer or issuer in effecting, or attempting to effect, purchases or sales of securities. In Choice A, the individual takes "messages," while in Choice B, the individual takes "orders." Taking an "order" clearly is "effecting a securities transaction." Taking a "message" is vague - if the individual taking the message just took a name and phone number to be returned, then he or she is not an agent. If the individual taking the message actually wrote down the details of the order, then he or she is an "agent." The question does not give detail on this - so, given the choice of "order" or "message" - we go with order! Note that it makes no difference if an order is solicited or unsolicited - the individual taking the order must be registered.

A broker-dealer is a syndicate member in a negotiated underwriting of revenue bonds issued by the City of Jacksonville, Florida Industrial Development Authority. If the issue is oversubscribed, under NASAA rules, it would be unethical for the bonds to be sold to: StatusA A. residents of Florida Correct B. employees of the broker-dealer that are Florida residents StatusC C. institutional investors in Florida StatusD D. investors that are non-residents of Florida B

When a broker-dealer does a new issue offering, it must make a "bona-fide" sale to the investing public and cannot retain part of the issue for itself or for its employees. If this were permitted, the broker-dealer would have the incentive to "underprice" the issue and then buy it for itself; intending to turn around and resell it for a profit. This would be in addition to any underwriting fees earned by the broker-dealer. The issue can be sold to both Florida and non-Florida residents, as long as it is suitable. While it is typically the case that only State-residents will get the highest tax benefit if they buy an issue of that State, it is not always true. There are situations where out-of-state residents can benefit by buying bonds (for example, by buying taxable bonds of a State, and these are taxable bonds).

Who would NOT have to file a U-4 registration application as an Investment Adviser Representative with the State? Correct Answer A. A director of the investment advisory firm who does not have any sales responsibility Incorrect Answer B. An outside contractor who is retained by the investment advisory firm to find new clients StatusC C. An employee of the investment advisory firm who solely solicits potential clients in the State where the advisory firm has its principal office StatusD D. An employee of the investment advisory firm who solely solicits potential clients in States other than the State where the advisory firm has its principal office A

When a broker-dealer or investment advisory firm application is filed in a State, the officers of the firm are named in the application and are automatically registered at the same time. Thus, all officers are automatically registered with the BD or IA registration. If the officer has no sales responsibility, the firm can "turn off" that registration and avoid paying annual State registration fees for that individual. Note that anyone who is hired by the IA to sell advisory services must be registered as an IAR of that firm. It makes no difference if this person is classified as an independent contractor or an IAR.

A customer of a broker-dealer that is located in California moves to Nevada. The broker-dealer is registered in both States. The agent that handles the account wishes to remain the agent of record on the account. In order to do so, the agent: A. is not required to do anything B. must appear in front of the Nevada State Administrator C. must register in Nevada D. must file a dual registration on Form U-4 C

When a customer moves to a new State, given that the broker-dealer is already registered in the State, then the agent who services that customer, if not registered in the State already, must register in the State where the customer has moved. Some States require this within 30 days of the customer moving; others give 60 days. The actual number of days is not specified in the Uniform Securities Act and thus cannot be tested. Dual registration on Form U-4 is used to register an agent with multiple broker-dealers; it does not register an agent in multiple States.

An agent of a broker-dealer recommends a specific stock to a customer and says that the stock will most likely increase substantially in value within the next couple of months. The customer invests in the stock and its market price plummets. The customer is upset about the decline in value and wants all of his original commission refunded. Which statement is TRUE? StatusA A. The agent is allowed to refund all of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer StatusB B. The agent is only allowed to refund a portion of the commission originally received from the transaction with the specific authorization of the agent's broker-dealer StatusC C. The agent is allowed to discount the commission based on a formula set forth by the State Administrator Correct D. The agent cannot refund the commission D

When an agent recommends the purchase of a stock, he or she is only allowed to accept the normal commission for the transaction. The agent cannot rebate any commission if the stock decreases in value; nor can the agent accept any larger commission based on an increase in value of the recommended stock. The only time that a refund would be made is if there was an error made by the agent or the firm, which is not the case here. The recommendation was made in good faith by the representative.

Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II Whether a payment for order flow was made III The customer name and account number IV The price of execution StatusA A. I and II Incorrect Answer B. III and IV Correct Answer C. II, III, IV StatusD D. I, II, III, IV C

Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of any commission charged and whether a payment for order flow was made must be disclosed. The customer name, account number, size of the trade, and price of execution must all be on the confirmation.

A retired elderly customer lives off the earnings from his modest retirement account, in addition to small pension payments that he receives from his former employer. The customer's nephew, who works at an electronics company that trades sporadically in the Pink Sheets, tells him that the company is coming out with a great new product and the stock would be a good investment. The customer wants your advice about buying some shares of the electronics company. The BEST advice would be to tell the customer that because: StatusA A. the recommendation came from a relative, it is probably a good one and he should buy the stock StatusB B. the recommendation came from an employee of the subject company, it is probably a good one and he should buy the stock Correct C. of the customer's advanced age and limited resources, this type of speculative investment is not appropriate StatusD D. the recommendation did not originate from your brokerage firm, you cannot give the customer any guidance on this proposed transaction C

While it may be the case that this stock will be a good investment, it is not appropriate for an elderly investor who relies on investments for income to live on.

Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: Correct A. a single annual fee based on total assets in the account for account transactions and maintenance StatusB B. a commission for each transaction performed StatusC C. a commission for each recommendation that results in a transaction StatusD D. both a commission on each transaction performed and an annual maintenance fee based on total assets in the account A

Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account; all services are covered in the single "wrap" fee.

non-issuer transaction (or secondary transaction)

a transaction not directly or indirectly for the benefit of the issuer, the proceeds fr sale of the securities go to someone other than the issuer; take place in secondary or trading mkt

offer to purchase

an attempt or offer to obtain a security, or a solicitation of an offer to sell a security or an interest in a security, for value

Federal covered adviser

an investment adviser that has at least $100,000,000 of assets under management, or an investment adviser to registered investment companies. Federal covered advisers are required to register with the Securities and Exchange Commission, and cannot be required to register in the State. By creating this defined adviser, duplicate registration of investment advisers at both the Federal and State level is eliminated. All other investment advisers must register with the State, but are not required to register with the SEC.

offer to sell

any attempt or offer to dispose of a security, or a solicitation of an offer to buy a security or an interest in a security, for value

(3%) ***SECURITIES REGISTRATION: def of security

any investment in a common enterprise for profit, w/ mgmt performed by ano party; "securities" MUST be registered in the State; o corporate issues o govt issues o investment co issues o option clearing corp issues o tax sheltered invest issues o third party mgr needed for these to be considered securities (whiskey warehouse receipts, merchandising marketing schemes, commodity option contracts) - considered sec when 3rd party manages enterprise, if investor is mgr > personal bus & are NOT sec

exclusions fr "IA" def (all of above, plus)

any person who advises solely about US govt guar obligations

issuer

any person who issues or proposes to issue a security

conduct of customer acct rules

o 4 critical pieces of information to open acct: - cust name - addr - DOB and - SSN o if margin acct, get cust signature promptly aft acct opening (aft first trade) o agent must sign new acct form, mgr must sign o no unauthorized trading of cust acct o joint accts o third party canNOT place trade unless given written authorization o discretionary accts: - NASAA Rule for IAs: written auth to exercise discretion m/b obt'd fr cust no later than 10 bus days aft being given discretionary auth - SEC Rule for b/ds: req'd prior to o trade is NOT discretionary if agent only selects price and/or time of execution o b/d "suitability" standard - axns that VIOLATE: - failure to inq as to cust fin situ, needs and invest obj - recomm sec w/out regard to cust fin situ of obj - recomm sec w/out having reasonable basis for recommendation - churning cust accts (performing trades of excessive frequency) - perform excessively lg trades in cust accts - failure to sufficiently desc important facts and risks concern transaxn - making blanket recomm of same sec to all cust o invest adviser "fiduciary" standard (b/d suitability standard does NOT apply to IAs): s/b investing alongside their cust

Federal covered security

o NYSE, AMEX (NYSE-MKT), or NASDAQ o invest co issues, sold to qualified (wealthy) purchasers, sold in trans exempt under 1933 Act - sold to qualified purchasers (basically a person who owns invest of at least $5,000,000 OR invest mgrs w/ at least $25,000,000 of invest AUM OR sold in exempt trans specified by Sec Act of 1933 such as Reg D private placements o OTCBB and pink sheet issues MUST be state registered - UNLISTED SECURITIES

REGISTRATION REQUIREMENTS FOR B/Ds & AGENTS: b/ds and agents MUST register

o agents cannot be employed unless they are registered in the State o agents cannot be affiliated with more than one BD at one time in most States o if Administrator allows dual registration - this must be disclosed to b/ds o prompt notification to State if agent ceases employment o agent may only be registered thru b/d o agents cannot register on their own

other rules for external threats

o allocating block trades unfairly / block is 10,000 shs or more - shs m/b allocated across all cust participating in block trade on pro rata basis at avg execution price o failing to disclose conflicts of interest - to which cust m/agree to in writing: - IA receiving adv fee fr cust and receiving commission on ea trade executed for cust - IA receiving adv fee fr cust and rec's "referral fee" for ea trade performed for that cust given to executing broker - IA rec's so called "soft dollar" comp fr b/d to whom adviser directs its portfolio trades (b/d gives adviser "free" serv such as research rpts, real time stock quotes - as long as directly benefit adviser's clients) - IA allocates block trades to cust accts using meth oth than pro-rata distr o adviser canNOT take a personal position in a security that is opposite to recommendation (as fiduciary, s/ always be on same side of mkt as client) o MUST get written client consent PRIOR to settlement: - takes sec positions in adviser's pers acct that differ fr positions being taken in client accts - sells sec owned by adviser to adviser's clients o privacy of cust acct info / init and annual privacy notice / opt-out notice: SEC Reg SP ("stmt of Privacy") o notices can be posted on firm's web-site - if cust agrees o essentially, any personal information collected about a cust falls under the rule - ANY information: aggregated info does NOT fall under this policy, ie, disclosing avg cust acct bal, info that m/b disclosed by firm to 3rd party in order to effect trans for cust or to maintain or serv cust acct, any request for info made by court of law, info requests made by regulators, SEC, FINRA o promissory note fraud: unlicensed ind push bogus promissory notes that are sold as invest that offer above mkt fixed int rates and safeguarding of principal o both the salesperson and the promissory note must be registered in the State - smaller note offerings, <$50,000 to smaller investor are non-exempt and unrated note offerings or non-invest grade note offerings m/b registered in State (ONLY prom notes that have maturities of < 9 mos that are invest grade and that are sold in min increments of $50,000 are exempt) o tell-tale signs of promissory note fraud: - stmts that notes are "guaranteed" or "insured" - esp by bogus foreign entities - promises of above mkt rates of return - stmts that notes are "risk-free" - the labeling of start-up co's notes as "prime" (only est'd) - offers of prom notes fr stranger who does NOT know cust fin situ o branch location in a bank setting - NASAA has model rule (req'd disclosures to cust) for sec branches that are located w/in bank settings - wherever possible, physical loca where mbr's serv are conducted s/b distinct fr area where deposits are taken - mbr's name s/b clearly displayed - at or prior to opening acct for cut, mbr m/ give (both orally and in writing) the "NOT-NOT-MAY" disclosure that: 1/ acct is NOT FDIC insured 2/ sec products are NOT deposits and that they are not guaranteed by fin inst 3/ sec prod are subj to invest risk and MAY lose value :. sim disclaimers are req'd in any commun sent to cust by b/d operating w/in fin inst

