Quiz 2
The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state?
Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state. Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state. Reference: 2.8.1 in the License Exam Manual
Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding registration of broker-dealers and agents? I.Those defined as broker-dealers must be registered with the state before transacting any securities business. II.An agent of a broker-dealer must become registered with the state before transacting business. III.Agents of a broker-dealer are not required to be registered.
I and II. All persons defined as broker-dealers or agents under the act must register as such before transacting any securities business. It is unlawful for a broker-dealer to employ an agent unless the agent is registered. Reference: 2.3 in the License Exam Manual
Which of the following involves an offer or sale?
A gift of an assessable security. The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale. Reference: 2.12.1 in the License Exam Manual
Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? I. An adviser who exercises discretion in client accounts. II. An adviser who maintains custody over client funds and securities. III. An adviser who maintains less than $35,000 in net worth. IV. An adviser who, 6 or more months in advance, collects prepaid fees of more than $500.
II and IV. The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees. Reference: 3.11.1 in the License Exam Manual
According to the Investment Advisers Act of 1940, which of the following statements regarding registration of investment advisers is TRUE? I.State registration is a requirement for federal registration. II.An investment adviser must be registered with the SEC to be registered at the state level.
Neither I nor II. A critical point to remember about investment advisers is that, if required to register, they register with either the state or the SEC, never with both. This is unlike broker-dealers who invariably register with both the SEC and the state(s) in which they do business. Reference: 3.3 in the License Exam Manual
Which of the following securities is NOT exempt from the Securities Act of 1933?
REITs are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipals are exempt. Reference: 1.2 in the License Exam Manual
The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT:
a record by security showing each client's interest and location thereof. The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets. Reference: 3.8 in the License Exam Manual
The federal Securities Act of 1933 has certain requirements for those selling new issues. One of those requirements is to:
deliver a final prospectus no later than with confirmation of the sale. The Securities Act of 1933 requires that a prospectus dealing with a new stock issue be delivered to a purchaser no later than with the confirmation of the trade. Preliminary prospectuses have no relevance once the issue is effective. The Securities Act of 1933 does not deal with the registration requirements of agents. Reference: 1.4.4 in the License Exam Manual
In reviewing prospectuses and registration statements, the SEC:
does not approve or disapprove of the issue. The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue. Reference: 1.4.5 in the License Exam Manual
One way to make money is to buy low and sell high. If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must:
indicate that there are limitations and difficulties to using the system. Anytime you see a question dealing with advertising a charting system (or investment formula, etc), always look for limitations and difficulties in the answer. Reference: 3.13 in the License Exam Manual
Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is
margin interest on the debit balance In a cash account, you can't have margin activity, so there can't be a margin interest charge. Reference: 2.11.11.1.1 in the License Exam Manual
Active Technicians (AT) is a state-registered investment adviser. In their brochure supplement, they would include information relating to each of the following individuals EXCEPT
members of AT's board of directors who are active in the firm's business Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals had direct client contact or exercised discretion, a supplement for them would need to be prepared. Reference: 3.10.1.1 in the License Exam Manual
Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT:
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. 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. Reference: 3.14 in the License Exam Manual
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must
send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state- or federal-covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Reference: 3.10.3.1 in the License Exam Manual
The NASAA Model Rule on Custody of Customer Funds and Securities requires that an adviser with custody of client funds or securities do all of the following EXCEPT:
send monthly account statements to clients. Investment advisers with custody must send statements to clients on a quarterly, not monthly, basis. Reference: 3.11 in the License Exam Manual
All of the following must register with the Securities Exchange Commission EXCEPT:
state securities Administrators. State securities Administrators are not registered with the SEC, but the SEC requires securities issuers, transfer agents, securities information processors, as well as major stock exchanges, and the Nasdaq Stock Market to be registered. Reference: 1.6.3 in the License Exam Manual
If an investment adviser representative is engaged in criminal activity while violating a rule under the Uniform Securities Act, but had no knowledge of the rule violated, the maximum penalty that may be imposed is a:
$5,000 fine. The maximum penalty for criminal violations is $5,000 and/or 3 years imprisonment. However, no prison sentence can be imposed if the person can prove he had no knowledge of the rule being violated. Reference: 2.15.2 in the License Exam Manual
Under the USA, an agent may file for a review of an Administrator's revocation order within how many days of revocation?
60 days. An agent may appeal a final order of the state Administrator but a written petition must be filed with the appropriate court within 60 days of the entry of the Administrator's order. Reference: 2.15.3 in the License Exam Manual
Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client— a United States Government employees pension fund with assets of $4 billion. What are this firm's registration requirements? A)It does not have to register because its only client is the United States government. B)It can only register with the SEC because the District of Columbia is not a state. C)It must register with the SEC because the AUM is so high. D)It may choose to register with either the D.C. Administrator or the SEC.
