Mastery Exam 1

An application to register securities may be filed by the: I Broker-Dealer II Agent III Issuer IV Investment Adviser A. I and III B. II and IV only C. I, II, III D. I, II, III, IV

A. Applications to register a security in a State cannot be filed by agents; nor can they be filed by investment advisers. 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).

Sarah Sacks has an individual account at a broker-dealer. Sarah calls her agent at the broker-dealer and states that she wishes to open an account for her sister Sally in her sister's name and buy 1,000 shares of PDQ stock. Which statement is TRUE? A. The agent can open the account B. The agent can open the account only if the sister Sally gives authorization in writing C. The agent can open the account only if the manager approves in writing D. The account cannot be opened unless the sister Sally orally approves

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

If a person accumulates a 5% or greater holding in a publicly held company with the intention of being a passive investor: A. Form 13d must be filed within 10 business days B. Form 13g must be filed within 45 calendar days of year end C. Form 10K must be filed within 90 days of year end D. Form S-l must be filed promptly

B. Anyone who accumulates a 5% position in one company and intends to remain a passive investor must make a 13g filing with the SEC within 45 calendar days of year-end.

Investment companies are obligated to send their financial statement to shareholders: A. annually B. semi-annually C. quarterly D. monthly

B. Investment companies must send their financial statements to shareholders semi-annually.

All of the following information must be recorded on an order ticket EXCEPT: A. Customer name or account number B. Customer address C. Execution price and order size D. Identity of agent accepting the order

B. Prior to entry of an order, the information required to be noted on the order ticket includes the customer name or account number; registered representative name or number; buy or sell; number of shares or bonds to be traded; description of the security to be traded and execution price. The time that the order was entered must be stamped on the order ticket (this can also be done electronically). There is no requirement for a customer address or customer social security number on an order ticket.

An independent investment adviser is talking to a brokerage firm's research analyst about XYZ company. The analyst tells the adviser that she is going to issue a report stating that the company will miss its revenue projections. The adviser was planning to add the stock to her portfolio. What should the adviser do? A. The adviser cannot act on the information because it is "inside information" B. The adviser must purchase the stock as planned C. The adviser can change her mind about buying the stock D. The adviser must report the conversation to the State Administrator

C. The adviser was planning to buy the stock; and the analyst thinks the stock isn't a good investment right now. There is no "inside information" here, so the adviser can take the opinion of the analyst and change her decision to buy the stock. Note, however, that if the adviser and the research analyst worked for the same parent company, then the answer would change. The restrictions on "trading ahead of a research report" would apply to all employees of the parent company and the stock could not be purchased or sold prior to the public release of the report.

Apart from the filing of a registration for a broker-dealer, separate registration is required for each individual that is a(n): A. partner of the broker-dealer B. director of the broker-dealer C. agent of the broker-dealer D. all of the above

C. Named in the registration statement for a broker-dealer are the partners, officers, and directors of the broker-dealer. These persons do not have to make a separate agent filing in the State. However, any person who sells or solicits for the broker-dealer must register as an agent.

nder the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following EXCEPT: A. person connected with the Investment Adviser who recommended the transaction to the client B. person who placed the order C. date of order entry D. time of order execution

D. 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.

Disclosure of which of the following is made in a Form ADV Part 2 that is filed with the SEC under the Investment Advisers Act of 1940? I Description of how fees are assessed II Method of analysis used III Educational background of applicant IV Balance sheet of applicant if the firm takes custody of client funds or accepts $1,200 or more of prepaid advisory fees

D. The Form ADV Part 2 is broken down into Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract. Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts.

13G reports are filed with all of the following EXCEPT: A. Securities and Exchange Commission B. Company that is the subject of the report C. Exchange where company trades D. Financial Industry Regulatory Authority

D. 13G reports are filed by "passive" investors that purchase 5% or more of a company's stock without the intention to exercise control (a 13d report is filed if the purchaser intends to exercise control). The 13G report is filed within 45 calendar days of year-end. A copy of the form is filed with the SEC; the exchange where the company trades; and the issuing corporation.

Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactions II An attorney who manages the business affairs of athletes for a fee III An accountant who manages the business affairs of entertainers for a fee IV An economist who gives advice to pension plans for a fee on the outlook for the securities markets A. II and III only B. I and IV only C. II, III, IV D. I, II, III, IV

D. Investment adviser Release IA-1092 specifically includes advisers to entertainers and athletes, and advisers to pension plans, as investment advisers that must register with the SEC. In addition, the SEC in this release, states that a financial planner that provides general financial planning for a fee comes under the definition and must register with the SEC. It makes no difference whether or not the financial planner takes commissions on recommended trades - if this person gives general "non-specific" advice for a fee, he or she is still considered to be an "investment adviser" that must register.

An order ticket for the purchase of stock does NOT contain: A. Quantity B. Time that the order is placed C. Fill price 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.

A pension consultant has been hired by an employee benefit fund to render advice for compensation. The adviser is exempt from the registration requirements of the Investment Advisers Act of 1940 if it takes any of the following actions EXCEPT: A. retaining an outside counsel to advise the plan on labor law B. hiring an accounting firm to provide employee benefit consulting services to the plan C. allocating plan assets to investments in real estate D. deciding the proportion of plan assets to be invested in securities

D. Pension consultants assist plan sponsors and trustees in: - determining the plan's investment objectives, investment restrictions, and asset allocations; - selecting money managers and mutual fund options; and - tracking investment performance and selecting other service providers. - Since the Investment Advisers Act of 1940 defines an adviser as a "person who receives compensation for advising others about securities or the advisability of investing in securities," deciding the proportion of plan assets to be invested in securities would make that pension consultant an "adviser" that must register. Deciding the proportion of plan assets to be invested in real estate does not make one an adviser, since real estate is not a security. Finally, deciding on which outside accountants and lawyers should be used by the plan does not fit the definition.

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 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 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).