oth powers of the Administrator

o Admin can conduct investigations: both in State and outside State; the Admin c/start investigation if he suspects, but does NOT h/proof that a violation exists o public and private investigations: does NOT give out any info about private - either before, during or after - however Admin c/share info among its employees and officers during private o Admin may publish information about violations: c/"broadcast" to world any violations committed by a person thus deterring any potential offenders o Admin can subpoena persons and records: if subpoenas are NOT obeyed, the Admin c/enforce subpoena by petitioning appropriate court in any State o Admin can compel testimony that incriminates: this is permitted as long as that State's law guarantees that evidence canNOT b/ used to prosecute that ind, OR ind c/use his 5th Amendment right against self-incrimination to not testify o Admin can issue a cease and desist order w/out providing a hearing: - issue a "cease and desist" order against any such person - bring action in a court of law to enjoin acts or practices that violate the law :. upon court granting perm or temp injunction, restraining order or writ of mandamus/ - prohibition, a receiver or conservator m/b appointed for defendant or the defendant's assets; the court m/enter order of rescission, restitution or disgorgement directed at any person that violated the Act o if ano State proves a violation, then this State can take action: then Admin in this Sate c/appoint receiver or conservator for defendant's assets located in this State and c/apply for any oth relief that State court considers t/b just o judicial review of orders must be petitioned w/in 60 days aft entry of order: if any person disagrees w/ final order of Admin, he m/obtain a review in appropriate court, a written petition m/b submitted to court

scope of the Act

o Admin has power to change Act's provisions: only portion of Act that Admin canNOT change is def of exempt sec o Admin has broad jurisdiction - offer m/b made verbally or in writing: - either agent r client resides in State - transaxn occurred in State - offer is directed fr State - offer is directed into State - offer is accepted in State :. the follg situs cover interpretations of these rules: o b/d in State A offers securities to a cust in State B - both States A and B have jurisdiction > b/d m/b registered in both States A and B o b/d in State A offers securities to a cust located in State B who is temporarily on vacation in State C - only States A and B have jurisdiction > b/d m/b registered in States A and B, not req'd t/b registered in State where cust is vacationing o b/d located in State A offers securities to a cust in State B, but the mail is forwarded by the post office to State C, where the cust is temporarily residing - only State A has jurisdiction > State B has no jurisdiction, b/c offer was never rec'd in State B o jurisdiction over offers made in the media - specific rules relating to scope of Act are: - an offer made in newspaper w/ general, reg and paid circulation is NOT considered t/b made in the State, OR - if newspaper is published in State but has more than 2/3 of its circulation outside the State during last 12 months :. any offer to sell which is made thru radio, TV or oth electronic commun in ano State is NOT considered t/b offer made in this State o offers made via the internet: - internet communications by b/ds, IAs and their agents (shall NOT be deemed t/b "transacting bus" in State where commun was recd if): oo commun is ltd to genl info on pruducts and serv and does NOT involve effect sec trans, attempting to effect secd trans or rendering of personalized invest advice for compensation oo commun contains a legend that B-D, IA BD agent or IA agent m/only transact bus in that State if first registered in that State or if that "person" is excluded or exempted fr registration oo any follow-up individualized responses to persons that involve effect sec trans or attempt to effect sec trans or rendering of invest advice for compensation, canNOT b/made unless that "person" has complied w/ State regis requirements oo Internet Commun contains "fire wall" or oth procedure designed to ensure compliance w/ above requirements o b/d agent / IA agent internet communications (shall NOT be deemed t/b "transacting bus" in State where it was rec'd: - Internet Commun m/ prominently disclose affiliation of BD agent or IA agent w/ b/d or IA - b/d or IA retains responsibility for reviewing and approving content of any Internet Commun by any agent and authorizes distr of info on particular products and serv offered thru Internet Commun and - agent canNOT exceed scope of authority granted by b/d or IA in internet Commun

genl rules re: securities registrations

o Admin req's that filing fee be paid to register issue in State: - condition of regis by qualification or coordination any "unusual" consideration paid to promoter m/b req'd t/b deposited in escrow for upto 3 years - c/ impound proceeds fr sale of sec until issuer rec's specified amt o each regis stmt is effec for 1 year fr its effec date - a regis stmt may NOT be withdrawn for 1 year fr its effec date if any sec of the same class are outstanding o Admin may req issuer to file qtrly rpts to disclose progress of offering

registration requirements for IARs

o IARs MUST be registered in the State o IARs of Federal covered advisers MUST be registered in State o solicitors for advisers MUST be registered in State o IARs of exempt invest advisers are also exempt fr State registration o repres begins or terminates employment - adviser gives prompt notice to Administrator o repres begins or terminates employment w/ Federal covered adviser - repres gives prompt notice to Administrator o IAs cannot employ persons who have been suspended or barred

Uniform Prudent Investor Act > modernized -

o Modern Portfolio Theory guides investments, allows fiduciaries to use for invest decision making o invest performance based on overall portfolio return: - genl economic conditions - effect of inflation or deflation - tax consequences - the role that ea invest plays as part of overall port - expected total return - oth resources of beneficiaries - need for liquidity, income and preservation or apprec of capital - an asset's special value to one or more of the beneficiaries o asset diversification / manage impartially if multiple beneficiaries o trustee can appoint invest mgr - TTEE c/ sign contract w/ IA

communication rules: o b/d > FINRA o Federal covered adviser > Invest Adv Act of 1940 o State registered IA > NASAA, ll Advisers Act rules

o NASAA IA advertising rule: - canNOT contain testimonial (b/d can) - canNOT state that any rpt of research w/b provided for free unless this is offered w/o condition - canNOT contain false, untrue or misleading stmts - can incl list of recomm made w/ their performance as long as all recomm over that period ( 1 year min) are incld, along w/ mkt price at time of recomm and curr mkt price of sec o internet communications (shall NOT be deemed t/b "transacting business" in State) by b/ds, IAs and their agents IF - ltd to genl info on prod and serv and does NOT involve effect sec trans, attempting to effec sec trans or rendering of personalized invest advice for compensation - contains a legend that b/d, IA, BD agent or IARs may only transact bus in State if first registered in State or person is excluded or exempted fr regis - any follow-up individualized responses to persons that involve effect sec trans or attempt, or rendering of invest advice for comp, canNOT be made unless that person has complied w/ State's regis requirements and - Internet Communication contains a "fire wall" or oth procedure designed to ensure compliance w/ above requirements o b/d agent / IAR internet communications (shall NOT be deemed t/b "transacting business" in State) IF - Internet Commun m/ prominently disclose affiliation of BD agent or IAR w/ b/d or IA - b/d or IA retains resp for review and approving content of any Internet Commun by any Agent and authorizes distr of info on particular products and serv offered thru Internet Commun and - Agent canNOT exceed scope of authority granted by b/d or IA in Internet Commun o filing rules: of web page, web site in printed form; customers cannot be solicited to trade securities or to buy advisory services via e-mail solicitations unless the Broker-Dealer, BD Agent, Investment Adviser and Investment Adviser Representative (IAR) are registered in the State where the customer resides. o canNOT e-mail "spam" recommendations of securities - unethical bus practice o canNOT solicit business or make recommendations in internet chat rooms - ltd to making genl stmts about investing

