Part 1 Series 65

An agency cross transaction can be described as A) a transaction where a person acts as both an investment adviser and broker-dealer in the same transaction B) a transaction between an issuer and a broker-dealer C) a sale of securities between different agencies of the federal government D) a sale of a security owned by a broker-dealer to the general public

a (An agency cross transaction occurs when an investment adviser acts as both adviser and broker-dealer and requires prior written approval from the client and special reporting requirements. The adviser cannot recommend the transaction to both parties, only one side or the other.)

A business continuity plan should be designed to provide an investment advisory firm with policies to be followed in the event of any of the following EXCEPT A) embezzlement by the firm's CFO B) an overload at the local public utility that causes a lack of power at the firm's principal office for at least 2 days C) a disruption caused by a tornado striking the firm's principal office D) a terrorist attack that leads to a lockdown and prevents the principal office from opening

a (Although embezzlement is certainly not pleasant for the firm, it is not something that would normally lead to an interruption in the ability of the firm to service its clients.)

Under the Uniform Securities Act, which of the following statements regarding the consent to service of process is NOT true? A) Only applicants whose principal office is in another state need to file a consent to service of process. B) A consent to service of process does not need to be supplied each time a registrant's registration is renewed. C) A consent to service of process makes legal process served on the Administrator as legally binding as process served on the registrant personally. D) Investment advisers and investment adviser representatives must file a consent to service of process to become registered.

a (All applicants for registration must file a consent to service of process regardless of where their principal office is located. A consent to service of process grants legal authority for the Administrator to receive legal notices on behalf of the registrant and applies to all securities professionals. The document is part of the initial registration and, once filed, does not have to be renewed.)

Which of the following statements are TRUE? I. An agent must register in the state in which he advertises and solicits a security. II. To make sales, an agent need not register in a state in which the broker-dealer is already registered. III. Under no circumstances may an agent register with two unrelated broker-dealers. IV. A secretary for a broker-dealer who, as a courtesy, takes orders for the broker-dealer's clients must be registered. A) I and IV B) III and IV C) II and III D) I and II

a (An agent must be registered in the state in which a security is advertised and solicited. A secretary who takes orders for the broker-dealer's clients must be registered. If the state Administrator specifically grants an exception, an agent may be registered with two unrelated broker-dealers. The fact that a broker-dealer is registered in a state does not qualify the agent for sales unless he is also properly licensed in that state.)

USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of A) the state in which its principal office is located B) the state with the most stringent financial requirements C) the SEC D) each state in which it has a place of business

a (Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located, the other states have no further claim.)

An unintentional omission of material facts when offering or selling a security may result in I. civil liabilities II. criminal liabilities III. criminal penalties A) II and III B) I only C) II only D) I, II, and III

b (An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties.)

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, the maximum that a purchaser would be entitled to claim would be I. attorney's fees II. court costs III. interest at the state's legal rate IV. the greater of the original consideration paid for the security or the current market value A) I and II B) I, II, III, and IV C) I, II, and III D) III and IV

c

If a broker-dealer purchases 100,000 shares of common stock from an individual investor, this is A) a prohibited transaction B) a private placement C) a nonissuer transaction D) a local transaction

c (In a nonissuer transaction, the proceeds of the trade do not benefit or go to the issuer.)

Under the Uniform Securities Act, which of the following must register with the state securities Administrator? A) Investment advisers without an office in the state whose clients are exclusively insurance companies B) Investment advisers to an investment company registered under the Investment Company Act of 1940 C) Investment advisers with a place of business in the state and less than $100 million in assets under management D) Investment advisers who have $100 million or more under management

c (Under the USA, an investment adviser with a place of business in the state must register with the state securities Administrator, regardless of who the clients are, unless they are federal covered advisers. Advisers without an office in the state, or whose clients are exclusively insurance companies, are not defined as investment advisers in that state under the USA. An adviser who manages an investment company that is registered under the Investment Company Act of 1940 or who has $100 million or more under management, are federal covered investment advisers that do not register with the states. Once the $100 million level is reached, the adviser has the choice of state or SEC registration until hitting $110 million.)

Included in the USA's definition of an exempt transaction would be any transaction by any of the following EXCEPT A) a marshal B) a trustee in bankruptcy C) a guardian D) a trustee of an irrevocable trust

d (Although the term trustee is found in the list of persons engaged in exempt transaction, the USA limits it to trustees in bankruptcy.)

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A) 0.25% of the asset per quarter B) hourly fees C) 1% of the average annual assets D) 1% of the increase in account value over the next quarter

d (Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation.)

Baird, a registered agent, receives an order from Miller, her customer, for an unusually large order of common stock in XYZ Incorporated. He states that he overheard the CFO of XYZ, Inc., telling his golfing partner that XYZ was close to being acquired by Monolith Communications, Incorporated. In light of ethical standards under the Uniform Securities Act, which of the following actions is most acceptable? A) Baird tells her immediate supervisor (principal) of Miller's intent to trade based upon nonpublic (inside) information. B) Baird takes Miller's order and does not discuss the conversation she has with Miller regarding XYZ and Monolith with anyone. C) Baird purchases 1,000 shares of XYZ for her personal account. D) Within the trading day, Baird recommends XYZ to 20 of her customers who have indicated aggressive growth as their main trading objective.

a (Baird should inform the firm that a customer wishes to trade a security using inside (nonpublic) information. Under no circumstances should Baird trade for her own account using inside information or use such information as the basis for recommendations to customers. Because Miller's order may cause Baird's employer to violate securities law, she should bring Miller's order to the attention of her supervisor.)

