Series 63 Final Exam 3
According to the Uniform Securities Act, which of the following investment advisers would be exempt from registration? A) An adviser with no place of business in the state, with 10 clients, all of whom are accredited investors B) An adviser with no place of business in the state and fewer than six retail clients C) An adviser with an office in the state, with five or fewer retail clients D) An adviser with no place of business in the state and only six clients who have a net worth of at least $1 million each
B) An adviser with no place of business in the state and fewer than six retail clients There is no investment adviser exemption based on net worth in the Uniform Securities Act. (In federal securities law, there is a securities registration exemption for private placements to accredited investors.) If an adviser does not have a place of business in a particular state and limits clientele to institutional investors (or no more than five retail investors), the adviser is exempt from registration.
Which of the following statements regarding business continuity plans (BCPs) is TRUE? A) Only investment advisers are required to have a BCP. B) Both broker-dealers and investment advisers must have written BCPs. C) BCPs are recommended by state and federal regulators; however, they're not required for either broker-dealer or investment advisers. D) Only broker-dealers are required to have a BCP.
B) Both broker-dealers and investment advisers must have written BCPs. Business continuity plans (BCPs) are used to protect organizations against disruptive events (e.g., natural disasters or cyber attacks). Both broker-dealers and investment advisers are required to create written BCPs. The plan must address operations, communications with employees, staff, and regulators, as well as the recovery of books and records.
Broker-dealer A holds customer registered stock in its vault. It also holds its own inventory of stock in the same vault. To save on space and expense, it does not separate customer stock from the broker-dealer's own stock. This practice is called: A) Discretionary custody and is permitted if the clients approved in writing B) Commingling and is prohibited C) Commingling and is permitted if the securities are held in different areas D) Churning and is prohibited
B) Commingling and is prohibited Customer securities may not be commingled with broker-dealer securities, even if the stock is all held in street name. Churning is excessive trading in a customer's account for the benefit of the broker-dealer, not the customer.
An agent receives insider information about a stock. Out of nowhere, a customer calls her and places an order to sell the same stock. The agent must: A) Refuse to accept the order without additional explanation B) Execute the client order without mentioning the information C) Tell the client about the insider information before executing the order D) Tell the client that she must refuse the order because of the insider information
B) Execute the client order without mentioning the informatio An agent who has material, nonpublic information about a security may not trade that security either on her own behalf or on behalf of her firm. She is also forbidden from recommending or soliciting the purchase or sale of that security. The agent (and the firm) may, however, accept and execute unsolicited client orders regarding the security. An agent should never share insider information with anyone except her supervisor or compliance officer.
Under NASAA's Model Rule on Brochure Rule Requirements, if an investment adviser provides a brochure at the time that a contract is signed, how long must a client be given to terminate the contract without penalty? A) 48 hours B) Five days C) Two days D) 12 months
B) Five days According to NASAA's Model Rule on Brochure Rule Requirements, individuals who receive the brochure at the time they sign an advisory contract must also be given a five-business-day period to cancel their contract without penalty (i.e., a five-day free look). If an individual receives a brochure 48 hours before he signs an advisory contract, he is not required to be offered a free-look period.
Sales of viatical investments can be made only to suitable investors. Which TWO of the following investors are considered suitable? I. An accredited investor under Regulation D II. Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000 III. Anyone who is in the highest marginal tax bracket and is in need of liquidity IV. Anyone who has been specifically approved by the state Administrator A) II and III B) I and II C) III and IV D) I and III
B) I and II A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy. Since it is unknown when the insured will die and the funds invested are not readily accessible on demand, NASAA has established specific suitability requirements for viatical investments, which are stated in choices (I) and (II). Viatical investors must either be accredited investors according to Regulation D or must meet one of the following financial standards. - Minimum net worth of at least $150,000 (not including their residence) and an annual income of $100,000, or - Minimum net worth of at least $250,000 (not including their residence)
Which TWO of the following choices describe an unethical business practice? I. An agent tells clients that the broker-dealer will rebate their commissions if an IPO does not increase by 10% during its first month of trading II. An agent tells clients to purchase shares in a company based on the research report the broker-dealer just issued III. An agent who has insider information about a stock executes a client's unsolicited order for that stock IV. An agent highlights the important parts of a prospectus at the client's request A) III and IV B) I and IV C) II and III D) I and II
B) I and IV The agent in choice (I) would be guaranteeing the client against losses, which is an unethical practice according to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. The agent in choice (IV) should not have highlighted the prospectus even if his only intent was to help the client. An agent should never mark up or alter a prospectus for a client.
Which of the following are considered material changes that require updating an individual's uniform registration form (Form U4)? I. Change in residence II. Receipt of a bonus for the previous quarter's sales III. Becoming registered in a new jurisdiction IV. New outside business activity A) III and IV only B) I, III, and IV only C) I, II, III, and IV D) I and II only
B) I, III, and IV only Material changes that require an update to Form U4 include a change in legal name, a new business or residential address, becoming registered in a new state (i.e., adding a jurisdiction), and additional outside business activities. The receipt of a bonus doesn't require the updating of Form U4.
When opening a margin account, which TWO of the following MUST be signed? I. A loan consent form II. A hypothecation agreement III. A margin account form IV. Trading authorization A) I and III B) II and III C) I and IV D) II and IV
B) II and III When opening a margin account, a customer must sign both a hypothecation agreement and a margin account form. The loan consent form is used when a customer authorizes the member to lend his securities, and is not required. Trading authorization is also not required.