An investment adviser representative (IAR) has an oral agreement with a customer to provide advisory services and has given the new customer a glossy brochure describing the adviser's services, but has forgotten to give the customer Part 2 of Form ADV. Which statement is TRUE? A. The customer must receive the Form ADV Part 2 and then has 2 days to sign the agreement B. The customer must be given the Form ADV Part 2 at the time of signing the agreement C. The oral agreement is binding because the customer received the glossy brochure D. The customer must receive the Form ADV Part 2 and then has 5 days to sign the agreement

A. - Under NASAA rules, customers must receive Part 2 of Form ADV (the "Brochure" and "Brochure Supplement") at least 2 business days prior to the completion of an oral or written contract to provide advisory services. As an alternate to this "2 day free look," the customer can be given the brochure at the time the contract is signed; but must have the right to rescind the contract within the next 5 days after examining the brochure. - 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 will always be considered to have taken custody if the adviser: A. is the trustee for the client in a trust account B. has been given a power of attorney by the client permitting the adviser to trade the client's account C. has the authority to transfer client funds between different accounts of that client maintained at a custodian D. accepts payment for services rendered from clients

A. Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have the ability to withdraw funds. Similarly, a power of attorney that permits an adviser to transfer funds between different accounts for the same client at the custodian is not taking custody because the adviser cannot withdraw funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

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? A. Obtain verbal authority for that specific transaction B. Obtain verbal authority to exercise discretion over the account C. Obtain verbal authority to exercise discretion only over price and time of execution in the account 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 offerer offers to buy back a securities issue that was inadvertently sold in the State, buyers of the issue have how many days to accept the offer? A. 30 B. 60 C. 90 D. 120

A. If an offerer offers in writing to buy back a securities issue that was inadvertently sold in the State at original cost plus interest paid at the legal rate in the State (6%), plus any attorney's or court costs (net of any dividends or interest received by the holder), buyers of the issue have 30 days to accept the offer. Otherwise, the offer is null and void, and the offerer is relieved of any further obligation to buy back the issue. Thus, buyers must exercise their right of rescission within 30 days' written notice by the offerer.

An investment adviser, age 33 and married, needs cash for the down payment to buy her first house. She asks her father if he can "help out" with the down payment. Her father is one of her advisory clients. Which statement is TRUE about this situation? A. The investment adviser can accept the money from her father if he gives it as a gift B. The investment adviser can accept the money from her father if he gives it as a loan C. The investment adviser cannot accept the money from the father, whether given as a loan or a gift D. The investment adviser can only accept the money from her father if there is a written agreement that details the terms and conditions

A. Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser. Note that an investment adviser can accept a gift!

A hedge fund wishes to make a seed capital investment in a start-up company under Rule 504 of Regulation D. The maximum permitted investment by the hedge fund is: A. $5,000,000 B. $10,000,000 C. $20,000,000 D. $50,000,000

A. The Regulation D Private Placement exemption consists of Rules 501-506. Rules 501-503 are definitional rules, basically explaining who is an accredited investor and who is a "sophisticated" investor. The actual permitted offerings are detailed under Rules 504-506. - Rule 504 is for small offerings, and is pretty much obsolete (but still tested!). Rule 505 has been rescinded. Rule 506 is the one everyone uses and can be used to raise any dollar amount. - Rule 504: Covers offerings of up to $5,000,000. For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statements. While there is no Federal registration required, the State(s) where the issue is offered can still require State registration. - Rule 505: Rescinded. - Rule 506: Covers offerings of more than $5,000,000: This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accredited investors; and to an unlimited number of accredited investors. However, the States cannot require registration at the State level - a big financial benefit.

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: A. $30,000 B. $35,000 C. $40,000 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."

Which of the following would be defined as "being in the business" of giving investment advice? A. A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors B. A newsletter that discusses in general terms, the advisability of investing in securities, as part of a broad discussion of the future direction of the U.S. economy C. A lecturer that is hired to give an annual talk to the employees of an investment adviser, where the merits of specific Blue Chip stocks are discussed D. A consultant, who, on a rare and isolated basis, prepares reports or analyses on asset allocation across various asset classes

A. There are advisers that specialize in offering market timing services (of about 8,000 SEC registered advisers, there are 200 or so of these firms). They are considered to be "in the business" of giving investment advice for a fee and must register. A newsletter that discusses investing in securities in general terms as part of a broad discussion of the U.S. economy is not giving advice about investing in securities. The giving of isolated advice means that one is NOT "in the business" of giving advice (Choices C and D).

Under Uniform State law, civil liability exists in all of the following circumstances EXCEPT when: A. customer margin securities are commingled with those of other margin customers B. an unregistered agent sells exempt securities to customers in the State C. a customer makes a purchase of securities based upon misleading statements made by an agent D. an offer of unregistered non-exempt securities is made to a customer and a sale occurs

A. There is no prohibition on commingling one customer's securities with those of other customers - this is just fine. The prohibition is on commingling customer securities with proprietary (firm) positions. Unregistered agents cannot sell any securities (exempt or non-exempt) in a State, so Choice B is a violation. Choice C is clearly a violation - agents cannot make misleading statements to induce a purchase or sale. Offers of unregistered non-exempt securities that result in sales are also violations (for example, an offer of unregistered common stock (a non-exempt security) is not permitted in a State unless the transaction is exempt).

"Small Dollar Offerings" are given an exemption from registration under the Securities Act of 1933 under the provisions of: A. Regulation A B. Regulation B C. Regulation C D. Regulation D

A. Under Regulation A - Small Dollar Offerings - an issuer can sell up to $50,000,000 of securities within a 12-month period under an exemption from registration.

All of the following actions would be permitted under the Uniform Securities Act EXCEPT: A. engaging in wash trades for a customer B. engaging in tax swaps for a customer C. omitting facts when making a recommendation to a customer D. recommending unregistered exempt securities to a customer

A. Wash trades are quick "in and out" trades in a stock to create the appearance of trading activity, without any actual change of ownership. This is an unethical practice also known as "painting the tape" - since the ticker tape is being "painted" with phony trades. Tax swaps involve selling a security that has depreciated at year end to realize a loss for tax purposes; and then buying a similarly depreciated security early in the next year to re-establish a roughly equivalent position. This is permitted. One can omit facts when making a recommendation to a customer - the unethical practice would be to omit material facts when making a recommendation. Finally, one can recommend unregistered exempt securities (such as U.S. Governments) - the unethical practice is to recommend unregistered non-exempt securities.

A written customer complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record? A. A copy of the original complaint along with its resolution must be retained in the file of the agent by the broker-dealer B. A copy of the original complaint along with its resolution must be retained at the firm's supervisory office C. A copy of the original complaint along with its resolution must be retained by the State Administrator D. There is no requirement to retain a copy of the complaint because it was resolved to the customer's satisfaction

A.SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways: 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 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."

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 Registered Investment Adviser is the beneficiary in the liquidation of a partnership investment that it made years ago and in settlement, receives the assets of an existing broker-dealer. As a result of this, the directors of the RIA: A. are required to register in the State as directors of the broker-dealer B. are not required to register in the State as directors of the broker-dealer, nor take qualification exams, as long as they are not involved in overseeing the sales or operations of the broker-dealer C. must register in the State as directors of the broker-dealer but are not required to take qualification exams D. are not required to register in the State as directors of the broker-dealer

B. The question is, typically, not very clear on what is going on here. What is happening is the RIA now owns a broker-dealer. We don't know if the broker-dealer is operating with its own officers; or whether it is just a dormant "shell." If it has its own officers, they would already have been registered with both FINRA and the State. If not, then the RIA that now owns the broker-dealer would have to appoint officers and register them in the State. It is not true that the directors of the RIA would be required to be registered in the State. Only those RIA directors that were appointed directors of the broker-dealer would be required to register (of course, this is not a choice!). Of the choices offered, Choice B is the best one. Only those directors of the RIA that are involved in overseeing the sales or operations of the broker-dealer must be registered in the State and must take the proper licensing exams.