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? I. The brochure must be updated each time Part 1A of Form ADV is updated. II. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. III. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A) II and III B) I and III C) I and II D) I, II, and III

a (Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.)

An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable, A) the investment company must have net worth in excess of $2.2 million or at least $1.1 million in assets under management with the IA B) all the shareholders in the investment company must be qualified investors C) the individual in charge of the investment company must be a qualified investor D) a majority of the shareholders in the investment company must be qualified investors

a (In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. Over the years, the numbers have increased and currently are net worth in excess of $2.2 million or assets managed by the IA of at least $1.1 million. By the way, this is not a registered investment company under the Investment Company Act of 1940; those need at least 100 investors.)

As defined in the Uniform Securities Act, the term "security" would include I. debentures II. Keogh plans III. a preorganization subscription IV. whole life insurance policies that pay dividends to their policyholders A) I and III B) I and IV C) II and IV D) II and III

a (It is always easier to remember the things that are not a security—retirement plans, nonvariable insurance policies, collectibles, commodities, condominiums, and currencies.)

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies B) they have assets of less than $150 million C) they have no more than 100 investors D) their advisers are exempt from filing reports on Form ADV

a (Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.)

An investment adviser representative of a federal covered investment adviser registers with A) the Administrator. B) the SEC. C) the NASAA. D) the FINRA.

a (Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered)

An agent is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients and learns that the client happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, which choice consists solely of Administrators who do not have jurisdiction? A) Illinois and Ohio B) Ohio and Indiana C) Indiana and Illinois D) New York and Indiana

a (The Administrator has jurisdiction from the state in which the offer originated (NY) and was accepted (IN). Mailing of the certificate is of no consequence. Ohio does not have jurisdiction because the client was merely traveling and the call was directed to the New York number. When the Uniform Securities Act was written in 1956, obviously, there were no cell phones, but there was a situation similar to this. The USA addresses the issue of forwarded mail and rules that the original address is what counts, not the state to which the mail is forwarded. NASAA applies that logic when an agent contacts a client on a cell phone. It is the home location of the owner of the phone that counts, not where the call is received. That changes when the client actively participates in the transaction from another state, in this case Indiana.)

Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following? I. A security issued by a nonprofit organization II. Investment contracts of employee benefit plans III. An exempt transaction not involving a federal covered security A) I, II, and III B) II and III C) I and III D) I only

a (The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by nonprofit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.)

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? I. An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. II. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. III. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. IV. The fee is projected to consistently be more than the expected return in the portfolio. A) I and IV B) I and II C) II and III D) III and IV

a (The Model Rule specifically refers to the authority of the Administrator to determine whether an adviser's fee schedule is competitive. Logic would dictate that fees that consistently exceed the return earned on the portfolio should not be acceptable. Investment advisers, upon making proper disclosure, are permitted to charge both fees and commissions, and there is no requirement to discount one's hourly fee, regardless of the size of the client's portfolio.)

Under the Uniform Securities Act, which of the following is an agent? A) An individual who effects securities transactions for commissions B) An individual who is in the business of providing investment advice on behalf of his employer C) A clerical person who files trade confirmations for the firm D) A broker-dealer that charges a commission as a regular part of its business

a (The Uniform Securities Act defines an agent as any individual (other than a broker-dealer) who represents a broker-dealer in effecting securities transactions.)

Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? I. Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. II. Clients must be kept informed in writing of the location of their funds and securities and of any changes. III. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period. A) II and III B) I and II C) I only D) I and III

a (The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.)

Witherspoon, Eustis, and Brahmin (WEB), an investment banking firm and SEC-registered investment adviser, is the principal underwriter for MTEX's upcoming stock issue. Lynn Black is an analyst and IAR with WEB, and she learned from an employee in MTEX's programming department that a serious problem was recently discovered in the software program of its major new product line. In fact, the problem is so bad that many customers have canceled their orders with MTEX. Black checked the stock's prospectus and found no mention of this development. The red herring prospectus has already been distributed. According to WEB's required code of ethics, Black's best course of action is to A) inform her immediate supervisor at WEB of her discovery. B) keep quiet because this is material nonpublic inside information. C) report her discovery to the Administrator of the state where MTEX's principal office is located. D) notify potential investors of the omission on a fair and equitable basis.

a (Whether the adviser's code of ethics or rules of FINRA and NASAA, whether acting as an investment adviser or broker-dealer, the answer to a question like this is always to notify your immediate supervisor. From there, it will probably be taken to the chief compliance officer (CCO). Depending on the nature of the problem and the firm's policies, it might be necessary for this to be escalated to the proper regulatory authorities, but we can't tell that from the information given. You can never go wrong with going to your supervisor.)

Which of the following statements are TRUE? I. A federal covered adviser sells federal covered securities only. II. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers. III. A federal covered security is exempt from registration with the SEC. IV. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940. A) I and III B) II and IV C) I and II D) III and IV

b (A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.)

A federal covered investment adviser is a person A) registered under the Uniform Securities Act B) registered, or excluded from the definition, under the Investment Advisers Act of 1940 C) registered with North American Securities Administrators Association (NASAA) D) exempt from regulation under the Securities Exchange Act of 1934

b (A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.)

Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) that any transactions made on the adviser's own account are consistent with the advice given to clients B) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented C) that the adviser has never been subject to disciplinary action or censure by the SEC D) the number of clients with whom the adviser does business

b (Advisers must disclose to clients any outside interest or potential conflicts of interest involved in its recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities, but not the absence of such actions. The adviser is not required to disclose its consistent transactions, but must make disclosure if its transactions are not consistent with the advice given.)

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable B) SONG must have less than $150 million in assets in the fund C) SONG is not registered under the Investment Company Act of 1940 D) SONG's investment adviser is exempt from registration

b (Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.)

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee A) is not subject to regulatory oversight by the Administrator if the client is considered financially sophisticated B) may be considered unreasonable if it is not in line with fees charged by other advisers for similar services C) may not be based on a percentage of the client's assets under management D) must reflect the amount of time the adviser spends managing the client's account

b (An investment adviser may not charge any client an unreasonable fee. A fee may be considered excessive if it is substantially higher than that charged by other advisers for performing similar services. The Administrator may research the fees charged by various investment advisers for the purposes of comparison. Whether clients have agreed to the fee or have done their own price shopping is irrelevant in determining if a particular adviser's fee is unreasonable. The exam sometimes phrases this as stating that fees must be competitive.)

Under the Uniform Securities Act, which of the following statements is TRUE regarding the Administrator's power to deny or revoke an exemption? A) The revocation may apply to a period prior to the date on which the revocation order was issued. B) An order revoking an exemption may be issued without prior notice to the persons affected. C) In a proceeding to revoke an exemption, it is assumed that the exemption applies and the Administrator must prove that it does not apply. D) The Administrator may not revoke the exemption of securities issued by a nonprofit corporation.

b (An order revoking an exemption, sometimes called a summary order, may be made effective without prior notice. The injured party may request a hearing in writing, which must be granted within 15 business days of receipt of the request. No denials or revocations may be made on a retroactive basis. The Administrator does have the power to revoke the exemption granted to securities issued by nonprofit entities. In any proceeding, the burden of proving an exemption is on the person claiming it, not the Administrator.)

The Uniform Securities Act is designed to protect the general public and not restrict investment activities of institutional or professional investors. Any offer or sale to any of the following would be considered exempt from the registration and advertising filing requirements of the USA EXCEPT A) banks B) chief executive officers of companies listed on the NYSE C) savings institutions D) broker-dealers

b (Any offer or sale to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity is considered an exempt transaction. Corporate chief executive officers are individual investors under the USA. Transactions in their personal investment accounts are therefore not exempt from the provisions of the act.)

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) The sale of an unregistered nonexempt security to an individual client at that client's request B) An agent sells U.S. treasury bonds to an individual client C) An executor liquidates the estate's portfolio D) The sale of ABCD common stock, traded on the OTC Link, to an insurance company

b (Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.)

Form PF must be filed by A) SEC-registered advisers with no more than $150 million in private fund assets under management B) SEC-registered advisers with at least $150 million in private fund assets under management C) SEC-exempt reporting advisers D) state-registered private fund managers, regardless of the amount of assets under management

b (Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.)

Under the Uniform Securities Act, which of the following statements are TRUE about the authority of an Administrator? I. A cease and desist order may be issued prior to a hearing. II. A cease and desist order may be issued after a hearing. III. A cease and desist order is valid for a maximum of 30 days. A) I only B) I and II C) I, II, and III D) II and III

b (In issuing a cease and desist order, the Administrator may provide prior notice and hearing or may issue the order without prior notice or hearing (summarily). There is no time period associated with the order.)

Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT A) the adviser, if a partnership, must notify the client of any change in the partnership's membership B) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account C) the investment adviser's compensation shall not be based on capital gains in client accounts D) no assignment of the investment advisory contract may be made without the client's consent

b (Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account, although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent.)

Parsimonious Planning Associates (PPA), an investment adviser with over $250 million in assets under management, is accused of violating the antifraud provisions of the Uniform Securities Act. Which of the following statements is true? A) The Administrator of the state where PPA's principal office is located is the only person authorized to investigate the charge. B) The Administrator of the state where the alleged fraud occurred may investigate the charge. C) Because PPA is a federal covered adviser, only the SEC has the jurisdiction to investigate the charge. D) No investigation may take place until the charges are proven true.

b (Once an investment adviser's AUM reaches $110 million, registration with the SEC is required. That makes PPA a federal covered adviser. Although covered advisers are exempt from the jurisdiction of the state for most things, one area in which they are not is when the antifraud provisions of the USA are breached. In that case, jurisdiction will usually rest with the Administrator of the state where the alleged fraudulent activity took place. In some states, the Administrator will refer the charges to the Administrator of the state where the IA's principal office is located, but that is not mandatory. Because the violation is of the USA, the SEC has no jurisdiction. Without an investigation, how can the charges be proven true (or false)?)

A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use A) qualification B) notice filing C) supplementation D) coordination

b (Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.)

Which of the following statements may not be made by an agent in regard to a security registered with the SEC under the Act of 1933? A) "This issue is lawful for sale." B) "The SEC has approved of this issue and that's why I'm so glad to be able to offer it to you." C) "This issue is suitable for you on the basis of your objectives and the personal profile you have provided me." D) "My broker-dealer is a member of the underwriting group."

b (The SEC never approves of an issue. The other statements are permissible.)