Under the Uniform Securities Act, which of the following statements is/are FALSE concerning the definition of a broker-dealer? I. A person who has no place of business in a state and effects transactions only with institutional buyers is not considered a broker-dealer II. A person who has no place of business in a state and effects transactions only with other broker-dealers is not considered a broker-dealer III. A person who has no place of business in a state and effects transactions with fewer than five clients is not considered a broker-dealer IV. A person who has a place of business in State A and selling to existing clients who are temporarily in State B is considered to be a broker-dealer in State A A) I, II, and IV only B) III only C) I and III only D) II and IV only
B) III only Only choice (III) is false since there is no de minimis exemption from the definition of a broker-dealer. Choices (I), (II), and (IV) are true statements since the definition of a broker-dealer does not include a person who has no place of business in a state and deals exclusively with other broker-dealers, institutional clients and existing clients who are temporarily in another state.
An investment advisory firm has done extensive research on the pharmaceutical industry and is in the process of buying shares of several companies. Many of the stocks are speculative issues but several of the firm's accounts are conservative. According to the Uniform Securities Act, the placement of shares in any of the clients' accounts: A) Is acceptable because the investment adviser did extensive research B) Is permitted as long as it is consistent with the clients' objectives C) Is permitted if it represents a small portion of the clients' portfolio D) Is acceptable as long as the shares reduce the overall risk of the portfolio
B) Is permitted as long as it is consistent with the clients' objectives The adviser may only purchase securities that are consistent with client objectives. The fact that the firm has done extensive research does not alter this requirement. While it is important to manage the portfolio's risk, the investments must be consistent with the clients' objectives.
An investment adviser is registered in State A and State B. A broker-dealer is registered only in State A. The client of the investment adviser is a resident of State B. The investment adviser asks the broker-dealer to purchase a nonexempt security, which is registered in State B, for the advisory client. The broker-dealer: A) May accept the order as long as this practice does not occur with any regularity B) May accept the order if the broker-dealer has no place of business in State B C) Should refuse the order because the broker-dealer is not registered in the state in which the client resides D) May accept the order only if the client places the order
B) May accept the order if the broker-dealer has no place of business in State B This question is very tricky. Here is the point you need to watch for. The business relationship is between the broker-dealer and the investment adviser, not the advisory client. In other words, the investment adviser is the broker-dealer's customer. The transaction is being requested by the investment adviser, who is considered an institution. As a reminder, the term broker-dealer EXCLUDES any person who (1) has no place of business in the state and (2) transacts business with or through a financial institution or institutional buyer, whether acting for itself or as a trustee.
According to the Uniform Securities Act, which of the following actions accomplishes renewal of an agent's license? A) Participation in Continuing Education B) Paying a fee C) Making an announcement in a publication distributed in that state D) Passing an examination
B) Paying a fee An agent renews his license by paying a fee designated by the Administrator. Passing an examination is generally only required for an agent's initial registration. (FINRA does impose a mandatory Continuing Education on all registered personnel, but this is not a state requirement.)
Micro Manager Partners is an investment advisory firm. Micro is creating a new standard contract for its advisory clients. Which of the following clauses should NOT appear in the contract? A) If any partner leaves the business of the Adviser, or if the Adviser adds any partner, the Adviser will notify the Client within a reasonable period, but not more than ten business days after any such change B) The Client agrees to pay a quarterly fee to the Adviser consisting of (i) .25% times the value of the portfolio at the end of each quarter, plus (ii) 2% of any increase in the value of the portfolio compared to the end of the previous quarter. Part (ii) of the fee will not be assessed if the portfolio declines in value C) The Adviser may not assign this contract to another party without the prior written consent of the Client D) The Adviser [Micro] will provide the following services to the Client: management of the Clie
B) The Client agrees to pay a quarterly fee to the Adviser consisting of (i) .25% times the value of the portfolio at the end of each quarter, plus (ii) 2% of any increase in the value of the portfolio compared to the end of the previous quarter. Part (ii) of the fee will not be assessed if the portfolio declines in value An investment adviser may not charge a fee which is based on a share of the capital gains in the account or a share in the capital appreciation of the funds in the account. The part of Micro's fee that consists of 2% of any increase in the value of the portfolio each quarter would not be permitted.
If an investment adviser has $300 million of assets under management, it must register with: A) Each state in which it has an office B) The SEC only C) The SEC and each state in which it has an office D) Only the state in which it maintains its principal office
B) The SEC only The National Securities Markets Improvement Act (NSMIA) was created to eliminate some of the dual requirements of federal and state securities law. An investment adviser whose assets under management (AUM) range from $100 million up to $110 million may register with the SEC. If the adviser's AUM exceed $110 million, it must register with the SEC. An investment adviser that's registered with the SEC is referred to as a federal covered adviser and is not required to register with the state(s). Investment advisers with less than $100 million of AUM are generally exempt from SEC (federal) registration and are required to register at the state level.
Which of the following choices is NOT a security? A) A voting trust certificate B) A mining trust C) A universal life insurance policy D) A variable universal life insurance policy
C) A universal life insurance policy A universal life insurance policy is a type of permanent life insurance policy that is regulated by the insurance commissioner. Variable products, voting trust certificates, and oil, gas, and mining interests are securities according to the Uniform Securities Act.