(12%) ***BUSINESS PRACTICES: advisory contract and anti-fraud rules: IT IS UNLAWFUL - - employ any device, scheme or artifice to defraud. - engage in act, practice or course of bus which operates or would operate as fraud or deceit on any person - effect a transaxn for cust, as b/d, w/out obtain the consent of cust to such transaxn - engage in any dishonest or unethical practice as Admin may define by rule

o NASAA advisory contract rules: be in writing, have a fixed life - can accept prepaid advisory fees -early termination - refund prepaid fees - c/ not assign contract unless client approves (if same firm, this is not assignment) - no compensation based on gain/loss (permitted for compensation t/b based on total value of all assets being managed) - notify customer of changes in partnership composition - a change in majority of partners is an assignment that req's cust consent o wealthy clients can be charged a performance fee: exception to comp based on gain/loss - cust w/ either $1MM of AUM or $2MM NW - Invest Advisers Act of 1940 allows perf fee o NASAA req'd disclosures if performance fee is charged: (m/ disclose in writing) - fee arrangement m/ create incentive for adviser to make invest that are riskier - invest adviser w/ get comp based on both unrealized appreciation and cap gains - basis for valuing any illiquid invest used in computing unrealized appreciation - periods that w/ be used to measure perf and their significance to computation of the fee and - nature of index used as a comparison of invest perf, significance of index and reasons why adviser believes index is appropriate o wrap fees/ commissions: either as flat dollar amt or as %-age of AUM o soft dollars: adviser sends its port trades to brokerage firm that does NOT discount commissions, broker gives back research rpts, asset alloc software, stock selection software - benefit adviser's clients - NOT the adviser o 12b-1 fees: adviser c/ colect portion of 12b-1 fee o no hedge clauses that are either unreasonable or that seek to hold adviser harmless for violations: canNOT contain "hedge clauses" that seek to elim adviser's liability for negative invest results. o NASAA invest adviser brochure delivery rule - Form ADV Part 2A (the Brochure): gives information about the adviser's business - Form ADV Part 2B (the Brochure Supplement): gives information about adviser's key personnel o brochure delivery: - 2 day free look before signing, OR - if no free look, 5 days to rescind w/out penalty o annual brochure update - if changes are material - send to customers: w/in 120 days of adviser's year end, same as SEC rule o firm can create its own brochure, brochure can be delivered electronically o custody rules: prohibited for invest adviser to have, or take custody of cust funds and sec: - if Admin prohibits this by rule OR - it there is no rule, adviser fails to notify Admin that he has, or m/ take custody IF custody: - notice to Admin: in writing on Form ADV that it has, or ma/ have custody - securities held by qualified custodian: m/ b kept in separate acct under ea client name, or in accts that only contain client funds and sec, held in invest adviser name as trustee for the clients - prompt notice to customer of custodian identity: name, addr and manner in which funds or sec are maintained - qtrly stmts - annual surprise audit of custodian: at least annually to verify all client funds and sec o file audit results w/in 120 days w/ State Admin o qualified custodian registration: - FDIC insured deposit taking institutions, - registered b/ds holding cust assets -registered futures commission merchants holding cust assets and - foreign fin inst holding financial assets for cust o custody definition, also incl: - prepaid advisory fees of $500 or more, 6 mos + in advance of rendering serv, $1,200 for federal covered advisers, Invest Advisers Act of 1940 o acct w/ full power of attorney, ability to withdraw monies, if ltd, not considered to be taking custody o inadvertent pymts not considered to be "custody" if returned w/in 3 days o annual ADV update - 90 days of fiscal year end, SEC Federal covered advisers is the same o material change ADV update - 30 days, SEC Federal covered advisers req's these t/b made "promptly"

orders / confirmations

o b/d order tkt information: - cust name or acct no - agent name or no - buy or sell - if sale - long or short - whether order was "solicited" or "unsolicited" - no of shs or bonds t/b traded - descr of sec t/b trades and -execution price, if mkt order - only "MKT" o solicited or unsolicited: req'd b/c "suitability" complaints have no standing when trade is unsolicited o order tkt time stamps: - time of order receipt - time of order execution - time of order cancellation, if canceled o NASAA rule for IA order tkts (sends order to b/d for execution): - name of person at IA who recommended transaxn - name of person who placed order - date of order entry - name of acct for which order was entered - name of b/d or bank to which order was sent for execution - whether order was discretionary o the "do it" rule (for cust even if b/d, IA believes t/b unsuitable) o not following instructions: "do it!" rule prevails o limit order display rule: req's that mkt mkrs in sec that rec cust limit orders that are btr priced than their "displayed quote" m/ show btr priced quote in mkt - really only applies to OTCBB and Pink OTC Mkts quotes o confirmation information: - b/d name, addr and tel no - cust name and addr - no os shs bot or sold - sec descr - execution price - commissio charge for agency trade - whether pymt for order flow was rec'd o no disclosure if trade was solicited on confirm - only req'd on order tkt copy o disclosure if pymt for order flow was rec'd on confirm