Under the Uniform Securities Act, "consent to service of process" means that the: A. Administrator is empowered to fine or penalize an agent or broker-dealer B. Administrator is authorized to receive suits on behalf of an agent or broker-dealer C. registrant is under the jurisdiction of the Administrator for up to 1 year after withdrawal from registration 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.

If an investment adviser is "federal covered," this means that the adviser: A. is registered with the proper agencies B. has at least $115,000,000 of assets under management C. has clients in more than 1 state D. offers advice only to accredited investors

B. A federal covered adviser that must register with the SEC (instead of registering in the State) is either an adviser to investment companies; or an adviser with at least $100,000,000 of assets under management. The SEC issued an interpretation that if an adviser has between $100,000,000 and $110,000,000 of assets, it has the option of registering with the SEC, so the only adviser that must register with the SEC is one that has at least $115,000,000 of assets under management. In addition, the SEC issued an interpretation that advisers that operate in 15 or more States and that have at least $25,000,000 of assets under management, may register with the SEC and thus do not have to register in multiple States.

An exempt reporting adviser: A. must file Form PF with the SEC B. must file Form ADV with the SEC C. must file both Form PF and Form ADV with the SEC D. is neither required to file Form PF nor Form ADV with the SEC

B. An "exempt reporting adviser" is a private fund adviser (such as a hedge fund adviser) with less than $150 million of AUM (assets under management). Exempt reporting advisers are not required to register with the SEC (which is accomplished with Form PF - as in Private Fund adviser). However, they must still report to the SEC on Form ADV Parts 1 and 2 annually - and this information is made public.

A Registered Investment Adviser enters into an agreement with a Certified Public Accountant, where the CPA will refer clients that need the services of an investment adviser. For each client referral, the CPA will be paid a fee. The CPA is: A. required to register in the State as an agent B. required to register in the State as an investment adviser representative C. not required to register in the State because he already has an independently conferred professional designation D. not required to register in the State because

B. Any person retained by an investment adviser to "find" new clients, if he or she is paid for doing so, is defined as an IAR who must be registered in the State. Choice C gets at the exemption provided under the Investment Advisers Act of 1940, where professionals such as lawyers or CPAs that do not separately charge for advice are excluded from the definition of an adviser. However, this does not apply here because the CPA is getting separate compensation for each referral made to the investment adviser.

he statute of limitations on civil suits arising from alleged violations of the Uniform Securities Act is: ' A. 1 year of discovery B. 2 years of discovery C. 3 years of discovery D. 5 years of discovery

B. Civil suits alleging violation of the Act must be brought within 2 years of discovery of the alleged violation, but no later than 3 years after the actual violation occurred.

If a representative that transacts business in a State terminates employment with a Federal covered adviser, notice must be given to the Administrator by the: A. Federal Covered Adviser B. Investment Adviser Representative C. both the Federal Covered Adviser and the Investment Adviser Representative D. neither the Federal Covered Adviser nor the Investment Adviser Representative

B. 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.

Which of the following persons is "in the business" of giving investment advice? A. A full service broker-dealer who charges higher commissions than discount brokers because of the value of recommendations made B. An insurance agent that advertises "no-fee" financial planning but who sells insurance for a commission to advisory clients C. A real estate agent who receives a fee from customers to appraise the value of their real estate holdings D. An accountant who charges a fee to customers where the services rendered include tax deferral strategies on securities positions

B. If an insurance agent creates "no-fee" financial plans, and then takes commissions on insurance policies sold to these customers that are part of the plan, then this person is "in the business" of giving advice about "securities" (since the SEC views financial plans are giving advice about securities) and is "compensated," so this person must register. Broker-dealers who do not charge separately for advice are excluded and need not register; real estate agents appraising real estate holdings are not dealing in securities and are excluded; and accountants who do not charge separately are excluded.

Under the Investment Advisers Act of 1940, if an adviser accepts prepaid advisory fees of $1,200 or more, 6 months or more in advance of services rendered, each new client MUST: A. give discretionary authority to the adviser B. receive a copy of the adviser's balance sheet C. be provided with a "Brochure" at least 5 days in advance of signing a contract D. be reported to the Securities and Exchange Commission

B. If an investment adviser accepts prepaid advisory fees of $1,200 or more, for 6 months or more of services to be rendered; then the adviser must include a balance sheet in the ADV Form Part 2A that constitutes the "Brochure" that must be given

An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE? A. The use of market timers is prohibited under the NASAA Statement of Policy B. Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A C. The arrangement between the IA and the market timing firm must be documented in a written contract D. The IA must review the performance of the market timing firm at least quarterly to evaluate its benefit to the referred customers

B. Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer.

Which statement about penalties under the Uniform Securities Act is TRUE? A. Criminal liability may be offset by rescission; the statute of limitations is 3 years B. Civil liability may be offset by rescission; the statute of limitations is 3 years C. Criminal liability may be offset by rescission; the statute of limitations is 5 years D. Civil liability may be offset by rescission; the statute of limitations is 5 years

B. Only civil liability can be offset by rescission. Criminal liability cannot be offset by rescission. The statute of limitations on civil cases is 3 years (but no later than 2 years after discovery); for criminal cases it is 5 years.

An investment adviser believes that its sophisticated customers need better access to the IPOs of companies that are in their early rapid growth phase. The adviser enters into a contract with a finder to locate promising issuers. The adviser will give the finder a fee equal to 20% of the amount invested in each issuer by the adviser's customers. The finder is not an employee of the adviser and is not registered with the SEC or in any State. Which statement is TRUE? A. The finder is considered to be a statutory broker-dealer because it is receiving a commission and must register in the State B. The finder, by locating potential sellers of securities for the adviser for a fee, is considered to be a solicitor and this must be disclosed on Form ADV Part 2A C. The fee being charged by the finder is excessive and is prohibited under the NASAA Statement of Policy D. The arrangement between a finder and an investment adviser is outside the scope of both the Uniform Securities Act and the Investment Advisers Act of 1940

B. Part of Form ADV Part 2A covers the solicitors that are hired by the adviser. In most States, a solicitor hired by an adviser is defined as any person who will "locate, introduce, or refer potential purchasers or sellers" to the adviser. So, a solicitor is not only a person who finds customers to purchase the adviser's services; a solicitor is also a person who finds someone that sells to the adviser. In this case, the solicitor is a finder - that is, a person who finds companies that wish to raise capital and introduces them to investors. The relationship between the finder and the adviser must be disclosed in the Form ADV Part 2A.