Under the Uniform Securities Act, which of the following statements is NOT TRUE concerning the state registration of an agent? A) If an agent leaves a broker-dealer to go to another broker-dealer, the agent and both broker-dealers must notify the Administrator of the change B) An agent may only sell securities that have been properly registered in a state or qualify for an exemption from registration C) An agent's registration to sell securities in a given state expires at the end of the broker-dealer's fiscal year D) An agent may only solicit business in a state if both the agent and broker-dealer are registered in that state
C) An agent's registration to sell securities in a given state expires at the end of the broker-dealer's fiscal year The licenses of all agent, broker-dealer, investment adviser, and investment adviser representatives expire on December 31 each year and must be renewed in order to be effective. Renewal is accomplished by the payment of a filing fee.
Which of the following persons is NOT excluded from the definition of a broker-dealer under the Uniform Securities Act? A) An issuer B) An agent C) An investment adviser D) A bank
C) An investment adviser This is an example of a question that must be read very carefully. When you are asked "Who is NOT excluded?" you are essentially being asked, "Which one of these might be considered a broker-dealer?" ("Not excluded" means "Which ONE of the following".) This question is one that tests the letter of the law, a potential event on the real exam. According to the Uniform Securities Act, a bank, an agent, and an issuer are all specifically excluded from the definition of a broker-dealer. An investment adviser has no specific exclusion. However, if it performs the activities that fit the definition of a broker-dealer, it must register as such. For example, if an investment adviser effects agency cross transactions or conducts principal transactions with clients, the adviser is acting a broker-dealer.
An advertisement is printed in State A and circulated in State B. A client in State B feels that she has been treated in an unethical manner by the agent who created the advertisement. Which state has the authority to investigate the agent? A) State A only since the advertisement was printed in that state B) State B only since the client is a resident of that state C) Both States A and B D) Since this involves an interstate transaction, only the SEC has jurisdiction
C) Both States A and B The Administrator has jurisdiction over a securities professional whose offers originate within his state or who solicits residents of a state. In this scenario, the agent created an advertisement in State A. This is where the solicitation originated. The agent then sent the advertisement to State B. Since the offer occurs in both locations, both Administrators have the authority to investigate the solicitation. The SEC may have jurisdiction as well, but not solely.
Under what circumstances may an agent registered in State A sell securities to an investor who is a resident of State B? A) The security is exempt from registration in State B and the agent receives no compensation B) The investor states that he is in the process of moving back to State A C) Both the agent and broker-dealer are registered in that state D) The security is exempt from registration in State B and the order is unsolicited
C) Both the agent and broker-dealer are registered in that state In order for an agent to sell securities to a resident of another state, both the agent and broker-dealer must be registered in that state. This question concerns the agent's registration, not the security's. Compensation is irrelevant. Until the investor actually establishes residency in State A, he is still a resident of State B.
An agent may NOT: A) Call an existing client before 8:00 a.m. B) Split commissions with another agent who works for an affiliated firm C) Call a prospective client after 9:00 p.m. D) Sell non-registered, exempt securities
C) Call a prospective client after 9:00 p.m. The Telephone Consumer Protection Act of 1991 prohibits all cold calls except during the hours of 8:00 a.m. to 9:00 p.m. local time of the called person. In other words, an agent may not call a prospective client before 8:00 a.m. or after 9:00 p.m. However, she may call an existing client after 9:00 p.m. or before 8 a.m. to service his account. This Act also requires agents who place cold calls to state their name, their company's name, and give either the company's phone number or address. Agents may not make calls to emergency numbers or cell phones, or send unsolicited faxes. Any person who states that she does not want to be called again must be placed on the firm's Do Not Call List.
Which of the following investors may be charged performance fees by investment advisers? A) Accredited investors under Regulation D B) None, since investment advisers are prohibited from charging performance fees C) Qualified clients D) Exempt investors
C) Qualified clients Under the Investment Advisers Act of 1940 and the NASAA Model Rules, advisers are prohibited from charging performance fees that are tied to gains in the account. However, an exception is made for qualified clients. A qualified client is an institutional or retail client with at least $1.1 million under management with the adviser or one with a net worth in excess of $2.2 million. If the client is an individual, then the net worth calculation CANNOT include the value of the client's primary residence. An accredited investor, as defined under Regulation D, is not the same as a qualified client. For example, an individual who has a total net worth of $1 million (excluding her home) is considered an accredited investor according to Regulation D, but is not a qualified client.
In reviewing prices for a mutual fund, an investor notices that the fund has three listings, one for Class A shares, another for Class B shares, and a third for Class C shares. The distinctions among the three classes of shares would most likely reflect different: A) Distribution arrangements B) Minimum purchase requirements C) Sales charges and 12b-1 fees D) Investment objectives
C) Sales charges and 12b-1 fees Classes of shares in mutual funds are distinguished by their sales charges. Generally, Class A shares have front-end sales charges and low or no 12b-1 fees. Class B shares have contingent deferred sales charges and higher 12b-1 fees and often convert to Class A shares after a set number of years. Class C shares have a higher 12b-1 fee than Class A shares and they might also have a small front-end load or a small contingent deferred sales charge if the investor sells the shares within 12 to 18 months.