borrowing / lending / sharing / guaranteeing

o borrowing fr cust: b/d is prohibited fr borrowing money or sec fr cust accts; is permitted to borrow cust sec if the cust gives written permission by signing a loan consent agreement *** If an agent of a broker-dealer has a customer that is a relative, NASAA has a very different rule than FINRA. FINRA allows registered representatives to borrow from relatives that are customers; NASAA does not! (Since this is NASAA's test, you must know their rule!) o lending to a cust by agents, IAs and IARs is prohibited o b/ds and banks can lend: under provisions of Reg T o agent canNOT share in gain/loss of cust acct unless joint acct is opened w/ cust - such an acct "aligns the agent's and cust's interests" - can if: a joint acct is opened w/ cust - sharing is in proportion to capital contributed and - mgr approval is obt'd o IAs, IARs canNOT share and canNOT open joint acct w/ cust o canNOT guarantee cust acct against loss, applies to both exempt and non-exempt sec (no b/ds, agents, IAs, IARs)

registration procedure

o consent to service of process - appts State Admin t/b "attorney" for registrant o consent only reqd for init applications - no requirement for renewal apps o registration information: - form of bus org - place of bus & proposed meth of doing bus - qualifications & bus history of applicant (incl that of any partners, officers or directors of b/ds & invest advisers - fingerprints - listing of any injunctions, admin orders or convictions for misdemeanors or felonies in sec bus - applicant's financial condition & history - for IAs only, any information req'd t/b furnished to any client or pros client o Federal covered advisers file notice in State (Form ADV) o init licensing fee o init notice fee o completion of filing (both proper docs & filing fee h/b rec'd by that State) o annual renewal fee o no pro-rating of fee for mid-year init filing o registration effective in 30 days (fr filing date) o no addtl filing fee for successor firm o regis expires each Dec 31st unless renewed o CRD regis satisfies State requirements o invest adviser regis depository (IARD) - regis of both State registered & Federal covered advisers - notice requirements for Federal covered advisers - regis of IARs which is req'd for both IARs of State registered advisers & IARs of Federal covered advisers that have filed notice in the State o Form ADV filed in IARD for both Federal covered and State registered Advisers - regis expires each Dec 31st unless renewed o annual Form ADV updating amendment filed w/in 90 days of fiscal year end under SEC and NASAA rules o "other than year end" updating amendment for material changes filed promptly under SEC rules -- filed w/in 30 days under NASAA rules o U-4 industry application creates CRD or IARD file for individuals -- annual U-4 update w/in 30 days of year end renewal date o U-5 industry termination form filed w/in 30 days of termination o U-6 rpt of disciplinary action taken by a regulator -- m/b filed w/in 30 days aft action h/b taken o U-6 rpt of customer complaints alleging a felony -- "reportable items" o electronic sign and pymt; PAPER FORMS filed for reasons of "hardship"

cust complaints / mail / incapacitation / death

o death of a cust: - cancel all open orders - note the DOD on acct - freeze acct fr removal of assets and - wait for proper pwk needed to transf acct or assets to executor or beneficiary o any power of attorney ceases upon cust death / durable power stays in force if customer is mentally incapacitated - if acct has "non-durable" POA, authorization expires upon cust incapacitation

specifically EXCLUDED fr def of a "sale" or "offer to sell"

o dividends o "security interest" - bona fide pledge for a loan o corp reorg resulting in merger, consolidation, reclassification of sec or sale of corp assets in consideration for issuance of sec of ano corp (d/not apply to cash tender offer for corp's sec) o "judicially approved" corp reorg where new sec is issued in exchange for OLD sec, bankruptcies

invest adviser repres

o engages in bus of advising others, directly or indirectly, ie, newsltr, as to value of sec or advisibility of investing in, buying or selling sec OR o issues/promulgates analyses or rpts concerning sec on regular basis as part of a business OR o provides invest advisory serv to others in financial planning practice

securities exempt fr registration: as well as fr advertising filing requirements

o exempt securities for State law differ fr Federal law / anti-fraud rules apply - govt & muni issues: o US govt & Agency sec o muni sec o Canadian govt sec o oth foreign govt sec - issues of cos already regultd under oth Federal or State laws: o depository inst issues (bank & sav & loan issues, but NOT bank hldg cos) o Federal credit union issues o industrial loan assn issues o ins co issues (except for VA contracts) o sec issued by RRs & common carrier regultd by Interstate Commerce Commission o sec issued by public utilities regultd by Public Utility Hold Act of 1935 - issues of "est'd cos": o "blue chip" exemption - NYSE / AMEX (NYSE-MKT) / Midwest Stock Exchange / Regional Stock Exchanges (& NASDAQ for most States) o corp commercial paper - non-profit issues: 1/ securities of non-profit persons such as educational or charitable orgs: o c/ req issuer to file Notice specifying material terms of offer in State and file copies of proposed advertising and sales lit used in connection w/ offering o c/ provide that exemption b/comes effec only if Admin d/not disallow it w/in a stated time period o c/ disallow exemption, providing the grounds for denial or suspension o c/ req issuer to register in State - if Admin believes that bond is not a true "charitable" offering 2/ sec of cooperatives 3/ invest contracts issued in connection w/ employee stock purch, savings, pension or benefit plans

new issue rules / research rules

o failure to deliver a prospectus when selling a new issue - at or prior to confirmation of sale o marking-up or highlighting a prospectus o third party research disclosure o IPO allocations to b/ds and their employees are prohibited - unethical for employees of b/ds to buy IPOs fr u/w o free riding and withholding - w/h IPO fr sale to public w/ intention of keeping it personally so that "free ride" c/b taken on issue's price rise when it opens for trading o IPO allocations to IA are permitted - IA m/ buy allocation for all of its clients, it canNOT keep allocation for IAs acct or IARs pers acct o u/w mgr canNOT issue research rpt on issue for prescribed time windows - for 10 days follg effec date for IPO, 3 days follg effec date for secondary offer

WHY REGISTRATION CAN BE DENIED, REVOKED, OR SUSPENDED reasons for denial, suspension, or revocation of registration - if Administrator finds that it is in the public interest and that the person who is the subject ..