Which of the following would meet the USA's definition of "person"? I. An individual II. An unincorporated association III. A political subdivision A) I and III B) I, II, and III C) I and II D) II and III

b (The USA's definition of person is extremely broad. Just remember the three nonpersons: minors, those who are deceased, and those declared mentally incompetent.)

All of the following have legal standing as persons under the Uniform Securities Act EXCEPT A) trusts where the interests of the beneficiaries are evidenced by a security B) minor children C) joint-stock companies D) unincorporated organizations

b (The definition of a person under the act includes, among others, individuals, joint-stock companies, unincorporated organizations, and trusts where the interests of the beneficiaries are evidenced by a security. Minor children are not persons under the act.)

Under the USA, which of the following are exempt transactions? I. A transaction between an issuer and an underwriter II. An unsolicited customer order to buy an exempt security III. U.S. Treasury bonds IV. Municipal securities A) II and IV B) I and II C) I and III D) III and IV

b (Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.)

Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I, II, III, and IV B) I and III C) I, III, and IV D) I only

b (Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.)

Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not A) manage client accounts on a discretionary basis B) have physical custody over its clients' monies and certificates C) examine customers' stock certificates D) refer clients to an affiliated broker-dealer

b (Under the Uniform Securities Act, custody indicates that the adviser has physical possession over its clients' certificates and monies. A prohibition against custody in a given state does not prohibit the adviser from holding investment discretion over clients' accounts, provided such discretion is granted under a suitable authorization or power of attorney. Merely examining customers' stock certificates is certainly not the same as holding custody or possession of such certificates. As long as the affiliation is disclosed, there is nothing improper about an IA referring advisory clients to that BD.)

Registration with the SEC as an investment adviser would be required for a person who A) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940 B) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 C) limits the advice offered strictly to securities issued or guaranteed by the U.S. government D) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE)

b (if a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.)

In general, a broker-dealer will disclose any changes to its fee schedule A) when requested by the client B) by notifying clients of the change in advance C) within 30 days following the change D) to the Administrator and then to the clients

b (most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.)

A registered investment adviser recommends a stock that will be sold to his client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction A) is prohibited B) requires both written disclosure to and the consent of the client prior to the completion of the transaction C) requires the consent of the client D) requires written disclosure to the client

b (under normal circumstances, when a broker-dealer acts as a principal in a trade, that fact is noted on the confirmation. However, in this case, because it is an investment adviser who is recommending the transaction, both written disclosure by the adviser and consent by the client are required prior to completion of the transaction, even when an adviser sells securities through an affiliated firm in a principal transaction)

A broker-dealer is the lead underwriter in a new issue. During the period this new security issue is in registration, which of the following will usually be distributed? I. Subscription forms enabling clients to place a down payment on the issue II. A red herring prospectus III. The company's latest research report on that stock IV. Indication of interest forms A) III and IV B) II and IV C) II and III D) I and II

b (During the period a new securities issue is in registration, the underwriters usually prepare and distribute the red herring prospectus, along with forms to indicate interest in the issue. No firm orders or payment may be accepted prior to the date the issue is effective for sale)

Which of the following would justify an investment adviser's use of a full-service broker? I. Obtaining special reports dealing with economic projections from the broker II. Expense-paid business trips paid for by the broker III. The use of the research analysis provided by the broker A) I, II, and III B) I and III C) II and III D) I and II

b (Full-service brokerage firms often provide research reports, securities and portfolio analysis, and special reports without specific charges, but are usually compensated by their higher commissions. Nothing in industry rules prevents an adviser from using a full-service broker to effect customer transactions. However, it would be unethical if the adviser were to benefit personally from the direction of the client business.)

The Uniform Securities Act provides for all of the following EXCEPT A) criminal penalties for violations of the act B) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act C) subpoena power for the state Administrator D) exemption from registration for federal covered securities

b (The Uniform Securities Act provides for criminal penalties of up to 3 years in prison and/or $5,000 in fines. The act describes civil liability, not specific civil penalties. Civil liability includes interest costs, rescission of trade, payment of attorney's fees, and return of principal invested. The act makes no reference to penalties of 3 times the amount of money invested. The Uniform Securities Act does provide the state Administrator with the power to issue subpoenas.)

Under the Investment Advisers Act of 1940, an IA that uses a website would be required to I. maintain a copy of the screens used on its site in the firm's advertising file II. place copies of new screens into the firm's advertising file each time a change is made III. file copies of the web design with the SEC IV. password protect the site to limit access to existing clients only A) III and IV B) II and IV C) I and II D) I and III

c (A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.)

An agent for a broker-dealer member of FINRA may exercise his judgment as to which of the following without written authorization from the customer? I. Quantity II. Time III. Security IV. Price A) I and III B) I and II C) II and IV D) III and IV

c (Agents (or any of the other securities professionals) have the authority to decide the timing and price of a trade. Under prevailing securities law, time or price does not constitute discretion. Decisions involving the quantity and security require written trading authorization from the client.)

Under securities industry regulations, all of the following are prohibited when attempting to make a sale EXCEPT A) telling a client that her stock is a sure candidate for a takeover bid B) telling a client that he is trading commission free when, in actuality, your firm is acting as a principal and placing a markup on his trades C) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so D) an agreement by the agent to repurchase the security from the customer for the same price at a future date

c (An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a markup, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.)

