Series 66 Exam - Mastery Exam #1
A market maker in ABCD stock is currently quoting the stock at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to buy 800 shares of ABCD at $42.50, the market maker: A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C. must send the order to a stock exchange floor for execution D. is not required to take any action
The best answer is A. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently bidding the stock at $42.00 - this is the price at which he is willing to buy up to 500 shares. Since this customer is willing to pay more to buy - $42.50 for up to 800 shares, the customer's bid must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.
Licensing of investment adviser representatives occurs at the: A. State level only B. Federal level only C. Both the Federal and State level D. Neither the Federal nor State level
The best answer is A. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. Note that the SEC registers the investment adviser only - it does not register investment adviser representatives. The smaller advisers are only required to be registered at the State level. However, the State can require registration of investment adviser representatives for any investment adviser firm.
Investment advisers that manage $100,000,000 or more of assets are subject to: A. Federal registration only B. State registration only C. Both Federal and State registration D. Neither Federal nor State registration
The best answer is A. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level.
A customer has an individual account. Upon written request, the customer's account statements and confirmations may be received by whom? I The customer II One of the customer's immediate relatives III The customer's agent IV The customer's broker-dealer A. I only B. I or II C. III or IV D. I, II, III, IV
The best answer is A. Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office (nor to a relative's home), because then the customer would not know what was going on in the account.
An agent of a broker-dealer wishes to withdraw his registration. If there is a customer complaint, the Administrator: A. retains jurisdiction over the resigned agent for a period of 1 year B. retains jurisdiction over the resigned agent for a period of 3 years C. retains jurisdiction over the resigned agent for a period of 5 years D. has no authority over the agent as the agent is no longer employed by the broker-dealer
The best answer is A. If there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 1 year from the withdrawal date. If an agent resigns from a broker-dealer, both the agent and the broker-dealer must notify the Administrator promptly of the withdrawal. The withdrawal does not become effective for 30 days.
Which of the following investment companies can adopt a 12b-1 plan? A. Mutual fund B. Closed end fund C. Unit trust D. Face amount certificate company
The best answer is A. Only mutual funds (open-end management companies) have sales loads and 12b-1 distribution fees. Closed-end fund share trade like any stock - the only cost of investing is the commission charge for buying or selling shares. Unit trusts and face amount certificate companies also cannot adopt 12b-1 plans.
Information received by the Administrator in a private investigation: A. can be provided to the officers and employees of the Administrator B. can be provided to the general public on request C. cannot be used by the Administrator as the basis for issuing a cease and desist order D. are made available to the public upon the conclusion of the investigation
The best answer is A. The Administrator can conduct both public and private investigations. When conducting a private investigation the Administrator will not disclose any information about the investigation to anyone, other than the employees of officers of the Administrator (which makes sense, since they are conducting the investigation). Information received during the investigation can be used as the basis for issuing an order against the person that is the subject of the investigation. Private investigations are just that, private - the information is not disclosed to the public, before, during, or after, the investigation.
An investment adviser has its principal office in State X. It also has offices in States Y and Z. The recordkeeping requirements of State Y are more stringent than those of State X and the recordkeeping rules of State Z are the most stringent of all. The investment adviser is required to maintain its records in accordance with the rules of: A. State X B. State Y C. State Z D. each State separately under that State's rules
The best answer is A. The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.
The policy of securities regulators regarding emails sent or received by agents maintains that: A. records must be kept of both personal and business emails B. only business emails are required to be recorded and retained C. only personal emails are required to be recorded and retained D. emails are a privileged communication that is not subject to record retention rules
The best answer is A. The recordkeeping rules require the retention of e-mail. Both FINRA and SEC rules require the retention of BOTH business and personal emails, since representatives will often send business related e-mails from home computers and personal electronic devices.