o filed materially incomplete, false or misleading regis app o willfully violated Act's provisions o enjoined by court order fr engaging in sec business o is subj of an order by Admin denying, suspending, or revoking regis as b/d, agent, invest adviser or IAR o convicted of misdemeanor involving any aspect of sec business (ie, embezzlement, fraud, misappropriation of funds, theft, larceny), or convicted of any felony w/in past 10 years o subj of determination that person willfully violated sec laws (after notice & an opportunity for hearing is given) by Admin of ano State or SEC w/in past 10 years o willfully violated sec or banking laws of a foreign jurisdiction or has been subj of an order by a foreign regulator denying, suspending, or revoking that person's right to be in sec bus w/in past 5 years o engaged in unethical or dishonest bus practices o insolvent - inability to meet obligations as they come due o unqualified based on lack of experience, training and knowledge o failed to pay req'd fees to State w/in 30 days aft being notified by Admin o failed to properly supervise employees - b/ds and IAs, does NOT apply to agents o no longer in existence - ceased to do business as b/d, sales repres or IA, cannot be located aft reasonable search, or h/b adjudicated as mentally incompetent :. interpretations are applied: - Admin c/not enter order solely on basis of lack of experience if applicant is qualified by training or knowledge -Admin c/ req diff qualifications for b/ds then for their agents - c/ req diff qualifications for IAs than for their repres - Admin c/ condition regis as b/d or agent upon that person NOT acting as IA :. Admin is permitted to postpone or suspend regis pending final determination: - promptly notify applicant, employer that order h/b entered & why it h/b entered and - w/in 15 days of written request, matter w/b set down for hearing, if no hearing is requested order stands until Admin decides that it s/b changed o withdrawal fr registration effective in 30 days o if legal proceedings are commenced w/in 1 year, registration cannot be withdrawn o agents can maintain registration only if affiliated w/ registered b/d o if existing customer moves to new State, b/d and agent MUST register in new State - cust "vacationing" < 30 days; - cust "resident" where agent & b/d m/b registered in State > 30 days

exempt transactions: d/not involve the public

o if trans is exempt - no regis of the issue in State o individuals who represent issuers in exempt trans are excluded o individuals who sell securities in exempt trans still must regis in State o exempt trans: 1) isolated non-issuer trans 2) non-issuer trans in outstanding securities of cos registered under 1934 Act 3) non-issuer trans in outstanding securities of cos registered under the Invest Co Act of 1940 4) non-issuer trans in securities traded on designated stock exchanges 5) fiduciary trans 6) unsolicited trans 7) real estate trans secured by a mortgage 8) trans btw issuers and underwriters 9) trans w/ financial or institutional investors 10) private placements: offer to no more than 10 persons during any 12 mo period; a/ seller m/ believe that all of the purchasers are buying for invest AND b/ no commissions m/b paid for soliciting prospective buyers, oth than financial or institutional investors. ** diff than under Federal law 11) offers of sales of pre-organization subscriptions: exempt if NO commissions are paid for soliciting potential subscribers; no of subscribers is ltd to 10 persons, and no pymt is made by any subscriber 12) sales: exemption applies mainly to "rights offerings" where existing sharehldr subscribes to new issue of stock by exercising his subscription rights, applies to mergers, exchange offers, and oth corp reorgs - NO commissions or oth remuneration is rec'd

trading practices

o inside information: not public - canNOT trade based on inside information: effect sec transaxns based on material inside info, making recomm to either buy or sell o tipper - tippee: tipper is NOT held liable if info that results in trade is accidentally or unintentionally transmitted to tippee, also there is NO violation for either tipper or tippee if no trade results fr transmittal of inside info o b/ds MUST have procedures to prevent misuse of material non-public information (it is NOT a violation to rec inside info, it is to use info to trade for profit) - potential liability for tipper: $25 mill per trade, penalty is only imposed if tipper recklessly disregards insider trading laws - b/d policies & procedures: 1/ train employees about insider trading rules 2/ demonstrate that employee rec'd such training and understands insider trading laws 3/ impede flow of inside info btw diff depts of b/d o Chinese walls o if agent rec's inside info, rpt to regulator via firm's compliance dept o inducing trading based on rumors is prohibited o front running is prohibited - ahead of the placing cust order o manipulation is prohibited - fictitious quotes, effect "wash trades", "matched orders" o painting the tape - appearance of trading activity o trading ahead of underwriting or research is prohibited

issues SPECIFICALLY EXCLUDED fr def of a security

o insurance or endowment policies or contracts o fixed annuity contracts o ownership interests in credit unions o commodities futures contracts o interests in both contr and non-contr retirement plans (pension plans, IRAs, Keogh)

persons EXCLUDED fr IA def

o invest adviser repres o depository inst o professionals o b/ds o publishers of newsltrs that do NOT give advice based upon specific invest situations o Federal covered advisers o Federal registration w/ SEC is only reqd for lg advisers o Federal covered advisers MUST file notice in the State o advisers w/ no office in State who deal only w/ institutional investors are EXEMPT o advisers with no office in State w/ no more than 5 clients in State in past year - EXEMPT o de minimis exemption o Canadian adviser exempt for existing customers who are temporarily residing in US

def of investment adviser representative (IAR): any partner, officer, director or oth individual employed by invest adviser who:

o makes recomm or renders advice re: sec o manages accts or portfolios of clients o determines which recomm or advice re: sec s/b given o solicits, offers, or negotiates for sale of invest advisory serv OR o supervised employees who perform any of functions listed above :. ea State still has jurisdictin to req regis of ind associated w/ federal covered advisers IAR ( all of above, plus) - is employed by federal covered adviser

broker-dealer def

person who engages in business of effecting sec trans for the acct of others; OR engages in business of trading for his own acct, proprietary trading

prohibited stmts to customers ( m/b ethical, and not lie to, or mislead, cust):