According to the NASAA Model Rules for Sales of Securities at Financial Institutions, a networking arrangement between a financial institution and a broker-dealer must: A) Be renewed every year by December 31 B) Be filed with the state securities Administrator C) Set forth the compensation schedule for both parties D) Specify which functional regulator will be in charge of examining the broker-dealer's operations at the financial institution
C) Set forth the compensation schedule for both parties A networking arrangement is an agreement between a broker-dealer and a bank (or a savings and loan or credit union) under which the broker-dealer does business at a retail banking location. According to the NASAA Model Rules, these agreements must be in writing and must specify how both the bank and the broker-dealer will be compensated. The agreement must also state the duties and responsibilities of both the broker-dealer and the bank, and must provide that the broker's supervisory personnel and state regulators will have access to the bank to examine the records maintained there.
An agent of a broker-dealer executes a securities transaction that is not recorded on the broker-dealer's books and records. According to NASAA Statements of Policy, this would NOT be an unethical business practice if the agent had done which of the following? A) The agent received the broker-dealer's written authorization after the execution of the transaction B) The agent received the broker-dealer's oral authorization to execute the transaction C) The agent received the broker-dealer's written authorization prior to the execution of the transaction D) This type of transaction is considered an unethical business practice regardless of receiving the broker-dealer's authorization
C) The agent received the broker-dealer's written authorization prior to the execution of the transaction Generally, it is considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer's books and records. However, according to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may effect transactions not recorded on the books and records of the broker-dealer if the transactions are authorized in writing in advance by the broker-dealer of their execution.
Ron X, an agent, offered and sold an unregistered security to several of his clients in State W. These clients subsequently lost a considerable amount of money in this investment. Under the Uniform Securities Act, which of the following statements is TRUE? A) While unethical, this is not a violation of the Uniform Securities Act B) The Administrator may initiate a civil lawsuit C) The clients may initiate a civil lawsuit to recover their losses D) This is a violation of the Securities Act of 1933
C) The clients may initiate a civil lawsuit to recover their losses Clients may sue on the basis that the security was not registered and subsequently attempt to recover their financial losses.
Under the Uniform Securities Act, when would the sale of an unregistered, nonexempt security not be a violation? A) Under no circumstances B) The transaction was reviewed by the customer's attorney C) The customer provided a written statement that the order was unsolicited D) The customer had signed an agreement not to prosecute
C) The customer provided a written statement that the order was unsolicited It is normally a violation of the Uniform Securities Act to sell unregistered, nonexempt securities. However, there is an exemption for unsolicited transactions. Generally, most states require that the customer sign a written statement that the order was unsolicited, which serves as proof that it was unsolicited and, therefore, an exempt transaction.
The state Administrator has suspended Heathrow Securities, a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE? A) The firm may continue business as usual during the appeal process B) The only activity the firm may not participate in is new issue distributions C) The firm may apply to the state court for a review of the order D) The firm is allowed to accept unsolicited orders
C) The firm may apply to the state court for a review of the order Although the firm may apply to the state court to review the Administrator's order, there is no stay of the order. The firm is still suspended during the appeal process and cannot participate in any securities-related activities in that state.
An unregistered agent who is an employee of a licensed broker-dealer is allowed to sell exempt securities to the public: A) If the employee is not paid a salary or commission B) If it is an exempt transaction C) Under no circumstances D) Because the security is exempt
C) Under no circumstances An individual who sells securities (whether or not the securities are exempt) must be registered as an agent in order to sell such securities to the public for a licensed broker-dealer.
When must action be taken for recovery on a transaction made in violation of a registration provision? A) Within three years of notification B) Within two years of occurrence or three years of discovery, whichever occurs last C) Within three years of occurrence or two years of discovery, whichever occurs first D) Within five years of notification
C) Within three years of occurrence or two years of discovery, whichever occurs first If an agent sells a security in violation of a registration provision, a client must take action for recovery within three years of the occurrence of the sale or two years of the discovery of the violation, whichever occurs first.
Which of the following designations is acceptable on a business card? A) "IAR" for an individual who has passed the Series 63 and is employed by a federal covered adviser B) "RIA" for an investment adviser that's registered with the SEC C) "RIA" for an investment adviser that's registered with a state Administrator D) "Investment counsel" for a registered entity whose primary business involves acting as an investment adviser
D) "Investment counsel" for a registered entity whose primary business involves acting as an investment adviser The term "investment counsel" can be used in promotional material as long as a firm's primary business consists of acting as an investment adviser. Using the abbreviations "IAR" and "RIA" are prohibited and misleading because 1) these initials have no generally understood meanings; 2) initials after a name typically indicate a degree or a licensed professional position for which there are certain qualifications; and 3) there are no qualifications for becoming a registered investment adviser. However, using the full term (e.g., registered investment adviser) is permissible. The purpose of such a prohibition is to ensure that investors don't confuse a mandatory registration with a professional certification (e.g., CFA or CPA).
When trading on margin, clients are required to deposit: A) 25% of the amount of money borrowed B) 50% of the amount of money borrowed C) 25% of the market value of the security D) 50% of the market value of the security
D) 50% of the market value of the security Regulation T of the 1934 Act provided the Federal Reserve with the power to establish equity requirements when trading on margin. The current initial requirement when purchasing common stock is 50% of the market value of the security at the time of the transaction.