An investment adviser need not register in a state if it has A) a place of business in the state and only advises employee benefit plans with more than $1 million B) no place of business in the state, does not direct business communications in the state, and advises more than 5 high-net-worth individuals located in the state C) no place of business in the state and only advises 3 insurance companies located in the state D) a place of business in the state and advises fewer than 5 banks

c (An investment adviser need not register in a state if it has no place of business in the state and advises such institutional clients as insurance companies or banks. The number of clients is irrelevant as long as they all are of an institutional nature. Without exception, the USA requires an investment adviser to register in a state if it has a place of business in the state. With no place of business in the state, registration would not have been required regardless of the number of banks who were clients. With 5 or fewer noninstitutional clients, regardless of their net worth, no registration would be necessary under the de minimis provisions of the USA.)

Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser? A) An adviser rendering advice solely to broker-dealers B) An adviser rendering advice to employee benefit plans with at least $1 million in assets C) An adviser rendering advice to no more than 10 individual clients within a 12-month period D) An adviser managing more than $110 million in assets

c (An investment adviser with no office in the state would be exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an investment adviser has no office in the state, and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser would be required to register with the SEC, not the state.)

Which method of securities registration would most likely be used to register an initial public offering that is intended to be offered for sale in several states? A) Notice filing B) Qualification C) Coordination D) Registration by publication

c (Because the offering will be made in more than one state, registration with the SEC is required. Coordination is concurrent registration with the SEC and the state for public offerings. Notice filing pertains to certain federal covered securities, primarily by investment companies (mutual funds).)

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A) the friend is an employee of the advisory firm B) There are no exceptions C) the solicitations are for impersonal advisory services D) the friend is a client of the adviser's firm

c (Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.)

While several methods of registration are described under the Uniform Securities Act, which of the following would be most appropriate for an investment company registered with the SEC under the Investment Company Act of 1940? A) Registration B) Qualification C) Notice filing D) Coordination

c (Federal covered securities (those listed on the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market) are exempt from registration under the USA. However, the states are permitted to assess fees and some require filing of certain information. This is notice filing and most commonly occurs with investment companies registered under the Investment Company Act of 1940.)

Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is A) a charge if the client asks to have funds wired B) the fee for transferring certificates C) margin interest on the debit balance D) an account maintenance charge

c (In a cash account, you can't have margin activity, so there can't be a margin interest charge.)

Which of the following statements regarding matched orders is TRUE? A) Matched orders are a prohibited practice because they entail allocation of IPO stock in proportion to the level of customer trading activity. B) Matched orders reflect the timing of capital gains to be offset by capital losses and are considered an effective and permissible tax minimization strategy. C) Matched orders violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur. D) Advisers should pursue matched orders because they mirror an investor's trading objectives and time horizon.

c (Matched orders violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur.)

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? I. An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. II. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. III. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. IV. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. A) II and III B) II and IV C) I and IV D) I and III

c (One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.)

It would be permissible for an investment adviser to make which of the following statements? A) Because of the past performance of previous recommendations, this account is guaranteed to perform at least as well as the S&P 500. B) The account is guaranteed to earn a rate of return equal to a Treasury bill. C) Past appreciation of all accounts over the past three years has exceeded 20%. D) According to past returns, the account is expected to earn at least 15%, with a minimum of 8% guaranteed.

c (Stating past performance that is factual is not a violation of the act. However, this statement would probably also be accompanied by another saying that past performance is no assurance of future performance. Any type of guarantee, even related to government securities, is prohibited by the act.)

In conducting investigations, the Administrator does NOT have the power to A) apply to a state court to compel a witness to comply with a subpoena B) publish information about an investment adviser's violation of the USA C) sentence violators to imprisonment within prescribed limits D) make cease and desist orders without a prior hearing

c (The Administrator does not have the legal authority to sentence a violator to prison; only a court with proper jurisdiction can do that. The Administrator does have the authority to apply to a court to sentence a violator and can publish information concerning violations)

Under the Uniform Securities Act, the Administrator may A) waive only those requirements of the act that are nonbinding B) relax the antifraud provisions for investment adviser representatives not residing in the state C) make rules, orders, and forms the Administrator considers necessary to carry out the provisions of the act D) waive any requirement of the act he deems inappropriate

c (The Administrator has power to make, amend, and rescind such rules, forms, and orders it has issued as necessary to carry out the provisions of the act. The state Administrator may not waive provisions of the act.)

Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Uniform Securities Act B) Trust Indenture Act of 1939 C) Securities Exchange Act of 1934 D) Investment Company Act of 1940

c (The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.)

Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives will be defined as A) an agent B) a journalist C) an investment adviser D) a broker-dealer

c (The definition of investment adviser includes any person who for compensation engages in the business of advising others as to the value of securities or the advisability of buying, selling, or investing in securities or who, as a part of a regular business, publishes securities analyses or securities reports for individual investors on a paid subscription basis.)

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) the schedule should be made available on the broker-dealer's public website and should be password protected B) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats C) the schedule should be made available on the broker-dealer's public website without requiring any login or password D) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers

c (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.)