An agent of a broker-dealer "A" has been terminated and is associating with broker-dealer "B." The terminated agent agrees to turn over his clients to another agent at broker-dealer "A" in return for half of the commissions generated by those clients over the following year. This arrangement is: A. permitted because it was negotiated while both agents were working at broker-dealer "A" B. prohibited because during the life of the agreement, the agents will be working at different broker-dealers C. permitted as long as both agents were registered in the same State at the time that the agreement was negotiated D. prohibited because the transfer of a customer account at a broker-dealer from one agent to another requires the written consent of the customer

B. Splitting commissions is only permitted between registered individuals who work at the same broker-dealer. Since the terminated representative will be working at another broker-dealer during that year, splitting commissions is prohibited. Splitting commissions is not permitted between 2 registered individuals who work at different broker-dealers; it is not permitted between a registered individual and a non-registered individual (like a sales assistant) who work at the same broker-dealer; and it is not permitted between a registered individual and an individual that used to work at the firm and who has left that firm's employment and is no longer registered.

A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of: A. being solicited to purchase the new issue B. entering into the contract to purchase the new issue C. completion of the purchase of the new issue D. settlement of the purchase of the new issue

B. The rule for prospectuses is that they must be delivered at, or prior to, confirmation of sale. The generation of the confirm is the time that the customer is legally entering into the "contract" to buy the security, so this is the best answer. Settlement is the date (typically 3 business days after the confirm is generated) when the customer actually makes the payment for the purchase. This is when the transaction is legally "complete."

To protect against identity theft and theft of funds, client instructions received electronically must be: A. encrypted B. authenticated C. monitored D. refused

B. To protect against identity theft and theft of funds, customer instructions received electronically must be authenticated, to make sure that the instruction actually came from that client.

The term "Investment Adviser" includes: A. lawyers who give advice about investments as part of an estate tax plan B. depository institutions that recommend bank products as investments C. publishers of reports on securities tailored to client situations D. broker-dealers who make recommendations to clients and charge commissions on the resulting trades

C. 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."

Which of the following is an acceptable hedge clause found in an investment advisory contract? A. "While the Adviser agrees to use its best efforts in the management of the portfolio, the Adviser shall not be responsible for errors in judgment or losses on investments made in good faith." B. "We will extend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in good faith." C. "The Adviser shall not be responsible for losses caused by conditions or events beyond its control such as war, strikes, natural disasters, communications disruptions, etc." D. "The adviser shall not be liable for any loss or depreciation in the value of the account unless it shall have failed to act in good faith or with reasonable care."

C. Investment advisers have attempted to use contractual language that seeks to limit or entirely avoid civil liability - these are known as "hedge clauses." Generally speaking, such hedge clauses are prohibited. Under both Federal and Uniform State Law, an investment adviser that is a fiduciary may be subject to civil liability - even if he or she acted in good faith and with reasonable care!!! Advisers are held to an affirmative duty of utmost good faith and full and fair disclosure when dealing with clients - so it could be the case that the adviser acted in "good faith" but was not acting strongly enough in "good faith" - and so is subject to civil liability (yes, many questions on this exam are written by state securities attorneys). The only acceptable hedge clause is one that limits liability only in situations outside the adviser's control - such as war, terrorism, new government restrictions, natural disasters, etc.

A customer wishes to make an investment in growth mutual funds for an Individual Retirement Account. All of the following statements by an agent are prohibited EXCEPT: A. "The fund has averaged a 20% annual growth rate in the past and is guaranteed to produce the same growth rate in the future" B. "Last year, the fund paid out dividends of $1.00 per share and capital gains of $.50 per share, for a total income yield of $1.50" C. "The fund yielded 20% last year and is expected to yield the same this year, though the actual yield may be more or less" D. "The fund is registered with the SEC, which has approved of the fund's shares"

C. An agent cannot guarantee a return to a customer (Choice A), nor can an agent state that income from a fund consists of both dividends and capital gains (the income portion consists solely of dividends), nor can the agent state that the SEC approves of the fund. It is perfectly acceptable to state the historical yield for the fund, and then to state that similar results are expected in the future, although the actual result may be more or less.

Which of the following is an unethical business practice? A. Publication of a tombstone announcement by a broker-dealer in the local newspaper on the effective date of a registered new issue offering managed by that broker-dealer B. Publication of a research report by a broker-dealer that shows the performance of prior recommendations made by that broker-dealer during the prior 12 months C. Publication of a report by an agent detailing the performance of transactions recommended by that agent over the prior 12 months D. Publication of a report by a broker-dealer written by an agent detailing the performance of transactions recommended by that agent over the prior 12 months

C. An agent cannot publish and distribute reports detailing the performance of recommended transactions. Broker-dealers, on the other hand, may do so, but the State Administrator can require the filing of these reports.

Two agents work at the same broker-dealer. One of them has just resigned to go into his family's pizza business. The two agents verbally agree that all of the departing agent's clients will go to the agent that remains at the firm. The agent staying at the firm has agreed to pay 25% of the commissions from these clients to the departed agent for the next 6 months. The branch manager has been told of this arrangement and has agreed to it. Which statement is TRUE? A. The arrangement is acceptable since all parties involved have full knowledge and are in agreement as to the terms B. This arrangement is acceptable because the branch manager has approved C. The arrangement is not acceptable because it is unethical D. This arrangement is not acceptable because it is not documented in writing

C. An agent of a broker-dealer must be registered to accept commissions. Once an agent leaves a broker-dealer, unless he or she affiliates with another broker-dealer, his or her registration is terminated. Unregistered individuals cannot receive commissions and cannot share in commissions. This agent is resigning to work in the family pizza parlor and will not be registered - so commissions cannot be paid to this person.

A client of a RIA dies. His attorney calls the RIA and instructs him to sell 500 shares of ABC at the market and deposit the proceeds to the client's checking account. The RIA should: A. accept the trade verbally and follow the attorney's instructions B. get a copy of a power of attorney that authorizes the attorney to act on behalf of the client C. get a copy of the client's will to see what is allowed and what is not allowed D. require the attorney to send the instructions in writing either by e-mail or fax

C. An attorney for a client does not have trading authorization over that client's account, unless the client gave the attorney trading authorization in a written power of attorney. Regardless, any power of attorney dies with the client and is void. The assets in the deceased client's account must be transferred to an account for the estate before anything can be done in the account - so get a copy of the will and see if the attorney is appointed the executor over the estate. As executor, the attorney would then be permitted to effect transactions in the account.

An investment adviser with no place of business in the State is exempt from registration if it renders advice solely to employee benefit plans with assets of at least: A. $100,000 B. $500,000 C. $1,000,000 D. $5,000,000

C. An investment adviser with no place of business in the State that renders advice solely to employee benefit plans with at least $1,000,000 of assets is exempt from registration under the Act.

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.