Which of the following persons is NOT considered an investment adviser representative under the Uniform Securities Act? A) A person who solicits advisory services and private offerings for accredited investors B) A person who makes recommendations about municipal securities at an investment advisory firm C) An accountant who offers a separate service for securities advice based on his clients' tax situation D) A person who assists clients by entering orders for securities transactions
D) A person who assists clients by entering orders for securities transactions A person who assists clients and enters orders for securities transactions is an agent of a broker-dealer, not an investment adviser representative. A person providing advice at an advisory firm is an investment adviser representative, even if that advice is about exempt securities (e.g., municipal securities). A person who solicits advisory services is an investment adviser representative. An accountant who offers a separate service for giving securities advice will most likely need to register as an investment adviser representative. Although the accountant answer doesn't specifically mention compensation, it may be assumed because of the phrase "offers a separate service for securities advice."
Which of the following statements is NOT TRUE? A) An agent may not promise a client that any investment will always result in a profit B) If an agent recommends a security to a client, this security must be suitable for the client in relation to the client's investment objectives C) If an agent receives insider information, the appropriate action would be to report the news to a supervisor and ask the supervisor for advice D) Agent refers to a person who represents an issuer in an exempt transaction
D) Agent refers to a person who represents an issuer in an exempt transaction Under the Uniform Securities Act, agent means any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. However, excluded from the definition is an individual who represents an issuer in effecting transactions in certain exempt securities or who represents an issuer in an exempt transaction.
Monetary disputes between registered persons and their customers are usually settled by: A) The federal courts B) The state courts C) The SEC D) Arbitration
D) Arbitration Monetary disputes between registered persons and their customers are usually settled by arbitration, which is considered more economical than lawsuits pursued through the court system. Almost every brokerage firm includes in their customer agreements a mandatory predispute arbitration provision that forces those investors to submit to arbitration all disputes they may have with the firm or its employees. Many cases are settled and, if not, the only alternative is arbitration.
Prior felony convictions must be disclosed on Form U4 if the conviction occurred: A) Within the last five years B) Within the last two years C) Within the last 10 years D) At any time
D) At any time This question is an example of a "hair splitter" that sometimes occurs on the real exam. The fine point of the question is whether you must disclose something versus whether or not that situation would affect your employment. Agents are required to disclose all felony charges or convictions on Form U4 regardless of when they occurred. There is no time frame. If an applicant had a felony conviction 20 years ago, it must be disclosed. On the other hand, an agent will be statutorily disqualified if the conviction was within the last 10 years. The agent may be registered if she requests and receives permission at a special hearing. The Administrator may reject the application of anyone convicted of a felony regardless of when it occurred if the Administrator shows it is in the public interest to do so. As a follow-up point, applicants must also disclose all securities-related misdemeanors, charges or convictions, regardless of when they occurred.
A broker-dealer's registration may be revoked or suspended if the Administrator determines that this action is in the public interest and the: A) Broker-dealer has engaged in ethical business practices B) Broker-dealer's controlling partner has declared personal bankruptcy C) Broker-dealer withdrew its registration in another state D) Broker-dealer violated federal commodities laws within the past 10 years
D) Broker-dealer violated federal commodities laws within the past 10 years The Administrator may cancel, revoke, or suspend a broker-dealer's registration if the Administrator determines that this action is in the public interest and the firm has violated the provisions of the Commodity Exchange Act. The insolvency (personal bankruptcy) of one of the broker-dealer's partners, officers, directors, or controlling persons may not be used as a basis for revoking or suspending a broker-dealer's registration. Withdrawal from registration as a broker-dealer is a voluntary procedure and does not imply wrongdoing by the registrant.
Which of the following choices is considered a person under the USA? I. A customer II. A broker-dealer III. An estate IV. An issuer A) I and II only B) I, II, and III only C) I and IV only D) I, II, III, and IV
D) I, II, III, and IV Under the USA, a person is defined as a legal entity, which would include individuals (natural persons) and business entities such as corporations, broker-dealers, partnerships, and investment advisers. It also includes trusts and estates.
A fraudulent transaction was initiated by an agent in State Y with a customer who lives in State X. The transaction took place in State Z, where the customer was visiting a relative. Under the Uniform Securities Act, which Administrators have authority over the transaction? I. The State X Administrator II. The State Y Administrator III. The State Z Administrator A) II and III only B) I and II only C) I and III only D) I, II, and III
D) I, II, and III All of the Administrators could have authority over the transaction since each state's jurisdiction was crossed.
All the following descriptions would meet the definition of agent under the Uniform Securities Act, EXCEPT: I. A sales representative of a broker-dealer who sells only securities covered under a federal exemption II. An assistant to a sales agent who takes orders when the agent is not available III. A subsidiary of a bank, registered as a broker-dealer that sells nonexempt securities to the public IV. A broker-dealer that sells only exempt securities within the state A) II and IV only B) I and II only C) I and IV only D) III and IV only
D) III and IV only By definition, an agent is an individual and not a firm. Choices(III) and (IV) are both firms, not individuals. A sales agent of a broker-dealer is, by definition, an agent. It does not matter whether the securities are covered under a federal exemption or not. If administrative personnel are authorized to take orders, they are agents.
An investment adviser (IA) is dually registered as a broker-dealer in State A. The IA is also registered in State B, but it's not registered as a broker-dealer there. If the investment adviser only has advisory clients in State B, is it required to register as a broker-dealer in State B? A) No, because the firm is already registered as an IA in State B. B) Yes, if the firm has a place of business in State B. C) Yes, since broker-dealers must register in every state. D) No, since the firm does not have any brokerage clients in State B.