The manager of a broker-dealer is discussing investment strategies with her in-house research assistant. The conversation leads to a discussion about a client for whom the broker-dealer is negotiating to underwrite a common stock offering. The research analyst tells the manager that she is preparing a report indicating that the company is having sales difficulties and is going to downgrade the stock from "Accumulate" to "Hold." What should the research analyst do? A. Wait until the status of the underwriting contract is resolved before taking any further action B. Issue the report as scheduled after changing the recommendation back to "Accumulate" C. Issue the report immediately D. Sell short the stock and then issue the report
The best answer is A. This one is a bit sticky. During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue research reports on that stock (except under very specific rules where the issuer has always previously been publishing reports about that company; and the new report is no more favorable than the old reports). The issue here is that a favorable report would tend to influence that issuer's price upward; and then if the underwriter gets the deal, the underwriter could then sell the issuer's shares at a higher price and earn a larger underwriting spread. This is a conflict of interest. In this case the research analyst is going to issue a report that would influence the price of the stock downward - and the underwriting firm probably would not go through with the underwriting deal if the downgrade made the public too negative on the stock. The best course of action is to wait until the status of the underwriting contract is resolved before issuing the report.
An Investment Adviser Representative (IAR) has been employed by a Registered Investment Adviser (RIA) for the past 12 years and has accumulated $18,000,000 of customer assets under management in accounts for 47 different customers. The IAR has experienced a personal economic decline and has been trading these customer accounts with ever-increasing frequency to generate the commissions necessary to meet his personal debt obligations. Which statements are TRUE? I The IAR has regulatory liability II The IAR has no regulatory liability III The RIA has regulatory liability IV The RIA has no regulatory liability A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. This representative is churning his customer accounts, which is an unethical business practice. Not only does the investment adviser representative have liability, but his employing firm has liability for failing to supervise this individual.
An investment adviser is a private fund adviser that is not required to register with the SEC. All of the following would be permitted investors in order to retain its exempt pool status EXCEPT: A. an individual who is an accredited investor under Regulation D B. an individual who has at least $5 million of assets available for investment C. an hedge fund with at least $25 million of assets under management D. a trust with at least $5 million of assets available for investment
The best answer is A. Under the Investment Advisers Act of 1940, "private fund advisers" with less than $150 million of assets under management are exempt from registering with the SEC. A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either: it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); or it does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment. In contrast, an accredited investor under the Regulation D Private Placement rule is an individual with $200,000 of annual income; a married couple with $300,000 of annual income; and individual with a net worth of $1,000,000; or an investment manager with at least $5,000,000 of assets available for investment.
If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know the identity of the individual customers: I this is known as an omnibus account II this is known as a prime brokerage account III trade confirmations and statements are sent by the broker-dealer to the IA's customers IV trade confirmations and statements are sent by the IA to its customers A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the broker-dealer does not know the identity of the IA's clients. In such an arrangement, it is the responsibility of the IA to send out customer account statements and trade confirmations, since the broker-dealer does not know who the individual customers are. Prime brokerage is used by hedge funds, where the hedge fund uses a clearing "prime broker" to settle all trades and maintain custody of the positions. However, the prime broker agrees to accept trade executions from a list of broker-dealers given up by the hedge fund. In this way, a hedge fund can route its trade executions to differing brokers in return for getting research and investment insight from those firms.
With regard to closed-end investment companies, which statements are TRUE? I An initial offering must be made with a prospectus II The issuer redeems shares at NAV III Once issued, shares trade on the secondary market at prevailing market prices IV The portfolio of securities is fixed and is not managed A. I and II B. I and III C. III and IV D. I, III, IV
The best answer is B. The initial public offering of closed-end fund shares is made in the same manner as any registered company. The IPO shares are sold with a prospectus at POP. The shares are then listed and trade in the secondary market like any other stock. The shares are not redeemable, as is the case with open-end fund shares. Both open-end and closed-end fund portfolios are managed (remember, both are management companies).