o misleading or untrue stmts: - inaccurate mkt quotations - incorrect stmts of issuer's past earnings or future earnings projections - inaccurate stmts as to amt of commission or mark-up charged in sec transaxn - advising a cust that exchange listing is anticipated for sec w/out knowing whether stmt is true - telling cust that regis of security means that either SEC or State "approves" of that sec - telling cust that mutual fund is "no-load" when it charges 12b-1 fees in excess of .25% annually, (FINRA max is .75%) - telling cust that regis of agent means that either SEC or State Admin "approves" of that agent - promising to perform serv for cust w/out any intent or ability to do such - making exaggerated claims about invest perform - misrepresent status of cust acct - telling cust that regis as adviser means that State Admin "approves" of firm or "endorses" firm - telling cust that an asset alloc program is "proven and tested" when in fact, no one has ever used program o omissions of material fact: - deliberately being selective in information which is given to cust - failure to inform cust that transaxn w/ incur larger than normal commission, tax, or transaxn costs - failure to bring cust written complaints to attn of b/d - giving cust research recomm prep'd by someone oth than that firm, w/out disclosing that fact - failure to tell mutual fund cust about breakpts o soliciting orders for unregistered non-exempt (common stock) securities, however soliciting cust to buy unregistered muni bonds, exempt sec o recommending stock of publicly traded parent co, unless disclosed verbally at time of recomm and in writing on confirmation

rules for external threats

o money laundering rules apply to b/ds and IAs - PATRIOT Act post 9/11 o terrorist watch list / foreigners present passport and US tax ID number o AML program: - req'd rpts: -- Suspicious Activities Report (SAR): m/b filed w/ FinCEN (Dept of Treasury) - amt involved is $5,000 or more, w/in 30 days, client canNOT be told that rpt is being filed -- Currency Trans Report (CTR), structurings reported: m/b filed w/ FinCEN for cash deposits or w/d of amts > $10,000, req'd for trans broken apart to avoid rpting - m/b aggregated over 2 wk windows, w/in 15 dyas, client canNOT be told that rpt is being filed o written policies and procedures covering cyber security: - specific pol & proc as well as reltd testing and verification to defend against identity theft - written pol and proc to protect security and confidentiality of cust records and info - written pol & proc to protect against unauth access to or use of cust records or info that could result in substantial harm or inconvenience to any cust State registered IAs come under FTC's "Privacy of Cust Fin Info Rule": - information security program: designate employee(s) to coordinate firm's info security program - cyber risk assessment: 1/ employee training and mgmt, 2/ information systems, incl design, processing, storage, transmission, and disposal 3/ detecting, preventing and responding to attacks, intrusions, or oth systems failures o annual testing: m/b comprehensive, reevaluated - employee training: m/b trained on common cyber security risks and defensive strats - p/w protection: use and periodically change their p/w and user IDs , trained on safeguarding these - encryption: m/b installed on files, emails and mobile elec devices - anti-virus software: m/b installed and updtd as necessary on all elec devices - confirmation of money transf instructions rec'd electronically: m/b authenticated w/ client :. NASAA states that cust s/ask: - cyber preparedness - cyber security compliance program - cyber ins - insured for data breaches - cyber expertise - cyber confidentiality - cyber incident - cyber security safeguards o business continuity - succession planning: for IAs, - protection, backup and recovery of books and records - alternate means of communicating w/ cust, key personnel, employees, vendors, serv providers and regulators, incl providing notice to these persons of significant bus interruption, cessation of bus activities or death or unavailability of key personnel - office relo in event of temp or perm loss of principal place of bus - assign of duties to qualified persons in event of death or unavailability of key personnel and - minimizing serv disruptions and client harm that could result fr significant bus disruption o internal - eternal succession plan: death or disability of key personnel; internal ano IAR, external ano firm

agent / IAR rules

o prohibited actions before being registered as an agent in State - making recomm, soliciting sec trades, performing suitability determination and writing order tkts o permitted actions before being registered as an agent in State - taking new acct info, entering cust orders that have already been taken by licensed ind, rpting completed trades and responding to cust acct inquiries o if agent takes outside work - notify firm o private securities transactions - prohibited, if agent effects then he b/comes statutory "b/d" o selling away - if agent rec'd written permission of b/d to effect this trans and recorded trans on its books and supervised it, it is permitted o no sharing commissions w/ UNlicensed person o no sharing commissions w/ person licensed at ano firm o IAs can pay referral fees / solicitor who rec's fee MUST be licensed in the State as IA o IA can send trades to b/d affiliate w/ client consent (affiliated b/d can earn commissions on those trades as long as this is disclosed to cust and they give written consent - typically part of advisory agreement

social media

o red flags: - ltd history of posts: lack a prior history of posts or messages - pressure to buy or sell NOW - unsolicited invest info - unlicensed sellers: ck BrokerCheck, IAPD - affinity fraud o common scams: - pump and dump - research "opinions" and online invest newsltrs: fraudulent promoters claim to offer independent, unbiased opinions, usu of penny stocks - they c/b paid by co to do this - which is NOT illegal as long as pymt and relationship w/ co is disclosed (fraudsters do NOT) - High Yield Invest Programs (HYIPs): unregis invest sold by unlicensed individuals promising incredible returns, often of 1-2% / day at little or no risk, encourage followers to use referral link to share HYIP website w/ others in return for a referral fee

pymt / margin / commingling rules

o reg T applies to both cash and margin accts (for non-exempt sec): - long sale - short sale o prompt pymt for purchases (but no later than 5 bus days past trade date); if pymt is not rec'd, unpaid sec position m/b sold out and acct is frozen for 90 days o frozen acct: "cash up front", if cust behaves for 90 days, freeze comes off acct o cash / securities must be delivered on settlement o canNOT extend loan amt greater than limit set by Reg T o street name securities o commingling rules (apply to IAs, IARs): - b/d c/ commingle one cust margin sec w/ those of oth cust - b/d c/NOT commingle proprietary positions w/ cust sec positions - agent of b/d c/NOT commingle proprietary positions w/ cust sec positions - agent of b/d c/NOT take cust funds or sec and keep them personally o cust request to transf and ship securities - m/b fully paid