D) No, since the firm does not have any brokerage clients in State B. If an investment adviser is providing advisory service in State B, and is not effecting securities transactions, it's only required to register as an IA in State B. However, if the firm decided to begin effecting securities transactions with individual residents of State B, it would need to become dually registered as an IA and B/D in State B.
A client has a $5,000,000 account with an objective of income only. Under the Uniform Securities Act, an agent who has discretionary authorization for the account could: A) Speculate with 5% of the client's assets B) Not purchase equities in the account C) Speculate with any amount that could be reasonably justified D) Not buy a speculative stock without the client's approval
D) Not buy a speculative stock without the client's approval Regardless of the account size, any amount of speculative investing would be inappropriate in an account with an objective of income only.
All of the following practices are prohibited, EXCEPT: A) Executing a solicited order for an unregistered, nonexempt security B) Excessive trading in a client's account C) Sharing in the profits of a client's account without any contribution to the account D) Sharing of a commission on a trade by two agents of a broker-dealer
D) Sharing of a commission on a trade by two agents of a broker-dealer Agents employed by the same firm are permitted to share commissions on a trade.
An agent received a written complaint from a client. The next day, the client called the agent to apologize for the anger and tells the agent to disregard it. Which of the following statements is TRUE? A) The agent may disregard the complaint since the client rescinded verbally within 24 hours B) The agent may not contact the client until the issue is resolved C) The agent must forward the complaint to a supervisor who will then file it with the state Administrator D) The agent must forward the complaint to a supervisor
D) The agent must forward the complaint to a supervisor An agent must forward all written complaints to a supervisor even if the client rescinds the complaint. The supervisor is not required to submit the complaint to the Administrator. A copy of the complaint and any response must be maintained by the broker-dealer.
Under the Uniform Securities Act, which of the following sale would be considered a nonissuer transaction? A) A primary offering sold by a broker-dealer B) The sale of a new issue in a private placement C) The sale of a security executed by an agent of the issuer D) The sale of an outstanding security on the New York Stock Exchange
D) The sale of an outstanding security on the New York Stock Exchange A nonissuer transaction is a purchase or sale of a security whereby the issuer does not benefit, directly or indirectly. A trade between two investors for IBM stock on the New York Stock Exchange (a secondary market trade) would be an example of a nonissuer transaction.
Which of the following is MOST likely considered churning? A) A customer who normally buys securities four times a year is now buying securities four times month; however, a client verbally consents after the agent recommends this change in strategy B) Rather than buying 1,000 shares of one company, an agent buys 100 shares of 10 different companies C) An agent's customer needs funds available in two years and the agent purchases a large amount of two-year Treasury notes D) A customer who requests frequent trading and his agent employs a day trading strategy
A) A customer who normally buys securities four times a year is now buying securities four times month; however, a client verbally consents after the agent recommends this change in strategy According to NASAA, churning is defined as inducing trading in a customer's account which is excessive in size or frequency in view of the financial resources and character of the account. Recommending for a customer to increase her trading from four times a year to four times a month would be considered excessive. Employing a day trading strategy for a customer who requests frequent trading, and diversifying a customer's portfolio (buying 100 shares of 10 different companies) are not considered churning.
An investment adviser representative is managing a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE about including options in such a portfolio? A) Certain types of options strategies may be appropriate as part of a conservative portfolio B) Options are appropriate only if the investor has previous personal experience investing in options C) Options strategies are appropriate for conservative portfolios as long as they are profitable D) Options are never appropriate in a conservative portfolio
A) Certain types of options strategies may be appropriate as part of a conservative portfolio Prudent investor standards are applied to the client's total portfolio, not on an investment-by-investment basis. Rather than restricting individual investments, anything might be appropriate as part of a portfolio if the investment helps the portfolio achieve specific aims. For example, writing covered calls could be part of a conservative growth portfolio.
A broker-dealer keeps customer-owned, street-name securities and the broker-dealer's securities together in a way that may not clearly indicate who owns which shares. This could be considered: A) Commingling B) Conversion C) Sharing in profits and losses with a customer D) A fraudulent act
A) Commingling Commingling refers to the practice of intermixing securities belonging to customers with securities belonging to the broker-dealer. This is prohibited in order to assure that customer securities are not misused. Street-name securities are held in the name of a broker-dealer instead of the customer's name. This occurs when the securities have been bought on margin or when the customer (the beneficial owner) wishes the security to be held by the broker-dealer (the nominal owner).
A broker-dealer is a registered market maker in a Nasdaq security. The broker-dealer's current quote states that the firm is prepared to sell to clients 200 shares at $21.00 per share and buy from clients 200 shares at $20.50 per share. Which of the following activities by the broker-dealer would NOT be considered an unethical or dishonest business practice? A) Failing to sell 200 shares to a client at $20.75 per share B) Failing to sell 100 shares to a client at $21.00 per share C) Failing to buy 200 shares from a client at $20.50 per share D) Failing to buy 100 shares from a client at $20.50 per share
A) Failing to sell 200 shares to a client at $20.75 per share A broker-dealer is required to buy from a client or sell to a client any security at its stated or quoted prices. This broker-dealer's quotes reflect the fact that it is willing to buy up to 200 shares at $20.50 and sell up to 200 shares at $21.00. The broker-dealer is not required to sell shares at a price superior ($20.75) to its quoted prices. The broker-dealer could sell the securities at the superior price, but is not required to do so.