Which of the following does NOT have a federally imposed exemption from registration with the SEC? A) Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are not used for capital expenditures B) Securities issued or guaranteed by a state or political subdivision of a state C) Shares of bank holding companies traded on the New York Stock Exchange D) Securities issued or guaranteed by the U.S. government

c (Under the Securities Act of 1933, shares of bank holding companies listed on the NYSE are not exempt securities and they must be registered with the SEC. However, securities of commercial banks are exempt because they are regulated by the Controller of the Currency or some other banking agency. What might be confusing is that these NYSE-listed shares are federal covered securities, which makes them exempt from registration with the states. Securities issued or guaranteed by the U.S. government are exempt from registration under federal law. All securities issued or guaranteed by a state or political subdivision of a state qualify for a federal exemption. Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are used for working capital purposes rather than the purchase of fixed assets also have federally imposed exemptions.)

A state securities Administrator does NOT require the filing of A) advertising and sales literature relating to the sale of nonexempt securities B) pamphlets and marketing letters used by broker-dealers C) advertising and sales literature relating to the sale of exempt securities D) financial reports from broker-dealers and investment advisers

c (A state securities Administrator may require the filing of advertising and sales literature relating to the sale of nonexempt securities, financial reports from broker-dealers and investment advisers, and pamphlets and marketing letters used by broker-dealers in an attempt to increase their business. Exempt securities are not required to register with the state Administrator and, therefore, are exempt from the filing requirements for advertising and sales literature.)

Which of the following statements concerning conflicts of interest under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are true? I. Where a conflict of interest exists, an adviser must decline taking on the client. II. A conflict of interest is defined as anything that may impair the impartiality of the advice being rendered. III. An investment adviser who receives a fee for investment advice, and whose investment adviser representatives are paid commissions from broker-dealers, presents a conflict of interest that must be disclosed. A) I and III B) I and II C) II and III D) I, II, and III

c (Conflicts of interest could impair the rendering of unbiased and objective advice. Conflicts of interest include, but are not limited to, receiving compensation from sources other than clients' fees (such as a salary or commission from a broker-dealer) as a result of providing investment advice. Such conflicts of interest must be disclosed to a client in writing before the investment advisory contract is signed.)

If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must A) amend the registration statement within 60 days of the material change B) submit an entirely new registration form within 30 days of the material change in information C) amend or update the information promptly regardless of the renewal date D) update the information on the registration on the next annual renewal date

c (When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term "promptly.")

If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue, A) the firm would be engaged in a dishonest or unethical business practice B) the firm would be straddling a commingled arbitrage C) disclosure of the capacity in which the firms acts in the transaction must be made on the trade confirmation D) disclosure of the potential conflict of interest must be made

d (A classic example of a potential conflict of interest is when a broker-dealer has discretion over a client's account and purchases securities for that account that are issued by the firm or an affiliated company. There is nothing wrong with this, as long as disclosure is made, and in some cases (not tested), the client must give consent. What about disclosing capacity in the trade? Isn't that always required? Yes, it is, but this is an example of a question where there could be 2 correct answers, and you must choose the one that is closest to dealing with the point being made in the question.)

A consent to service of process required by an Administrator is A) a formal statement declaring that an investment adviser will comply with all advertising requirements of the USA B) a legal procedure that authorizes the Administrator to issue injunctions C) an agreement to perform all services and duties that the Uniform Securities Act (USA) requires of those individuals covered by the USA D) an agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant

d (A consent to service is a formal legal agreement whereby a registrant will be bound by a legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is not an authorization to issue an injunction.)

If AAA Investment Advisers has entered into a written discretionary advisory contract with a client, all of the following information must be stated in the contract EXCEPT A) AAA Investment Advisers charges 1% annually on the value of assets under management B) AAA Investment Advisers has discretionary authority to make investment decisions on behalf of the client C) consent of the client is required for AAA Investment Advisers to assign the contract to another manager or adviser D) AAA Investment Advisers shall be compensated on the basis of a share in the capital gains exclusive of capital losses

d (AAA Investment Advisers cannot be compensated on the basis of a share in the capital gains without considering capital losses. Performance-based fees are not allowed unless the client meets certain minimum financial standards. Individuals must have a net worth that exceeds $2.1 million or a minimum of $1 million under management with the adviser.)

All of the following actions, if performed by a registered agent, would be considered a prohibited activity under the Uniform Securities Act EXCEPT A) the client informs the agent that the appropriate written discretionary authorization forms are being hand-couriered to the agent and should arrive within the hour. Knowing the required paperwork is on its way, the agent begins discretionary trading in the account. B) the agent saves the client money by deliberately withholding the client's buy order for a stock when the agent sees the stock price is trending down. When the order is finally placed later in the day, the execution price is $1 less than when the agent received the order. C) the agent backdates customer confirmations in order to enable the client to achieve a long-term holding period, thereby saving considerable income taxes D) accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state

d (An unsolicited order is an exempt transaction, so accepting this from the agent's client would not be a prohibited practice. There is never a case when backdating of confirmations is permitted, even by 1 day. No discretionary activity may take place until the written authorization is actually received by the firm. Although an agent can use discretion as to time and price without written authority, oral instructions from the client are required, and nothing in the question indicates that the client instructed the agent to "buy when you think the price is right.")

An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require A) past performance since inception of the system must be shown B) if the system is indeed foolproof, verification of that fact C) disclosure of the length of time the charting system has been employed D) a statement as to the limitations of and difficulties involved in using this system

d (Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use.)