It is an unethical business practice for an investment adviser to borrow money from a: A. bank that is the adviser's client B. broker-dealer that is the adviser's client C. pension fund that is the adviser's client 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).

ADAP Advisers is offered a large block of ACME stock (a NYSE-listed issue) by an institutional investor at a 20% discount to the current market price, if ADAP Advisers is willing to buy the block that day. Which statement is TRUE if ADAP purchases the block for its own account rather than for its customers? A. This action is prohibited without exception, since ADAP Advisers is benefiting at the expense of its customers B. This action is permitted if ADAP Advisers rebates any profit that it earns to its customers when it sells the block C. This action is permitted if the purchased stock is not a suitable investment for ADAP's customers D. This action is permitted if the block is purchased in the Third Market during the hours that the NYSE is closed

C. Investment advisers have a fiduciary responsibility to their customers and must always put their customers' interests first. Since this block of stock is being offered to the adviser at a substantial discount, the adviser must buy the stock for its customers - but only if the stock is a suitable investment for these customers. On the other hand, if the stock is not a suitable investment for ADAP's customers, then ADAP is free to buy the block of stock for its own account. (Note that Choice A is incorrect because this is the exception to the general rule.)

When must a Registered Investment Adviser (RIA) send a notice of change in ownership? A. To each client, when the RIA changes its business form from a sole proprietorship to a partnership B. To the State Administrator, when the RIA changes its business form from a sole proprietorship to a partnership C. To each client, when the RIA changes its business form from a partnership to a sole proprietorship D. To the State Administrator, when the RIA changes its business form from a partnership to a sole proprietorship

C. Isn't this one special!! The rule on notifying clients of a change of ownership of an investment adviser only applies to investment advisers organized as partnerships. If there is a change in the majority of the partners (as would be collapsing a partnership into a sole proprietorship), then each client who has signed an advisory contract must be notified of the change. This is a requirement of NASAA Rule 502(c) for State-registered advisers and also is a requirement of the Investment Advisers Act of 1940 (for Federal covered advisers).

An investment adviser personally has a short position of 10,000 shares of ABC stock. The investment adviser believes that the short ABC Corp. position would be a good investment for one of his customers who is bearish on the stock and transfers his short ABC Corp. stock position to that customer at the current market price. This action is: A. prohibited because short sales can only be effected on an up-tick B. permitted since the adviser believes that it is in the best interests of the client C. an unethical business practice unless the conflict of interest was disclosed in advance to the client and the client gave written consent D. an unethical business practice because all securities transactions for customers must be effected in the public market

C. It is an unethical business practice for an investment adviser to take an opposite position to that being recommended to the customer. To close out the short position, the investment adviser is "buying" this stock that is being "sold short" by his customer. To do so, the conflict of interest must be disclosed in advance to the customer. In addition, when an adviser takes the opposite side of a recommended transaction to a client, the client must give written consent to that trade.

An Investment Adviser prepares a 4-color glossy brochure to be given to potential customers instead of the Form 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 under NASAA rules? A. This procedure complies with NASAA rules regarding the use and delivery of investment adviser brochures B. This procedure violates NASAA rules because only the Form ADV Part 2A can be delivered to customers C. This procedure violates NASAA rules because the customer must be given 5 business days to back out of the contract without penalty 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 2A information. The rule on delivery of the brochure is that either: - 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 - 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 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!)

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon: A. legal list requirements B. efficient market theory C. modern portfolio theory D. value investing theory

C. The Prudent Investor Act, adopted in most States, is a modernization of the "prudent investor rule" restricting the investment authority of fiduciaries. Instead of setting forth a list of "approved" securities (a "legal list") for investment, the Prudent Investor Act allows fiduciaries to use modern portfolio theory for investment decision making. Thus, instead of just investing in securities that have minimal risk, the fiduciary can apply risk-return analysis to choose the "best" investments for the level of risk assumed. Investment performance is not measured on each individual investment, but rather by looking at the overall portfolio return.

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.

A customer invests $100,000 and opens a discretionary account with an agent specifying an investment objective of long-term growth. The agent decides that it is best to diversify and spreads the monies among a number of income funds within the same fund family. Which statement is TRUE? A. The agent acted prudently as it is best to diversify a portfolio to reduce risk B. The agent acted prudently as long as the manager approves of the transaction C. The agent acted inappropriately and fraudulently D. The agent's actions are acceptable if there is a profit on the investments made

C. The customer specified an investment objective of long-term growth, not income. If the agent places the funds in a number of income funds, the action is inappropriate and fraudulent.

Under the Uniform Securities Act, the definition of "guaranteed" means that the security is guaranteed by another party: A. as to payment of dividends or interest only B. as to principal amount only C. as to payment of dividends or interest; and as to principal amount D. against loss of investment

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

The use of customer names by an investment adviser to promote the sale of the firm's advisory services is: A. prohibited in all circumstances B. permitted if the adviser notifies each client of its intentions C. permitted if the adviser notifies each client of its intentions and the clients consent to such disclosure D. permitted if the adviser notifies the State Administrator that the client names will be used

C. The use of customer names by an investment adviser to promote the sale of the firm's advisory services is prohibited, unless the customer consents to such disclosure. The only disclosure of customer information that may be made without customer consent is required disclosures to governmental bodies such as the IRS.

The fiduciary engaged in the administration of a trust finds that, under the directions of the trust document, there is a conflict of interest relating to a proposed investment. Under the provisions of the Prudent Investor Act, the fiduciary: A. should do nothing and permit the investment to be made B. is permitted to allow the investment as long as it is made in accordance with the Prudent Investor rule C. should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment D. should not permit the investment, otherwise the fiduciary is subject to liability for breach of fiduciary responsibility

C. There can be different types of conflicts of interest regarding a trust investment. The trustee cannot "self-deal" - an example of such a conflict is the trustee borrowing money personally from the trust account. This is outright prohibited. The trustee is supposed to make investments to meet the needs of the account beneficiaries. There can be conflicts between the beneficiaries' needs - and the trustee is supposed to choose investments to best meet the needs of ALL of the beneficiaries. If the document does not give enough guidance for the investments that are permitted to meet these needs where there is such a conflict, then the trustee should go to the trust grantor or settlor for specific guidance on the permitted investments and the trust document must be amended for this.

A customer submits a written complaint to your broker-dealer. Later, he changes his mind and asks that the complaint be returned. You should: A. do nothing unless the customer makes a written request B. return the original written complaint to the client C. return a copy of the complaint to the client and retain the original complaint in the firm's files D. return the original complaint to the client and retain a copy of the complaint in the firm's files

C. This is very judgmental. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways: 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 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." Thus, Choice C is the best answer.