Strong "Know Your Customer" requirements are part of a firm's policies and procedures covering: A. Privacy of Customer Information B. Anti-Money Laundering C. Cybersecurity D. Business Continuity
The best answer is B. When a customer account is opened, the customer must provide identifying information that must be verified promptly after account opening. The 4 critical pieces of information that must be verified are: Name, Street Address, Date of Birth and Social Security number. This is part of the "Know Your Customer" requirement. This is done to stop "bad actors" such as terrorists from opening accounts from which they can wire money to co-conspirators either within or outside the United States. Privacy of customer information is covered under Regulation SP. Customer account information is considered to be "private" and cannot be divulged to others unless the customer consents. A copy of the firm's privacy policy must be given to the customer at account opening and annually thereafter. Cybersecurity covers policies and procedures to stop the theft of customer account information. This includes protecting against unauthorized access and requiring strong customer password protection. Business continuity covers the procedures that the firm would follow to maintain customer access to accounts if there is a significant business disruption or if key personnel were compromised.
Under NASAA rules, a complaint is defined as one received: I in a written letter II by e-mail III verbally over the telephone A. I only B. I and II only C. II and III only D. I, II, III
The best answer is B. A complaint that must be recorded and resolved (if possible) is one received in writing (e-mail is written). Screamers don't count until they put the complaint in writing.
Which of the following is defined as advertising? A. Prospectus B. Website C. Letter to a Client D. Internet Chat Room
The best answer is B. Non-password protected websites can be seen by the general public, so they are defined as advertising. In contrast, a password-protected website is defined as sales literature, because it is seen by a specific audience. A Letter to a client is correspondence. A Prospectus is neither advertising nor sales literature, because it is a lawyer-prepared disclosure document.
An investment adviser has been formed and the firm and its representatives file their first registration with the State on July 1st. On June 30th of the following year, the firm files renewal registrations for itself and its representatives. Which statement is TRUE under the Uniform Securities Act? A. Since State registration is good for 1 year, the renewals were filed in a timely manner B. The firm's registration and its representatives' registrations lapsed after December 31st of the preceding year C. The firm's registration and its representatives' registrations are good until December 31st of the current year, at which point they must be renewed D. There is no requirement for annual registration renewals in the State
The best answer is B. Registration of broker-dealers, investment advisers, and their agents expires on December 31st of each year. This way, the States know that they will be getting those annual registration renewal checks at year end, year after year after year!! If the renewal check is not received by December 31st, registration lapses.
The portfolio construction most suitable for a pension fund seeking current income and safety of principal is: A. Treasury bonds, General Obligation bonds and covered call writing B. Treasury bonds, Corporate bonds and covered call writing C. Corporate bonds, Time deposits and naked call writing D. Treasury STRIPs, Corporate bonds and naked call writing
The best answer is B. Selling naked calls is risky; selling covered calls is a conservative income strategy with limited loss. Therefore, the best choice must either be A or B. General obligation bonds are tax-free Municipal bonds that yield less than taxable investments, such as Treasury bonds or Corporate bonds. Since the pension plan is tax-deferred, investing in these lower yielding investments is inappropriate; they are only appropriate for customers that are currently in high tax brackets. Therefore, the best choice is B - a portfolio of Treasury bonds, Corporate bonds and covered call writing.
If a customer of a broker-dealer fails to pay for a securities purchase by the 4th business day from trade date, the customer's account must be: A. restricted B. frozen C. liquidated D. terminated
The best answer is B. The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 4th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.
If an investment adviser wishes to charge a performance fee that allows it to share a percentage of capital gains in a customer account, then under the Investment Advisers Act of 1940: A. such an arrangement is prohibited because of the inherent conflict of interest between the investor and the adviser B. the adviser must disclose to the customer that such an arrangement can give the adviser an incentive to increase the portfolio's risk exposure C. the adviser must disclose that if a fixed fee were charged, the customer would be paying a lower fee, but the adviser would have to make this up by increasing its charges D. such an arrangement is permitted as long as all fees are disclosed to customers
The best answer is B. The Investment Advisers Act of 1940 allows performance fees to be charged if a customer is wealthy ($1,000,000 of assets with the firm or a $2,100,000 net worth). However, such performance fees can give the adviser the incentive to take on higher levels of risk in order to increase portfolio return (and hence increase the adviser's compensation). Advisers must disclose all material information regarding their performance fees, including that the fee arrangement may cause the adviser to enter into more speculative investments than would be the case otherwise; and that the adviser will receive increased compensation based on realized and unrealized appreciation of the customer's securities.