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 wrap fee account B) a violation of an investment adviser's fiduciary responsibility C) a properly worded disclaimer D) an improper hedge clause

d (Hedge clauses may not be used to disclaim statements that are inherently misleading.)

An investment adviser is eligible to register with the SEC if it A) has more than 100 investment adviser representatives B) would be required to register in at least 10 different states C) has rendered advice to more than 15 clients during the most recent 12-month period D) anticipates acquiring at least $100 million in assets under management within the next 120 days

d (IAs must have at least $100 million in AUM in order to register with the SEC. If it is reasonable to expect reaching that level within the next 120 days, SEC registration is allowable now. One of the exceptions that would permit small and mid-size advisers to register with the SEC is if they would have to register in at least 15 states, not 10.)

Registration with the SEC as an investment adviser would be required for a person who A) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940 B) limits the advice offered strictly to securities issued or guaranteed by the U.S. government C) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE) D) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940

d (If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.)

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following is unethical? A) Borrowing funds for personal use from a client that is a bank B) Exercising discretion with regard to the time or price of an order without written authorization from the client C) Omitting nonmaterial facts in a presentation to an advisory client about a recommended investment D) Recommending a certain limited partnership investment to all clients

d (Recommending an investment without determining its suitability to each client is considered unethical. When the same investment is recommended to all clients, it is called a blanket recommendation and almost always raises the suitability question. Time and price are not considered to be discretion, so no written authority is needed. While borrowing from clients is usually prohibited, that rule is suspended when the lender is a person in the business of lending money, such as a bank or a broker-dealer. Omitting nonmaterial facts is permissible when recommending securities to a client; the material facts must be disclosed.)

In which of the following situations has the investment adviser NOT violated the antifraud provisions of the Investment Advisers Act of 1940? A) Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer. B) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. C) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client. D) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account.

d (If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as an agent of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own account only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.)

Alpha Electronics Company wishes to raise capital by issuing some securities in its home state. They have been advised by their legal counsel that registration with the Administrator is unnecessary because the issue is exempt. Should Alpha be served with an order, the burden of proving its issue is exempt is on the A) lawyers B) Administrator C) court D) company

d (In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption.)

Profit Partners, LLC (PPL), a federal covered investment adviser, sends correspondence regarding its past performance to prospective retail clients in State A. PPL does not maintain a place of business and is not registered in State A. Because PPL is soliciting for new business there, the Administrator of State A A) would have no jurisdiction over PPL because the firm is a federal covered investment adviser. B) would be able to bring a claim against PPL for showing past performance in a communication with prospective clients. C) would be able to bring a claim against PPL for soliciting without being properly registered in the state. D) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated.

d (In general, Administrators have no jurisdiction over the activities of federal covered investment advisers. The situation is different, however, when a covered adviser pursues an activity in the Administrator's state that violates the antifraud provisions of the Uniform Securities Act. In that case, the Administrator can take action against the covered adviser. The showing of past performance is permitted as long as the required conditions are met; nothing in the answer choice indicates that the communication is not in compliance.)

Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940? A) All facts needed to assess the risks of an investment B) All facts C) All facts in the prospectus D) All material facts

d (It is a violation of the act for any person willfully or knowingly to make untrue statements of a material fact or omit to state a material fact in connection with a securities recommendation by an adviser. A material misstatement is one that may have an effect on an issuer's future financial prospects or the market value of its securities or may influence the decision of a customer.)

Which of the following statements is CORRECT? A) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment. D) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.

d (It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.)

According to the Uniform Securities Act, which of the following would be defined as an investment adviser representative? I. John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm II. Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers III. Margaret, who works as a commission sales agent for a broker-dealer IV. Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm's securities analyst A) I and IV B) II and III C) II and IV D) I and II

d (Paul, who works for a firm soliciting investment management accounts for several investment managers, would be defined as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner of a sole proprietorship, is both an investment adviser and the firm's only investment adviser representative. Margaret would not be defined as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer's investment management subsidiary, she then would be defined as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm's outstanding research department.)

If Perfect Pasta, Inc., a privately held company in Illinois that owns four restaurants, wants to issue shares to public investors who are residents of Illinois, the company A) must register by coordination B) is exempt from registration because there are fewer than 10 restaurants in the state C) may issue shares under the notice filing procedure available for covered securities D) must register by qualification

d (Perfect Pasta must register by qualification because the other methods listed are not available to an initial public offering for an intrastate (as opposed to interstate) offering. Perfect Pasta is not a federal covered security and may not use the notice filing procedure. The private placement exemption refers to the number of persons being offered the security, not the number of restaurants the issuer runs.)

Which of the following securities are exempt from registration requirements under the Uniform Securities Act? I. Issues of U.S.-based insurance companies authorized to conduct business in the state II. NYSE traded issues III. Issues of nonprofit religious organizations IV. Commercial paper meeting certain requirements A) II, III, and IV B) I and III C) III only D) I, II, III, and IV

d (Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state are exempt from registration. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less in denominations of at least $50,000 and in the top 3 ratings are also exempt.)

Each of the following statements regarding registration of securities by coordination is true EXCEPT A) the registration statement must contain or be accompanied by consent to service of process B) the registration becomes effective at the state level concurrent with SEC registration if the Administrator has not entered an order to deny it C) the Administrator may reduce the required time that the registration statement must be on file prior to becoming effective D) state registration must be effective prior to federal registration

d (State registration must be coordinated with federal registration. In most cases, the registration statement must be on file with the Administrator for 10 days, but the Administrator has the power to shorten that period. The registration statement becomes effective concurrent with the SEC and must contain or be accompanied by consent to service of process.)