An investment adviser with $110 million under management has its main office in New York and a branch office in Connecticut. Which statement is TRUE? A. The investment adviser must register in the State of New York only B. The investment adviser must register in both the State of New York and the State of Connecticut C. The investment adviser must register with the SEC only D. The investment adviser must register in both the State of New York and State of Connecticut and must register with the SEC

C. To be a Federal Covered adviser that registers with the SEC only, the adviser must have at least $100,000,000 of assets under management. This adviser has $110,000,000 of assets under management and is required to register with the SEC only. The adviser cannot be required to register in each State where it has a physical location or where it solicits advisory business. But, remember that these States can require a "notice" filing with the payment of a fee!

Which of the following persons can use the term "investment counsel"? A. Investment advisers who are also attorneys admitted to the Bar in that State B. Investment advisers who are also broker-dealers registered in that State C. Investment advisers whose primary business is the rendering of investment advice D. Any investment adviser registered with the SEC under the Investment Advisers Act of 1940

C. Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.

Under the Investment Advisers Act of 1940, when a Registered Investment Adviser is renewing its annual contract with customers, which is NOT required to be disclosed? A. Business Address B. Fees C. History of RIA D. Type of clients

C. Under the Investment Advisers Act of 1940, upon entering into an advisory contract, the advisor must provide the customer with the "brochure" - which is Form ADV Part 2A. In addition, within 120 days of year end, the client must be sent a free updated brochure; or a summary of material changes that offers to provide the free updated brochure. The brochure includes: Basic business contact information; Material changes from previous year; Description of the advisory firm and services offered including length of time in business; Fees and compensation; Types of clients; Methods of analysis; Disciplinary information; Code of ethics; Brokerage practices; Client referrals and compensation; Custody, discretion, and voting of client securities; IA financial information.

To be registered as a broker-dealer, the Administrator typically requires the posting of a surety bond in the amount of: A. $1,000 B. $5,000 C. $10,000 D. $50,000

C. 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).

An Investment Adviser is set up as a sole proprietorship. The owner has hired an Investment Adviser Representative (IAR) to market the firm to potential clients. The most important consideration in the firm's Business Continuity and Succession Plan would be: A. the identification of the business model of the Investment Adviser including size of the firm, types of services provided, and the number of locations B. making provision for the Investment Adviser Representative to notify the clients of the Investment Adviser in the event of business interruption caused by the owner's death or unexpected permanent incapacitation C. making provision for the IAR to contact clients to get their permission to assign advisory contracts to a 3rd party in the event that the owner dies or is unexpectedly unavailable D. providing for an appropriate emergency contact person when the investment adviser representative is away on vacation

C. When an Investment Advisor is formed as a sole proprietorship, the client's legal relationship is with the sole proprietor. With the death or permanent disability of the sole proprietor, the sole proprietorship is terminated as a legal entity, as would any advisory contracts. The IA must have a succession plan that immediately addresses this issue if the sole proprietor becomes unavailable. Otherwise, the clients would have no one to manage their funds held at the defunct IA because the existing investment advisory contracts are now void.

A customer of yours discusses a specific NYSE stock in which he wants to invest. He 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 of the following actions is appropriate? A. Purchase the stock since this is what the customer expressed in the phone conversation with you. B. Purchase the stock upon verbal authorization from the customer's wife C. Purchase the stock in your own account and transfer the shares to the customer's account upon his approval D. Do nothing unless the customer can be contacted

D. According to the question, your customer did not give specific enough information to warrant the execution of an order. If the customer had mentioned the exact amount of shares that he or she wanted to buy and the maximum price he wanted to pay, you could execute the order. If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." Prior to opening a discretionary account, a written power of attorney must be obtained from the customer.

All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT a(n): A. officer of the management company B. employee of the management company C. 5% holder of the management company's shares D. outside counsel for the management company

D. An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.

An attorney that has been appointed executor of a deceased customer's estate contacts an investment adviser in a State to invest and manage the estate's financial assets until they are distributed to the heirs. The attorney offers to pay an advisory fee that is based on a percentage of assets under management. Which statement is TRUE regarding this arrangement? A. The advisory contract must be approved by the probate court judge prior to the adviser taking control of the financial assets B. The advisory contract must be approved by the heirs prior to the adviser taking control of the financial assets C. The contract is null and void because executors are not permitted to delegate investment and management functions over estate assets D. The contract is valid as long as the adviser exercises reasonable care to comply with the terms of the delegation

D. An executor or trustee is permitted to delegate investment and management functions as long as the trust or will permits such; and the agent actions are consistent with the purposes and terms of the trust or will.

A sales representative who lives in Florida has a customer who lives in Georgia. The customer spends his summers visiting relatives in New York, where the representative also effects securities transactions with the customer. Which statement is TRUE? A. Only the New York Administrator has jurisdiction over the transactions B. Only the Florida Administrator has jurisdiction over the transactions C. Only the Florida and Georgia Administrators have jurisdiction over the transactions D. The New York, Florida, and Georgia Administrators all have jurisdiction over the transactions

D. Because the representative is located in Florida and is making offers from Florida, the agent must be registered in Florida and Florida has jurisdiction over the agent. Because the customer lives in Georgia, the agent must be registered in Georgia to do business with that client and the Georgia Administrator has jurisdiction over transactions that occur in Georgia. Finally, because the customer spends "summers" in New York, this is more than a "vacation." The agent must be registered in New York unless the agent can qualify for a "de minimis" exemption. So the best answer is that all 3 Administrators have jurisdiction.

A Registered Investment Adviser has established an enviable track record and decides that it should increase its asset management fee to reflect the increased value of its services. The Adviser amends its contract to include a fee equal to 5% of assets under management, charged each month to the client. This fee structure is disclosed in the Form ADV Part 2 filed with the Administrator and each customer signs a new advisory contract. Which statement is TRUE? A. This action can be taken because the Administrator was notified of the increased fee B. This action can be taken because each customer signed a new contract that disclosed the increased fee C. This action cannot be taken because advisory fees cannot be charged monthly D. This action cannot be taken because the compensation to the Adviser is excessive

D. Charging excessive fees is prohibited and a fee of 5% of assets per month is a 60% annual fee - clearly an unbelievably high fee! The ridiculous fee cannot be justified by including it in an amended Form ADV Part 2 filed with the Administrator (Administrators do not examine the filing information routinely - they just have it on file if they need access to it - so it would likely not be picked up by the Administrator unless there was a customer complaint). The ridiculous fee cannot be justified because the customer signed an advisory contract - he or she may not have known what was being signed. Finally, the adviser can charge fees monthly, quarterly, yearly - the frequency of the payment makes no difference. Rather, it is the amount being paid for the service that is the issue.

Criminal violations of the Investment Advisers Act of 1940 are punishable by: A. $5,000 fine and 3 years in jail B. $10,000 fine and 3 years in jail C. $5,000 fine and 5 years in jail D. $10,000 fine and 5 years in jail

D. Criminal violations of the Federal securities laws are punishable by a fine of $10,000 and up to 5 years in jail. In contrast, the criminal penalties under Uniform State law are a fine of up to $5,000 and 3 years in jail.