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
The best answer is 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.
Which statements are TRUE about Regulation D? I The maximum permitted offering under Rule 504 is $5,000,000 II The minimum permitted offering under Rule 504 is $5,000,000 III The maximum permitted offering under Rule 506 is $5,000,000 IV The minimum permitted offering under Rule 506 is $5,000,000 A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. 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.
The State Administrator is supervised by: A. the State governor B. the State secretary C. NASAA D. the State treasurer
The best answer is B. The State Administrator is part of the Secretary of State's office in the majority of States. Also note in some States, the State Administrator is part of the Attorney General's office, or the State Department of Corporations, Commerce, Business Services, or the State Securities Commission, none of which are offered as choices.
A solicitor for a Registered Investment Adviser is compensated by earning a percentage of the advisory fee. Which statement is TRUE? A. The solicitoris required to be registered with the SEC as either an investment adviser or an investment adviser representativeto receive such a payment B. The solicitor is required to be registered in the State as either an investment adviser or an investment adviser representative to receive such a payment C. The solicitor must be registered with both the SEC and the State as either an investment adviser or an investment adviser representative to receive such a payment D. The solicitor is neither required to be registered with the SEC nor the State as an investment adviser or investment adviser representative to receive such a payment
The best answer is B. There is no SEC registration requirement for adviser representatives; only for "Federal Covered" advisers. At the State level, the State requires registration of advisers that are not "Federal Covered" and also requires registration of investment adviser representatives - whether they are associated with either Federal Covered advisers or State-registered advisers.
An officer of an issuer is engaged in the sale of that issuer's securities to the public. The issuer's securities are federal covered. The officer is: A. excluded from the definition of an agent because the securities involved are federal covered B. not defined as an agent because officers of issuers are excluded C. defined as an agent who must register in the State D. defined as an issuer and is not required to register in the State
The best answer is C. Individuals representing issuers in the sale of certain "specified" securities are excluded from the definition of an agent. These include individuals who represent issuers selling: Treasury, Agency and Municipal securities; Bank issues; Money market instruments; Contracts issued in connection with pension plans; To employees of that issuer if no compensation is paid; and To qualified (wealthy) purchasers. In these transactions, either the security being sold is extremely safe (such as governments, agencies or municipals); or the sale is not being made to the general public. Note that there is no exclusion for the sale of federal covered securities by an individual. An individual who sells either federal or non-federal covered securities for an issuer is defined as an agent who must register in the State. This makes sense because the State wants to "capture" and register as many agents as it can! (Remember, it gets an annual fee for each registered agent.)
An agent has an individual account for a husband. The husband calls the agent and states that he wishes to open an account in his wife's name and buy 500 shares of PDQ stock. Which statement is TRUE? A. The agent can open the account B. The agent can open the account only if the husband gives authorization C. The agent can open the account only if the wife gives written authorization D. The account cannot be opened unless the wife orally approves
The best answer is C. A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. A husband (Third Party) cannot open an individual account in his wife's name (Customer). To allow the husband to trade in her account, the wife must open the account and she must sign a Third Party Trading Authorization, giving the husband power of attorney over the account.
Which of the following are NOT required to register as investment advisers under the Investment Advisers Act of 1940? Persons who give advice: I on U.S. Government securities II solely to insurance companies III solely to investment companies IV to customers within one State, where the investment adviser is a resident of that State A. II and III B. III and IV C. I, II, IV D. I, II, III, IV
The best answer is C. The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940 also exempts from registration advisers who only give advice on U.S. Government securities; and advisers who wholly operate within one State, trading securities only in that State. Because such an "intrastate adviser" does not conduct business across State lines, the SEC does not have jurisdiction. For the SEC to have jurisdiction over an adviser, the adviser must operate "interstate."