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of A) $500 for the next 3 months of advisory service. B) $1,000 for the next 3 months of advisory service. C) $500 for the next 6 months of advisory service. D) $1,000 for the next year's advisory service.

d (State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $500, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least 6 months of service to count.)

Holly Cavendish is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing the Form ADV-E. This tells Holly that her firm A) is undergoing a special evaluation by its clients. B) is reporting certain errors discovered by management. C) will be changing to state registration. D) maintains custody of customer funds and or securities.

d (The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser.)

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Broker-dealers receiving special compensation B) Economists whose advice is strictly incidental to their professional activity C) Bank subsidiary offering investment advice D) Investment adviser representative

d (The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.)

Under the Uniform Securities Act, all of the following are required to be registered as investment adviser representatives EXCEPT A) an individual who furnishes investment advice to clients of ABD Advisers, Inc. B) an employee who solicits new customers for ABD Advisers, Inc. C) a vice president of ABD Advisers, Inc., who serves on the firm's advisory committee D) ABD Advisers, Inc.

d (The Uniform Securities Act defines an investment adviser representative as anyone who is a partner, officer, director, or other employee or person associated with an investment adviser other than clerical or ministerial personnel who (1) make recommendations or provide advice regarding securities; (2) manage accounts or portfolios of clients; (3) determine which recommendations or advice should be given; (4) solicits, offers, or negotiates for the sale of, or sells, advisory services; or (5) supervises any such persons. An individual or a firm may be registered as an investment adviser, but only an individual can be an investment adviser representative.)

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should only sell what is suitable for the client based on all available information B) should pack her bags and leave the firm before the compliance department learns of her actions C) will probably be disciplined for failure to disclose the potential conflict of interest D) should pack her bags for the trip; she earned it

d (The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable)

An interest in which of the following is a security under the Uniform Securities Act? I. Preorganization certificate II. Certificate of deposit for a security III. Oil and gas drilling program IV. Cattle feeding program A) III only B) I only C) II and III D) I, II, III, and IV

d (The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.)

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name a commission charge when a client buys a security on a listed exchange the interest charged by the firm on money owed by customers in their margin accounts fees for providing advisory services to high net worth individuals A) II and III B) III and IV C) I and IV D) I and III

d (There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.)

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Excluded from that listing would be A) bonds issued by the District of Columbia B) securities issued by a credit union authorized to do business in the state C) bonds issued by a Canadian province D) corporate debentures

d (Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of, state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.)

Broker-dealers, investment advisers, agents, and investment adviser representatives who use the internet to distribute information on available products and services that are directed generally to anyone having access to the internet and transmitted through postings on bulletin boards, displays on homepages, or similar methods are not deemed to be transacting business in this state for purposes of the Uniform Securities Act solely on the basis of that fact if which of the following conditions are observed? I. The internet communication contains a legend in which it is clearly stated that the broker-dealer, investment adviser, agent, or IAR in question may transact business in this state only if first registered, excluded, or exempted from state broker-dealer, investment adviser, agent, or IAR registration requirements, as may be the case. II. The internet communication contains a legend in which it is clearly stated that follow-up; individualized responses to persons in this state by the broker-dealer, investment adviser, agent, or IAR that involve either the effecting or attempting to effect transactions in securities; or the rendering of personalized investment advice for compensation, as may be, will not be made absent compliance with state broker-dealer, investment adviser, agent, or IAR registration requirements, or an applicable exemption or exclusion. III. The internet communication contains a mechanism, including and without limitation, technical firewalls or other implemented policies and procedures, designed reasonably to ensure that before any subsequent, direct communication with prospective customers or clients in this state, the broker-dealer, investment adviser, agent, or IAR is first registered in this state or qualifies for an exemption or exclusion from such requirement. IV. The internet communication does not involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as may be, in this state over the internet, but is limited to the dissemination of general information on products and services being offered. A) I and II B) I, II, and III C) III and IV D) I, II, III, and IV

d (With the growth of the internet, NASAA developed an interpretive order concerning broker-dealers, investment advisers, agents, and investment adviser representatives using the internet for general dissemination of information on products and services. The primary focus of this order was to set the parameters under which securities professionals could communicate on the internet or use their websites in states in which they were not registered. Meeting all of the requirements stated in the answer is necessary.)

In which of the following situations is an agent committing a prohibited practice? A) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity B) Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account C) Buying a security on behalf of a customer and then reselling it before the customer has paid for it D) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority

d (Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades.)

Credible Investment Specialists (CIS) is a state-registered investment adviser with its only offices in State A. In which state(s) would registration be required? I. State A where the only clients are large pension plans II. State B where the only clients are banks III. State C where the only clients are insurance companies IV. State D where there are 6 or fewer retail clients over any 12 month period A) I only B) IV only C) II and III D) I and IV

d (For those investment advisers who are not federal covered, registration is always required in any state in which the firm maintains a place of business, regardless of the nature of its clientele. If there is not a place of business in the state, registration is not required when the clientele is limited to institutions, such as banks, insurance companies, and large employee benefit plans (at least $1 million in assets). Once the adviser has more than 5 retail clients in a state over a 12-month period, the de minimis exemption is lost and registration is required.)