Which of the following is NOT a "Red Flag" for securities fraud operated through social media? A. An e-mail received promoting a stock from an unknown sender B. A claim made on Twitter that a stock's price is about to "go through the roof" C. A website promoting an investment with no risk offering 30% monthly returns D. A banner advertisement placed by a broker-dealer on a "stock pick" chat room

D. E-mails received promoting stocks from unknown senders are a red flag for social media investment fraud, as are unfounded or exaggerated claims about investments made on websites and apps such as Facebook or Twitter. Banner advertisements placed by broker-dealers are not a red-flag (since they are regulated by FINRA).

HYIPs are typically: A. registered securities sold by licensed individuals B. registered securities sold by unlicensed individuals C. unregistered securities sold by licensed individuals D. unregistered securities sold by unlicensed individuals

D. High Yield Investment Programs (HYIPs) are unregistered investments sold by unlicensed individuals promising incredible returns, often of 1-2% per day, at little or no risk. Fraudsters use social media to promote HYIP websites, offering "lucrative" returns and "guaranteed profits" and encourage their followers to use a referral link to share the HYIP website with others, in return for a referral fee. These programs are a "hot button" item for NASAA and FINRA.

Which records MUST be retained in a state-registered investment adviser's principal office? A. Financial reports B. Client advisory contracts C. Investment adviser's bank statements 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).

The term "loan value" when applied to equity securities, is the: I percentage of the purchase price that must be deposited when the securities are bought II percentage of the purchase price that can be borrowed when securities are bought III reciprocal of the Regulation T requirement IV complement of the Regulation T requirement A. I and III B. I and IV C. II and III D. II and IV

D. The "loan value" of a security is the amount that may be borrowed against the position under the margin rules as set forth under Regulation T of the Federal Reserve for non-exempt securities. For example, if a security has a Regulation T requirement of 60%, then its loan value is 40%. If a security has a Regulation T requirement of 50%, then its loan value is 50%. The "loan value" is the "complement" of the Regulation T requirement. The complement of a fraction is the remaining fraction that makes both add to "1". (The reciprocal is "1" divided by the fraction.)

The vice president of a publicly traded company casually tells a close friend over dinner that the company's results are looking very weak this quarter. The friend offers some comforting words to the vice president and does not tell anyone else about the news. Which statement is TRUE? A. The vice president has violated the insider trading laws B. The friend has violated the insider trading laws C. Both the vice president and the friend have violated the insider trading laws D. Neither the vice president nor the friend have violated the insider trading laws

D. The "tipper-tippee" doctrine applies only to cases where the tipper "intentionally" gives the information to the "tippee," who then trades on it. In this case, the "tippee" never traded, so there is no violation.

Regarding the Administrator's ability to inspect the books and records of a broker-dealer doing business in its State, which statement is TRUE? A. The Administrator can only inspect the books and records of a broker-dealer on a surprise basis with 1 day written notice to the broker-dealer B. The Administrator can only inspect the books and records of a broker-dealer on a surprise basis with a court order C. The Administrator can only inspect the books and records of an out-of-State broker dealer if it is concurrently inspecting the books and records of that broker-dealer in its State D. The Administrator can conduct an inspection of a broker-dealer's books and records in any State and at any time

D. The Administrator is empowered to inspect the books and records of an investment adviser or broker-dealer that is doing business in that State in any location (either inside or outside that State) and without giving prior notice. There is no requirement for a court order to do so.

ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP: A. is required to notify each of Mark's customers of the change of IAR and get the customer's approval B. is required to send a negative consent letter to each of Mark's clients and if no response is received, the assignment is permitted C. has violated the Investment Advisers Act of 1940 because advisory contracts cannot be assigned. D. is not required to take any further action

D. The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. The firm can reassign customer accounts to any IAR at the same firm without notifying the customer.

A client has been following a certain security and tells his broker that he would like to buy it if the price reaches a certain level. The client leaves town for 2 weeks, and during that time, the security rises to the level mentioned as the buying target. The representative should: A. buy the security for the customer's account B. buy the security for his personal account and sell those shares to the customer when he returns from the trip C. buy the security in a numbered account and then reassign the account number to that customer when he returns from the trip D. do nothing

D. This situation makes no mention of the customer giving the representative a written power of attorney over the account; therefore, the representative cannot take any action without the customer's specific authorization.

An agent of a broker-dealer is located in State A. The agent solicits a customer located in State B, but no sale of securities results from that contact. The agent recontacts the customer in State C, where the customer spends winters and a sale of securities results. Which State Administrators have jurisdiction? A. The Administrator of State A only B. The Administrator of State C only C. The Administrators of States A and State C D. The Administrators of States A, B and C

D. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: originates in the Administrator's State; is directed into the Administrator's State; or is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. Because the broker-dealer and agent are located in State A, that Administrator has jurisdiction. Because the customer was initially contacted in State B, that Administrator has jurisdiction. Finally, the customer is recontacted in State C, where he or she spends winters (which is presumably longer than the "vacationing" exclusion) so the Administrator of State C has jurisdiction as well. Also note that it is possible that the "de minimis" exemption could be used in this example (a broker-dealer with no office in a State that solicits 5 or fewer clients in that State in 1 year), but this question does not address how many other clients this agent has in States B and C or how many solicitations this agent made in States B and C.

An agent of a broker-dealer recommends a specific stock to a customer and says that the stock will most likely increase in value within the next couple of months. The customer invests in the stock and its market price increases substantially. Which statement is TRUE? A. The agent may accept a bonus based on a percentage of the increase in market value with the specific authorization of the customer B. The agent may accept a bonus based on a percentage of the increase in market value with the specific authorization of the agent's broker-dealer C. Both the customer and the broker-dealer must approve of any increased commission given the agent based on a percentage of the increase in market value D. The only acceptable commission is that which was originally received

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 accept any larger commission based on an increase in value of the recommended stock; nor can the agent rebate any commission if the stock decreases in value.

Under the Uniform Securities Act, which of the following securities is (are) 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

I & II 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 an "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.)

An agent of a broker-dealer puts up a website that promotes the benefits of dollar cost averaging, including the caveat that it is suitable for investors only if they can maintain their periodic payments regardless of economic conditions and that it requires a long-term investment time horizon. If the website is viewed by an individual in another State where both the broker-dealer and agent are not registered, which of the following disclosures are required on the site in order not to be in violation of the Uniform Securities Act in that State? I "The broker-dealer or agent may only transact business in the State if registered in the State or if exempted or excluded from registration" II "Follow ups or individualized responses to persons in the State that involve either effecting or attempting to effect transactions in securities will not be made absent compliance with State registration requirements or an applicable exemption or exclusion" III "The services being offered do not represent an offer to sell securities or a solicitation of an offer to buy the securities in the State unless the subject securities are registered or are subject to an applicable exclusion" IV "The Securities and Exchange Commission has not approved, nor has it disapproved of offering made in this advertisement"

I & II ONLY. since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site: "The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." - So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). - There is no requirement to give a disclaimer regarding whether securities being offered are registered or exempt in the State; and the SEC has nothing to do with State law, so Choice IV does not apply (it does apply to prospectus disclosure on new issues of non-exempt securities registered under the 1933 Act, however).