Under the Uniform Securities Act, a state's Administrator may require the filing of which of the following documents by rule or order? I. Form letters II. Pamphlets and/or circulars III. A prospectus A) I, II, and III B) II and III only C) I and III only D) I and II only
A) I, II, and III The state Administrator may require all of these items to be filed as long as the do not involve federal covered securities, exempt securities, or securities sold as part of an exempt transaction.
A no-load mutual fund has no: I. 12b-1 fees II. Front-end sales charges III. Contingent deferred sales charges A) II and III only B) I, II, and III C) I and II only D) I only
A) II and III only A no-load mutual fund may not have any front-end sales charges (loads) or any contingent deferred sales charges (back-end loads). It may have a 12b-1 fee as long as this fee does not total more than .25% of the fund's average annual net assets.
An agent is employed by a broker-dealer. Both the agent and the broker-dealer are registered in State X. The agent wants to begin soliciting high net worth retail clients in State Y, where she already has many institutional customers. The CEO of the broker-dealer, who is also the firm's chief compliance officer, approves the agent's activities. The agent may start soliciting retail clients in State Y: A) Only after she is registered in State Y B) Immediately, since she is exempt from registration there as long as the broker-dealer is not registered in State Y C) As soon as possible, since the firm has approved her activities D) Who are qualified purchasers only
A) Only after she is registered in State Y Generally, both the broker-dealer and its agent must be registered in a state before they may do business there, which includes soliciting clients. There is an exception for broker-dealers and their agents who do not have an office in the state and do business only with certain institutional clients, such as other broker-dealers, banks, savings institutions, trust companies, insurance companies, investment companies, and pension plans. Both the agent and the broker-dealer need to be registered in State Y, before she may begin soliciting retail clients there.
An agent just received insider information that Company X has been awarded a huge government contract. The CEO of Company X is expected to announce this information to the public tomorrow. All of a sudden, the agent receives a call from one of his long-time clients telling him to purchase shares in Company X for the client. What should the agent do? A) Process the client's order without disclosing the information B) Hold the order until tomorrow C) Accept the order and recommend that the client purchase additional shares D) Refuse the order and tell the client why
A) Process the client's order without disclosing the information An agent who possesses material insider information must abstain from initiating any transactions in that security. Nor may the agent recommend the security or solicit clients about the security. However, the agent may accept unsolicited client orders to buy or sell the security. An agent who has insider information about a security should never discuss it with anyone except his supervisor or compliance officer.
The Administrator of State A believes that an agent who's registered in State B is operating in State A without being registered. State A's Administrator wants to begin investigating the agent by requesting records from State B. Which of the following statements is TRUE regarding State A's investigative authority? A) The Administrator of State A may begin its investigation without notifying the Administrator of State B. B) Both Administrators must notify the SEC of the potential rule violation. C) The Administrator of State A must coordinate its investigation with the Administrator of State B. D) The Administrator of State A must notify the Administrator in State B that it's conducting an investigation.
A) The Administrator of State A may begin its investigation without notifying the Administrator of State B. Administrators have broad inspectorial powers and may subpoena records or witnesses from other states. Although many Administrators will coordinate their investigations with Administrators from other states, there's no requirement to inform another state's Administrator of an ongoing investigation.
In a soft-dollar arrangement between an adviser and a broker-dealer, the broker-dealer would be permitted to pay: A) The cost of a conference concerning the future of the computer software industry B) A percentage of the salaries of the adviser's internal research staff C) The cost of computer terminals used to deliver market data services D) The cost of a coach flight for a portfolio manager to attend a conference
A) The cost of a conference concerning the future of the computer software industry An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.
According to the Uniform Securities Act, if an employee of an issuer is soliciting employees of that issuer for the purpose of selling securities, which of the following statements is TRUE? A) The employee would be considered an agent if she received commissions or other remuneration B) If the employee was an officer or director of the issuer, she could receive commissions and would not be considered an agent C) The employee could receive commissions without being registered as an agent D) The employee would never be considered an agent of the issuer
A) The employee would be considered an agent if she received commissions or other remuneration Generally, an employee of an issuer soliciting employees of that issuer for the purpose of selling securities would be considered an agent of the issuer if the employee received commissions or other remuneration (such as a bonus based on securities sales). According to the USA, these transactions are not exempt if the employee receives a commission.
According to the Uniform Prudent Investor Act (UPIA), what would be of LEAST concern to an investment adviser? A) The length of the adviser's contract and amount of fees collected B) Current market conditions C) The possibility of a future increase in the rate of inflation D) Tax implications of recommendations and strategies
A) The length of the adviser's contract and amount of fees collected The length of time remaining in the client's contract is the least of the adviser's concerns. Factors that are of greater concern include taxes, inflation, and the direction of the economy.
An agent takes the prospectus for a new issue and creates a marketing piece that includes all the positive facts from the prospectus but none of the risk factors. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, the agent may give this marketing piece to a client: A) This type of communication may never be provided to a client B) Only if it is approved by a principal and filed with an Administrator C) Only if the issue is exempt D) Only if the prospectus is included
A) This type of communication may never be provided to a client Any materials distributed to clients must be fair and balanced. They must include both positive and negative facts about the security and must not be designed to "detract from, supersede or defeat the purpose or effect of any prospectus or disclosure." A marketing piece that includes only positive facts from the prospectus would be misleading and deceptive, according to NASAA's Statement of Policy.