An investment adviser has determined that it can register as a federal covered adviser. This means that the adviser: I solicits clients on behalf of other investment advisers II currently operates in at least 15 States III has at least $25,000,000 of assets under management IV provides financial planning to customers for compensation as a regular business A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Advisers with $100,000,000 or more of assets under management must register with the SEC as "Federal Covered Advisers" and cannot be required to be registered in each State (though each State can require a notice filing). The SEC then issued some interpretations regarding this requirement. These are: Advisers that have between $100,000,000 and $110,000,000 of assets under management have the choice of registering either at the State or Federal level. Thus, SEC registration as an adviser is truly only required once an adviser has $110,000,000 or more of assets under management. The SEC then issued interpretations regarding so-called "mid-size" advisers, which are advisers with at least $25,000,000 under management. These are: Mid-size advisers that are not required to be registered in a State where they have their principal office must register with the SEC (there are a handful of States that do not require investment advisers to register and this forces them to register with the SEC and be regulated by someone!); Mid-size advisers that do business in 15 or more States can choose to register with the SEC rather than having to register with, and be regulated by, 15 or more States.
An agent of a broker-dealer publishes a web page that offers a free suitability determination to each customer that fills out a form electronically. Furthermore, if the customer agrees to open an account, the site states that: "The first month of trading will be free." Which statement is TRUE regarding this communication? A. This communication is permitted without restriction B. This communication is prohibited in each State C. This communication is permitted only if the broker-dealer and the agent are registered in each State where a customer completes the Web form D. This communication is permitted only if the broker-dealer and the agent are Federally registered Explanation
The best answer is C. Because this is not a "general" Internet Communication and the communication is being followed-up with specific client interaction, this is considered to be an offer of brokerage services in each State where a customer completes and submits the electronic suitability form. As such, the maker of the offer (the broker-dealer) and its agents must be registered in each State where this occurs. The fact that the first month of trading is free has no bearing. The broker-dealer will charge for its trades thereafter.
Which action is a prohibited practice under the Uniform Securities Act? A. Verbally communicating facts included in sales material to a customer B. Verbally communicating material information included in a prospectus to a customer C. Verbally communicating material inside informationto a customer D. Verbally communicating a purchase recommendation to a customer for a non-exempt security
The best answer is C. Communicating material "inside information" is a prohibited practice under the Uniform Securities Act, as well as a violation of the Securities Exchange Act of 1934. Of course, it would be permitted to verbally communicate to a customer, facts included in sales material, facts included in prospectuses, or recommendations of non-exempt securities (assuming that the security is properly registered in the State).
Which of the following are defined as "investment companies" under the Investment Company Act of 1940? I Face-Amount Certificate Company II Unit Investment Trust III Management Company IV Oil and Gas Leasehold Partnership A. I and II only B. III only C. I, II, III D. I, II, III, IV
The best answer is C. The Investment Company Act of 1940 defines 3 types of investment companies - face-amount certificate, unit investment trust, and management companies.
Which of the following statements are TRUE regarding Federal Covered Advisers and their representatives that have a place of business in a state? I Federal Covered Advisers must register in the State II Federal Covered Advisers are not required to register in the State III Representatives of Federal Covered Advisers must register in the State IV Representatives of Federal Covered Advisers are not required to register in the State A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Federal Covered Advisers are excluded from the definition of an investment adviser under State law and they are not required to register in the State (though they must file notice in the State if they transact business in the State). However, representatives of federal covered advisers are still required to register in the State if they transact business in the State. Of course, non-Federal covered investment advisers and their representatives must register in a State if they transact business in a State.
All of the following are federal covered securities EXCEPT: A. NYSE listed issues B. NASDAQ listed issues C. SEC registered issues D. Registered investment company issues
The best answer is C. Federal covered securities that cannot be required to be registered in each State include NYSE listed issues, NASDAQ listed issues and registered investment company issues. SEC registered issues are not necessarily "federal covered" securities. For example, issues listed in the OTCBB or Pink Sheets are SEC registered, but they are not "federal covered" securities. These issues represent the speculative (risky) side of the marketplace, and it is specifically these issues that are in the state regulators' crosshairs. These issues are SEC registered, but they also are required to be registered in each State where offered.