REGISTRATION STANDARDS FOR AGENTS AND IARs

o regis stand for agents: - Surety Bond Coverage and - the passing of a qualification examination (if no exam is req'd, Admin can ask for certification that ind has reviewed State's Blue Sky laws and understands his resp o regis stand for IARs: - the passing of a qualification exam (if no exam is req'd, Admin can ask for certification that ind has reviewed State's Blue Sky laws and understands his resp :. there is no surety bond requirement to be registered as an IAR, there is for b/d, agent and IA regis o exam waiver for CFP and CFA for Series 65, MUST still regis in State and pay annual State regis fees o filing of fingerprints req'd by many States - if fingerprints h/b filed w/ CRD for a federal regis, then they are NOT req'd t/b filed in the State; if NOT file, then the State req's fingerprint filing

BD and IA registration standards

o regis stand for b/ds - min dollar amts of net capital - surety bond coverage (set by Admin, old law called for $10,000 cash/sec in lieu of bond) - passing of qualification exam o surety bond gives State assurance that registrant will NOT violate State law o regis stand for IAs - min dollar amt of NW ( min financial requirements) - surety bond coverage - passing of qualification exam o surety bond only req'd for advisers that take custody o higher financial and bonding requirements for IAs that take custody or that exercise discretion :. NASAA Rule 202d-1, invest advisers that take custody of cust funds m/h min NW of $35,000; invest advisers that do NOT have custody of cust funds but have discretionary power MUST maintain min NW of $10,000 :. NASAA Rule 202e-1, invest advisers that have EITHER custody or discretionary auth over cust accts MUST maintain min surety bond coverage of $35,000 if their reported NW < than this amount o NW requirement only applies in State where adviser has principal business o items included in NW or net capital computation: - the min NW or net capital requirement for IAs is: All Assets - All Liabilities - Intangibles (ie, goodwill, trademarks, copyrights etc) :. If IA is an ind, value of all pers prop is deducted - but if IA is a partnership or corp, these items used in bus are incl'd and are NOT deducted o filing of financial rpts, typically a balance sheet of applicant along w/ oath or affirmation that it is true and accurate is req'd o if BD or IA fails to meet financial standards, notify Administrator next business day and file rpt the follg business day :. NW deficiency notice is given the day aft discovery, and a rpt is filed the day aft !!!

(3%) ***ADMINISTRATIVE PROCEDURES: why registration can be denied

o registration will be rescinded if it is in the public interest: - filed misleading app, which is interpreted as a materially incomplete app or one that is misleading w/ respect to any material fact - willfully violated provisions of the Act - been convicted of misdemeanor involving any aspect of sec bus, or any felony w/in past 10 years - been enjoined by any court fr engaging in or continuing to conduct any aspect of sec bus - been suspended or had its regis revoked by any State or SEC w/in past 10 years - engaged in dishonest or unethical bus practices - been found t/b insolvent, defined as not being able t/meet obligations as they mature - been found t/b unqualified d/t lack of training, experience or knowledge of sec bus - however lack of experience alone is NOT suff to deny regis - h/failed to reasonably supervise subordinates :. Admin is permitted to by order summarily postpone or suspend regis pending final determination - IF order is entered, Admin m/: - promptly notify applicant as well as employer that order h/b entered and why it has been entered AND - w/in 15 days of written request, the matter w/b set down for a hearing

offers of rescission

o seller can offer to buy back issue found to be illegally offered: this written offer m/b made PRIOR to buyer's instituting suit - - stmt of how liability m/h arisen, and which fairly advises purchaser of his rights of rescission - if offer is being made b/c a material misstmt or omission of material fact was made in connec w/ offering, any info necessary to correct error m/b furnished to purchaser - an offer to repurch sec for cash, payable upon delivery, computed in same manner as shown in prior section - stmt that offer m/b accepted w/in 30 days in writing, or any shorter period specified by Admin :. these amts are due the buyer if offer of sec is legally rescinded o no suits allowed if rescission right not exercised w/in 30 days of written notice by buyer

civil liabilities under the Act

o unknowing violations are civil: w/out willful intent - no fraud is involved, "null and void", buyer c/get refund of his money o liability where a person still owns that security - he is liable to all purchasers of sec or advisory serv, m/: - buy back security upon tender; refund investment losses and advisory fees - pay legal 6% rate of interest, net of any income rec'd fr invest, and - pay legal fees (of the purchaser) o liability where a person no longer owns that security: person m/recover diff btw orig price paid and the price at which sec was disposed of plus interest paid at legal rate plus atty's fees minus any income rec'd fr sec o civil suit survives death of plaintiff or defendant: cont's til resoln is reached either in court or by settlement o trans where civil liability applies: - failing to be registered as an agent or b/d - selling unregistered securities in non-exempt trans - participating in a trans that manipulates that mkt, where the price of security is affected by these actions (does NOT apply to Exchange listed or NASDAQ securities) - failing to give cust a prospectus where req'd by Admin - failing to file sales lit and advertising w/ Admin as req'd - misrepresenting status of an agent's or a security's registration - making unintentional false stmts or unintentionally omitting material facts when offering or selling a security o liability for civil damages can also apply to "controlling persons": who in the exercise of reasonable care s/h/known about violation, b/d c/b held liable o no civil penalties: seller is obligated to buy back sec plus interest, atty's fees and court costs less any income rec'd fr that sec o civil suits brought w/in 3 years but no later than 2 years aft discovery

criminal liabilities and penalties under the Act

o willful violations are criminal: fraudulent, classified as a felony o willful violations are felonies: shown to knowingly make a stmt that is false or misleading in any material respect he h/committed a felony, punishable by: - restitution: to injured party -$5,000 fine: in most States, but amt c/vary fr State to State - 3 years prison: upto 3 years, imprisonment, but this c/vary fr State to State o 5 year statute of limitations: aft date of alleged violation - Admin m/vary this time period

(12%) ***REGISTRATION/LICENSING: North Amer Sec Admin Assn

o wrote Uni Sec Act to attempt to standardize state sec rules o made up of 50 state Admin and the Admin in ea US Territory

def of Federal covered security

one that is covered under Sect 18b of Sec Act of 1933 - registration is NOT reqd (only registration w/ SEC is reqd), duplicate registration of sec at both Federal and State level is avoided