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

I & II. 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.

Under the Uniform Securities Act, an investment adviser is prohibited from taking custody of a client's funds if the: I Administrator prohibits this by rule II firm fails to notify the Administrator that it has custody or may take custody III firm is registered as a broker-dealer as well as an investment adviser

I & II. The fact that a broker-dealer can also be registered as an investment adviser has no bearing on whether an investment adviser can take custody of a customer's securities. An investment adviser can take custody of a customer's securities, if the firm notifies the Administrator that it has custody or may take custody. However, if the Administrator prohibits taking custody, then obviously the firm cannot do so.

An Investment Adviser can give advice on: I NYSE listed securities II Options III Commodity futures IV Variable annuities

I, II, & IV. Investment Advisers and IARs give advice about securities, not commodities or futures contracts. Choice I, II and IV are all securities. Commodities futures are not securities.

Due to an overall market decline, an investment adviser that imposes a .50% annual management fee on its clients is under financial pressure. To meet its expenses, the adviser wishes to increase its management fee to .65% for any new clients; the existing clients will see no change to the management fee charged. In order to do so, the adviser must: I file an ADV Part 2A with the Administrator within 30 days II provide the amended ADV Part 2A or a brochure to its new clients III provide the amended ADV Part 2A or a brochure to its existing clients at year end

I, II, III. A large change in fees is a material event and requires prompt notice to the Administrator, defined as notice within 30 days (on the other hand, a small change in fees would not be considered to be material). Such a change in fee structure must be included in the ADV Part 2A, which is provided to the customer when an account is opened (it is the "brochure" that details the adviser's business and fee structure). In addition, a copy of the amended Form ADV Part 2A or the Summary of Significant Changes section of the Form ADV with the offer of the complete Form must be sent to any existing customers at year end.

Under the Investment Company Act of 1940, an affiliated person is prohibited from doing which of the following activities? I Borrowing money from the fund II Borrowing securities from the fund III Selling securities personally to the fund IV Buying shares of the fund

I, II, III. Affiliated persons of investment companies (the officers, employees, and 5% shareholders of the fund) are prohibited from borrowing monies from the fund; from borrowing securities from the fund; or from buying securities personally from the fund's portfolio or selling securities personally to the fund's portfolio. In all of these instances, the affiliated person is in a position to effect such transactions at overly favorable terms - since there is no "arm's length." There is no prohibition on these persons buying the shares of the fund - in this case they buy at Net Asset Value (plus a sales charge, if any) - just like any other customer.

The Administrator can take which of the following actions? I Coordinate inspections with those conducted by the Securities and Exchange Commission II Inspect a broker-dealer located in another State that does business in the Administrator's State III Require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness IV Suspend the constitutional privilege against self-incrimination available to an individual

I, II, III. The Administrator may coordinate inspections with those conducted by the Securities and Exchange Commission; may inspect a broker-dealer located in another State that does business in the Administrator's State; and may require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness. However, the Administrator cannot suspend the constitutional privilege against self-incrimination available to an individual, since this Federal law (5th Amendment to the Constitution) supersedes any State law.

Which statements are TRUE about the recordkeeping requirements for communications sent to potential clients under the provisions of the Investment Advisers Act of 1940 I A record of the name and address of each person to whom the communication is sent must be retained II A record of the name and address of each person to whom the communication is sent is not required for communications sent to more than 10 persons III For communications sent to a list of individuals, a memorandum describing the list and its source must be retained IV Proof of mailing in the form of a postal receipt must be retained for each printed communication that is distributed

I, II, III. The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals, a copy of the communication, along with a memorandum describing the list and its source, must be retained. There is no requirement to retain proof of mailing or distribution of the communication.

Under the provisions of the Prudent Investor Act, a Registered Investment Adviser should consider which of the following when investing and managing trust assets? I General economic conditions II Possible effects of inflation or deflation III Trading patterns of plan beneficiaries IV Investment tax consequences

I, II, IV. The Prudent Investor Act states that the trustee should consider the following when making investment decisions relevant to the trust or its beneficiaries: General economic conditions; Possible effects of inflation or deflation; Expected tax consequences of investment decisions or strategies; The role that each investment plays within the overall trust portfolio; The expected total return; Other resources of the beneficiaries; Needs for liquidity, regularity of income, and preservation or appreciation of capital; and An asset's special value to one or more of the beneficiaries. The trading patterns of the plan beneficiaries have no bearing on this.

Which of the following information is included on an applicant's registration application? I Business history of applicant II Educational history of applicant III Financial condition of applicant IV Conviction record of applicant

I, III, IV. 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.

If an investment adviser wishes to hire an individual to solicit business for the advisory firm: I the solicitor must be registered as an agent of that investment adviser in the State II the adviser must be registered with either the SEC or the State as appropriate III there must be a written agreement between the adviser and the solicitor IV there must be a written agreement between the adviser and the SEC or the State Administrator, as appropriate

II & III. An investment adviser solicitor must be registered in the State; however, the solicitor can be an independent third party that is not a representative of that investment adviser, making Choice I incorrect. The investment adviser (the firm) must be registered with the SEC if it has $100,000,000 or more of assets under management (a federal covered adviser). If the firm has less than $100,000,000 of assets under management, then it only is required to register with the State. To use a solicitor, there must be a written agreement between the adviser and the solicitor that spells out the work to be performed and the compensation to be paid.

n investment adviser is opening that day's mail and receives a check from a customer for $5,000; however there is no payment due from the customer. The customer mailed the check in error. The same day, 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

II & III. 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. This is the situation in this question. 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.

The Administrator can, by order, deny an exemption from registration, to which of the following? I General Obligation bonds of another State that are being offered only in that State II An executor selling stock held by an estate III Corporate bonds being sold to a bank trust department

II & III. The Administrator cannot deny the registration in a State of an exempt security, such as a U.S. Government bond or a municipal bond. Note that the Uniform Securities Act requires the persons selling these securities in the State to be registered. On the other hand, the Administrator can modify the definition of an exempt transaction; or can deny an exempt transaction. For example, an "isolated non-issuer transaction" is exempt under State law, but each Administrator actually defines what this is (for example, maybe it is only 1 permitted transaction in a year; or maybe it is fewer than 5 permitted transactions in a year - the Administrator sets the requirements for the exemption).

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

II & IV. 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.

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

II ONLY. 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.