An investment adviser is prohibited from borrowing money from which of the following customers? A. Financial institution B. Broker-dealer C. Account with at least $100,000,000 under management D. Account of an affiliated company that is in the business of making loans
The best answer is C. Investment advisers can borrow from customers that are in the business of making loans (such as bank or broker-dealer customers). They can borrow from a parent company or an affiliated company, since they are under common ownership. They cannot borrow from wealthy customers (e.g., accredited investors); nor can they borrow from customers that have a large dollar value of assets managed by the adviser.
An issuer has filed in a State to register a new issue by coordination. The registration has been stopped by the Administrator. Now the Administrator has vacated the stop order. This situation could occur if: A. the offering is being made in violation of State law and the SEC has granted effectiveness to the Federal registration B. the Administrator serves upon all named parties a copy of the order and notifies the parties of their right to request a hearing C. the registrant has failed to pay required filing fees but the registrant has remedied the situation D. it is in the public interest for the Administrator to vacate the stop order
The best answer is C. Registration by Coordination in a State coordinates the SEC federal registration with registration in the State. The SEC filing is used as the State filing document. As long as the SEC filing and final SEC price amendment are filed in the State, along with the payment of the filing fee, then the Administrator cannot deny registration in the State. However, if the fee is not paid, then the Administrator can issue a stop order (remember, States really like the $$$ that they get from all of these fees!). Once the fee is paid, the stop order will be lifted. The other choices are verbal garbage.
The Administrator can take which of the following actions? I Require a witness to testify in a hearing, even though the testimony may tend to incriminate that witness II Suspend the constitutional privilege against self-incrimination available to an individual III Inspect a broker-dealer located in another State that does business in the Administrator's State IV Coordinate inspections with those conducted by the Securities and Exchange Commission A. II and IV B. I, II, III C. I, III, IV D. I, II, III, IV
The best answer is C. 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.
A customer invests $500,000 and opens a discretionary account with an agent specifying an investment objective of current income. The agent decides that it is best to diversify and spreads the monies between an income fund and a growth fund. Which statement is TRUE? 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
The best answer is C. The customer specified an investment objective of current income, not growth and income. If the agent splits the funds between an income fund and a growth fund, the action is inappropriate and fraudulent.
An investment adviser in State A has an investment adviser representative who gives advice to his client, a bank, in State B. When would the investment adviser representative (IAR) be required to be registered in State B? A. The investment adviser representative would never be required to register in State B because the investment adviser representative is already registered in State A B. The investment adviser representative would have to register in State B when the firm has 3 other clients in State B C. The investment adviser representative would have to register in State B when the investment adviser opens an office in State B D. The investment adviser representative would have to register in State B if he or she has 3 clients in State A and 3 clients in State B
The best answer is C. This IAR is physically in State A, so he or she must be registered there. Since the investment adviser (the firm) has no office in State B, and the IAR's client is a bank (an institutional investor), neither the IA nor the IAR are required to register in State B. If the IA opens an office in State B, then it has a physical presence there and both the IA and IAR would be required to register. The "de minimis" exemption allows an adviser with no office in a State, that has 5 or fewer non-institutional clients in a State, to do business without registration. Thus, this IA and IAR would also be required to register in State B if the firm had no office in the State, but the adviser had more than 5 non-institutional clients in State B. In both Choices B and D, this threshold is not met.
Under SEC advertising interpretations for investment advisers, advertising that shows past performance: I must make reference to market conditions during the period shownII cannot be selective in determining which clients' results are shownIII cannot use the names of specific clients when showing performance unless the client approvedIV must show a minimum 10-year past performance history A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is C. Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. Testimonials are prohibited in advertising. There is no requirement to show a minimum 10 year performance history when showing past performance in investment adviser advertising.
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
The best answer is 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.
