Part 1 Qbanks
When an agent engages in a fraudulent or prohibited practice, the Uniform Securities Act provides for 1. criminal liability 2. civil liability 3. revocation or suspension of registration
1,2,3. Should a registered agent engage in fraudulent or prohibited practices, the agent may be subject to criminal and civil liability, as well as suspension or revocation of registration. The agent can be fined, sentenced to prison, and have his license suspended or revoked. U5LO4
Under the Uniform Securities Act, which of the following would be least likely to be civilly liable for making false registration statements, using a prospectus that is untrue, or failing to meet the prospectus delivery requirements of the act? A) Every stockholder named in the registration statement B) Every underwriter of the security C) Any and every person who has signed the registration statement D) Every expert who is named in the registration statement
A. Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own 10% or more of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). Anyone who sells the underlying security without providing a valid prospectus, uses a prospectus that is false, or omits material information is also civilly liable to the purchaser. U4LO3
An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past 10 years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of A) a violation of an investment adviser's fiduciary responsibility B) an improper hedge clause C) a wrap fee account D) a properly worded disclaimer
B. Hedge clauses may not be used to disclaim statements that are inherently misleading. U7LO1
Federal covered securities, as defined under the Uniform Securities Act, A) would not include securities senior to a common stock listed on the NYSE B) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 C) must be registered with the SEC before they can be offered in the state D) must be registered in the state before they can be offered within the state
B. It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered. U4LO3
In general, the Administrator would require that a broker-dealer's social media policies A) be updated at least once every 3 years B) be left up to the manager of each branch office C) be committed to writing and communicated firmwide D) be limited to defining the responsibilities of supervisory personnel
C. Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and made known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every 3 years is not nearly frequent enough in this dynamically changing industry. U6LO5
In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for A) corporate common stock listed on the NYSE B) obligations of the Canadian government C) equipment trust certificates issued by a regulated common carrier D) stock issued by regulated insurance company
C. Although each of these is considered an exempt security under the Uniform Securities Act (state laws), only the securities of a regulated common carrier carry an exemption from federal registration. U4LO3
Registration by qualification is effective A) 20 days after the filing date B) no earlier than 10 days after the filing date C) when the federal registration becomes effective D) when determined by the Administrator
D. Registration by qualification is effective when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator. U4LO3
Regarding performance-based fees charged by covered investment advisers, all of the following statements are correct EXCEPT A) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark B) performance-based fees are generally prohibited C) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE D) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods
D. Covered advisers are those under federal jurisdiction rather than state. The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure. U7LO1
Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) customer permission was obtained prior to entering into the contract B) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules C) permission was obtained from the Administrator and custody was not prohibited by that state's rules D) the IA maintained adequate net worth or a surety bond
It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if the Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers. U7LO2
When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) the effective date of the offering B) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering C) the amount of securities to be offered in the state D) all other states in which the security is to be registered
The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering. U4LO3
According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, the schedule should be made available on the broker-dealer's public website without requiring any login or password
Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included. U6LO1
Exempt securities under USA
- U.S. government and municipal securities; - Securities of governments with which the United States has diplomatic relationships; - Securities of U.S. commercial banks and savings institutions or trust companies (when not engaged in securities-related broker-dealer activities); - Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less; and - Investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit-sharing plans.
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? 1. An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only 2. An adviser with a place of business in the state whose total fee income in the state amounts to $150 3. An adviser with no place of business in a state who only provides advice on fixed annuities 4. An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940
1&2. Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable. U1LO5
Before taking any disciplinary action with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following? 1. Obtain the approval of the appropriate state court 2. Find that the action is in the public interest 3. Cite a cause listed in the act
2 and 3. Disciplinary actions with respect to registration may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets. U5LO2
A consent to service of process allows the Administrator to A) terminate a registrant's application B) verify the accuracy and completeness of registration without obtaining the registrant's prior approval C) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant, or the registrant's successor D) ensure that the legal appeal process is expedited as a result of the Administrator's access to information
C. The consent to service of process provides the Administrator with power of attorney to accept legal papers on behalf of registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process. U3LO5
Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) checks made out to CIA are deposited within 3 business days B) checks made out to 3rd parties are forwarded within 3 business days C) CIA has a power of attorney granting authority to withdraw funds from the custodian D) CIA's advisory contract calls for the automatic deduction of advisory fees
When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. U7LO2
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is?? 1. a broker-dealer 2. an insurance company 3. an investment company 4. a person receiving impersonal advice for which the annual fee is less than $500
3&4. There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year. U6LO4