An instrument that permits legal documents served to the Administrator to have the same force as if served to an agent is called: A) A letter of rescission B) A Consent to Service of Process C) Habeas corpus D) A surety bond
B) A Consent to Service of Process A Consent to Service of Process is an irrevocable appointment of the Administrator as the applicant's attorney to receive and process any noncriminal legal complaints. This instrument must be provided when applying for registration as an agent, broker-dealer, investment adviser, or investment adviser representative.
Which of the following choices is not considered a security? A) American Depositary Receipts B) A Treasury bond futures contract C) A variable annuity set up as a retirement plan D) Call options on a gold futures contract
B) A Treasury bond futures contract Under the Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities, life insurance policies) and ADRs are also defined as securities.
A hedge fund is being sold to investors as a private placement under Regulation D. An agent believes that this fund would be an excellent investment opportunity for several of his clients. The agent may discuss the fund with which of the following clients? A) A newly retired man, whose annual income last year was $200,000 B) A middle-aged couple who are both physicians with a joint annual income of $400,000 C) A couple that just won the lottery, which made this year's annual income $500,000, and whose net worth is $550,000 D) A young, aggressive investor with a net worth of $500,000 and an annual income of $150,000
B) A middle-aged couple who are both physicians with a joint annual income of $400,000 Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors and/or no more than 35 non-accredited investors. Accredited investors include: - Individuals who have an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future - A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future - An individual or a couple with a net worth of at least $1 million The best answer is couple who are both middle-age doctors who can reasonably expect to continue making the same level of income. Although the newly retired person meets the income requirement, it may be assumed that his income is likely to drop during retirement. The young investor does not meet either the income or the net worth requirements. The couple that won the lottery have income that is probably much higher this year than normal, and it is unlikely to remain at the same level.
An investment adviser is entering into a contract with a new client. The adviser wants to include a provision in the contract that says it will be compensated based on a share of the capital gains or capital appreciation of the account. According to the NASAA Model Rule on Performance-Based Compensation Exemption for Investment Advisers, the adviser may insert this provision in the contract if the client is: A) An employee of the investment adviser who is the assistant to one of the partners B) A natural person who has a net worth of $2.2 million excluding the value of that person s primary residence C) A company that will have $500,000 under management with the adviser once the contract is signed D) A natural person who together with a spouse has a net worth of $2.5 million including $1.1 million in home equity
B) A natural person who has a net worth of $2.2 million excluding the value of that person s primary residence According to the NASAA Model Rules and the Investment Advisers Act of 1940, advisers are generally prohibited from charging clients performance fees (fees based on the capital gains or appreciation in the client's account). The concern is that advisers receiving performance fees will be tempted to invest in speculative securities in order to increase their fees which may not be in their clients' long-term interests. However, there are exceptions to this prohibition for qualified clients who are considered sophisticated enough to look out for their own interests. Qualified clients include companies and natural persons (individuals) with at least $1.1 million of assets under management with the adviser or with a net worth in excess of $2.2 million. For individuals, the net worth calculation must exclude the value of that person's primary residence.
An investment adviser representative started talking with an elderly couple a few months ago. The couple has recently kept all of their funds in cash, but they're worried about low investment yields and outliving their income. They decided to set up an advisory account and have given the investment adviser representative appropriate trading documentation. Under the Prudent Investor standard, which of the following recommendations is the MOST suitable for the couple? A) Bank-issued CDs maturing in 12 months B) A portfolio of exchange-traded funds (ETFs), corporate bonds, and large-cap equities C) A joint and last survivor annuity with the payout to the surviving spouse lasting 20 years D) Life insurance and bonds
B) A portfolio of exchange-traded funds (ETFs), corporate bonds, and large-cap equities Since this couple is using their savings as their income and are worried about outliving their savings, a diversified portfolio of stocks and bonds is the most suitable. The 12-month CDs will not yield enough to meet the couple's needs. Annuities have up front-sales charges and are typically more suitable for younger investors, rather than the elderly. Life insurance would be suitable if the couple wanted to leave money to their relatives or to a charity after their deaths.
According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices for Investment Advisers and Investment Adviser Representatives, what's an acceptable form of soft-dollar compensation? A) Acquiring a list of customers who made purchases of IPOs B) Acquiring research reports C) Travel expense reimbursement D) A broker-dealer referring its clients to an investment adviser
B) Acquiring research reports Investment advisers (IAs) may receive soft dollars if the non-cash compensation benefits their advisory clients. IAs receiving research is acceptable since the IA becomes more knowledgeable through the acquisition of the research. Receiving referrals, a list of IPO purchasers, and travel reimbursement doesn't directly make the IA's advice better and are therefore not permissible soft dollar arrangements.
Which of the following securities offerings would use registration by coordination? A) An IPO that will be distributed to the residents of one state only B) An IPO that will be distributed in 12 states and not listed on any of the national exchanges C) An offering of preferred stock by an issuer whose stock currently trades on the Nasdaq Global Market D) An IPO that will be listed on the New York Stock Exchange
B) An IPO that will be distributed in 12 states and not listed on any of the national exchanges Registration by coordination is typically used by an issuer that is conducting an IPO of securities that will not be listed on an exchange and that needs to register its securities at both the state and federal level (the two registrations are coordinated). Securities that are listed or authorized for listing on a national stock exchange (e.g., the NYSE or Nasdaq) are examples of federal covered securities and are generally exempt from state registration and notice filing. An issuer of securities that are being distributed to residents of one state will typically use registration by qualification