Under Uniform State Law, investment advisory contracts: I must be in writing II cannot allow for payment to the adviser based upon capital gains in the account III cannot allow for prepaid advisory fees IV cannot be assigned to another investment adviser without customer approval A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV
The best answer is C. Under the Uniform Securities Act, advisory contracts must be in writing; and must base the advisory fee as a fixed dollar amount or as a percentage of assets under management. Compensation based upon gains in the account is not allowed unless the customer is very wealthy. Prepaid advisory fees are allowed (it is common to have up to ½ year's fee paid in advance). Finally, the contract must provide that if the account is assigned to another adviser, the customer must give prior approval for the transfer.
An investment adviser's research department is going to issue a report, changing its recommendation from "Buy" to "Hold" on XYZZ stock. The analyst that prepared the report wants to sell his XYZZ holding that he has in his personal account. Which statement is TRUE? A. The analyst can sell the stock immediately prior to the release of the research report without any further action needed B. The analyst can sell the stock immediately prior to the release of the research report if the investment adviser approves in writing C. The analyst is prohibited from selling the stock until the report is released D. The analyst can tell his associates to sell the stock prior to the release of the report
The best answer is C. Until the research report is released, the analyst that prepared the report is treated as an "insider" and cannot trade that stock. Once the report is released, rules for broker-dealers prohibit the analyst from trading that stock until 5 days after the release of the report. There is no such rule for analysts at investment advisory firms, so once the information is disseminated, the analyst could sell his position.
Under 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
The best answer is 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.
An investment adviser is considered to "take custody" of funds or securities from a customer if it: A. exercises discretionary authority by placing trades of securities for that customer B. accepts a check from the customer made payable to the fund custodian to buy a mutual fund C. accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D. receives quarterly management fees from the custodian by direct deduction with client consent
The best answer is D. Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."
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 assessedII Method of analysis usedIII Educational background of applicantIV Balance sheet of applicant if the firm takes custody of client funds or accepts $1,200 or more of prepaid advisory fees A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV
The best answer is 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.
An investment adviser representative who is both located and registered in New York State has clients in New Jersey and Connecticut. The State Administrator of Connecticut, located in Hartford, has subpoenaed the representative to testify in Hartford. The representative: A. is only obligated to testify if he or she is registered in the State of Connecticut B. is only obligated to testify if the adviser has an office in the State of Connecticut C. is exempt from the requirement to testify in any State except New York D. must comply with the subpoena or be held in contempt of court
The best answer is D. A State Administrator has jurisdiction over transactions that occur in his State. Even though this representative is located in New York, because the firm has clients in Connecticut, the Connecticut State Administrator has jurisdiction over transactions that take place in Connecticut. The representative must comply with the subpoena to testify, otherwise he or she will be found in contempt of court.
All of the following actions by an agent are prohibited during a sales presentation EXCEPT: A. predicting specific future investment results B. omitting essential information C. omitting facts that can influence the investment decision D. showing past performance of the investment
The best answer is D. An agent can show past performance in a sales presentation, since this has a direct bearing on the customer's decision to invest. An agent cannot predict specific future investment results, since he has no basis for knowing what will happen in the future. Omitting facts that can influence an investment decision (essential facts) is prohibited, since these facts are "material."
Which of the following statements may be made by an agent about a new securities issue that is being registered by coordination? A. "Because these securities are being registered with the Securities and Exchange Commission, you are guaranteed that the issue is safe" B. "Once registration is effective, this means that both the Administratorand the Securities and Exchange Commission have approved of the offering" C. "The issue is selling out fast to institutional investors" D. "The security is being registered in the State and with the Securities and Exchange Commission"
The best answer is D. Making untrue or coercive statements is a violation of the Act. Stating that the security is registered with the State and the Securities and Exchange Commission is true if the issue is being registered by coordination. Stating that "you are guaranteed;" stating that "the Administrator or SEC approved;" or stating that "the issue is selling out fast;" are all either untrue or coercive statements and are prohibited.
An investment adviser representative manages a large portfolio for a wealthy customer, age 65. The portfolio contains a large holding of British securities and the adviser is worried that the British Pound may appreciate against the U.S. dollar. Which statement is TRUEregarding the use of currency futures to hedge against this risk? A. The Prudent Man Ruleprohibits the use of futures contracts as investments B. Because futures contracts are inherently risky, their use would be in contravention of the Prudent Man Rule C. The Prudent Man Rule only applies to securities and not to futures, so the adviser cannot use them D. The Prudent Man Rule does not specify the types of investments that can be used, so futures could be suitable as a hedging instrument
The best answer is D. The Prudent Man Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would. The use of futures as a hedge against loss of value due to currency fluctuations seems like a prudent strategy here.
The Uniform Securities Act covers: I Registration of securities in each StateII Registration of broker-dealers in each StateIII Registration of investment advisers in each StateIV Registration of agents of broker-dealers and investment advisers in each State A. I and II B. III and IV C. II, III, IV D. I, II, III, IV
The best answer is D. The Uniform Securities Act, as adopted in each State, covers the registration of broker-dealers and their agents; investment advisers and their agents; and securities that are sold in the State.
An established customer has an individual account. The customer discusses a specific NASDAQ stock with a sales representative and wants to buy shares of that stock when it declines to $60 a share lower. The customer leaves for a 3-week vacation traveling to a third world country where he cannot be contacted. During this time, the stock declines to the level at which the customer wanted to buy the shares. What is an appropriate action to take? A. Buy the stock in the customer's account since he wanted to buy the shares at that price B. Buy the stock in the customer's account as long as the branch manager or compliance officer approves of the transaction C. Attempt to contact one of the customer's immediate relatives, and if this is possible, obtain authorization from the relative to buy the shares D. Do nothing until the customer can be contacted
The best answer is D. The customer did not give specific enough information to warrant the entry of an order. If he had mentioned the exact amount of shares that he wanted to buy, 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.
Which of the following are "critical" pieces of information that MUST be collected from a customer to open a new account? I Name II Address III Date of Birth IV Social Security Number A. I and II B. III and IV C. I, II, IV D. I, II, III, IV
The best answer is D. There are 4 critical pieces of information that must be collected to open a new account: Customer Name Address Date of Birth Social Security Number These 4 pieces of information must be used to independently verify the customer's identity (a requirement put in place after September 11th, 2001).
An agent is employed by First Patriot Bank and Trust Company of Connecticut as a banking representative. The agent is registered in the State with a general securities license through First Patriot Securities, a separate operating subsidiary of First Patriot Holdings - the parent company of the bank. A retired couple that is making their monthly visit to the bank to deposit their social security checks asks the agent about the appropriateness of investing in either mutual funds or certificates of deposit. Which statement is TRUE regarding the actions that the agent may take when giving a response to these customers? A. In order to respond to these customers about either the suitability of investing in mutual funds or certificates of deposit, the agent must be registered in the State as an adviser representative B. The agent can give advice to the couple about investing in mutual funds since he or she has a general securities registration, but cannot give advice about investing in certificates of deposit C. The agent can give advice to the couple about investing in certificates of deposit, but cannot give advice about investing in mutual funds without being registered as an adviser representative in the State D. The agent may give advice to the couple about the suitability of investing in either mutual funds or certificates of deposit
The best answer is D. This agent is registered with a broker-dealer in that State. The agent can recommend securities such as mutual funds in his or her capacity as an agent of the broker-dealer. There is no separate registration required in the State as an investment adviser representative to do so. Regarding the recommendation of certificates of deposit, these are a bank product. Banks are excluded from the definition of an investment adviser under Uniform State Law (they are also excluded from the definition of a broker-dealer). There is no registration at the State level required to recommend banking products.
Under the Securities Exchange Act of 1934, registration with the SEC as a broker-dealer may be revoked for all of the following reasons EXCEPT the broker-dealer fails to: A. maintain minimum net capital B. send its financial statements to customers C. be audited annually D. report its net income to customers
The best answer is D. Under the Securities Exchange Act of 1934, broker-dealers must maintain minimum net capital; must send their financial statements (the requirement here is for a balance sheet only; there is no requirement to send an income statement) to customers semi-annually; and must be audited annually. Failure to comply with these will result in the broker-dealer's registration being revoked.