D Under the provisions of the Dodd-Frank Act of 2010, once a pension consultant's AUM reaches $200 million, it has the choice of state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client. Reference: 3.3.2.1.4 in the License Exam Manual
All of the following statements are consistent with the Uniform Securities Act EXCEPT: A)state Administrators may require federal covered investment companies to file documents with the Administrator using a procedure known as notice filing. B)a security for which a registration statement is filed under the Securities Act of 1933 may simultaneously register with the state by the procedure known as registration by coordination. C)any security may be registered with the state by the procedure known as registration by qualification. D)state Administrators do not require consent to service of process to be submitted with notice filings for covered securities.
D) The Administrator will require the filing of a consent to service of process with any securities registration. If required by the Administrator, notice filing is the procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states. Reference: 2.7 in the License Exam Manual
Jessica is an investment adviser representative for an SEC-registered investment adviser. She receives a letter from an old college friend requesting a contribution to the friend's political campaign for governor of a neighboring state. As it happens, Jessica's firm provides advisory services to that state's employee retirement fund. Which of the following actions would be permitted to Jessica under the SEC's pay-to-play rule without causing any concerns to her firm?
Donating a maximum of $150 to the campaign The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state in which Jessica cannot vote, the lower limit applies. Reference: 3.21.1.1 in the License Exam Manual
An agent knowingly sold a nonregistered security because he thought it would eventually become registered.
Fraud occurs when a person covered under the USA knowingly violates a provision of the law; the agent knew the security was not registered and fraudulently sold it. Reference: 2.10. in the License Exam Manual
The Administrator has authority to: I.issue a cease and desist order without a hearing. II.issue a cease and desist order only after a hearing. III.summarily suspend a currently effective securities registration upon discovering an officer of the issuer has been convicted of a securities-related crime. IV.sentence violators of the USA to three years in prison.
I and III. The Administrator may issue a cease and desist order without a hearing. Sentencing is only done by a court and suspension is a punitive action that may only take place after a hearing. Reference: 2.14.3 in the License Exam Manual
Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser who has custody of clients' securities or funds must: I.keep funds deposited in accounts containing only client funds. II.be subject to a surprise audit performed at least annually by an independent accountant. III.send clients' statements at least once every three months showing balances.
I, II and III. When advisers have custody of clients' securities or funds, they must abide by the following rules: (1) securities must be segregated and identified by clients and kept safe; (2) client funds must be deposited into bank accounts that contain only the client funds, and the adviser must be named trustee; (3) records of all funds, securities, and transactions affecting clients' accounts must be kept; (4) clients must be sent notice of the location of funds and securities and any changes that take place there; (5) clients must receive a quarterly statement showing all funds and securities in the adviser's possession and any transactions that have taken place; (6) the adviser must arrange for a surprise audit by an independent public accountant of all securities and funds in the adviser's custody each year. Reference: 3.11 in the License Exam Manual
Securities issued by which of the following would be exempt from the registration requirements of the Uniform Securities Act? I. Nonprofit organization. II. Exchange-listed security. III. Savings and loan association. IV. Federal credit union.
I, II, III and IV. All of the issuers listed are exempt from the registration provisions of the Uniform Securities Act. Reference: 2.8.1 in the License Exam Manual
Under the Securities Act of 1933, which of the following are exempt securities? I.Securities issued by the U.S. government, government agencies, and any state or municipality. II.Any security issued by a religious, educational, charitable, or not-for-profit institution. III.Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution. IV.Any interest in a railroad equipment trust.
I, II, III and IV. Most of the securities exempt from registration and prospectus delivery requirements in the Securities Act of 1933 are also exempt under the Uniform Securities Act. Securities exempt under the Securities Act of 1933 include government issues, commercial paper, securities issued or guaranteed by financial institutions, regulated common carrier issues, and nonprofit charitable or religious institutions, There are three securities that are exempt under the Uniform Securities Act and not exempt under the Securities Act of 1933. Stocks and bonds issued by insurance companies, securities issued by foreign governments, and securities listed on certain exchanges are not exempt under the Securities Act of 1933. Reference: 1.2 in the License Exam Manual
An investment adviser would be exempt from registration under the Uniform Securities Act if it had no place of business in this state and its only clients were: I.banks. II.insurance companies. III.registered investment companies. IV.other investment advisers.
I, II, III and IV. As long as the investment adviser does not maintain a presence in this state and its only clients are broker-dealers, other investment advisers, or institutional clients, it is exempt from registration in this state. Reference: 3.4 in the License Exam Manual
Which of the following are defined as securities under the Uniform Securities Act? I.An investment in a managed pool of rental condominiums. II.Unsecured debentures sold in a private placement only to accredited investors. III.Bills, notes, and bonds issued by the U.S. Treasury. IV.A Roth IRA.
I, II, and III. An investment into an individual condominium used as a residence is not a security. However, an interest in the rental income from a group of condos, where the rent is pooled, is a security under the USA. While the sale of the debentures in this case is an exempt transaction, the debentures are securities. Treasury bills, notes, and bonds are securities, although they are exempt from registration under the USA. A Roth IRA is not a security. Securities may be put in an IRA, but the IRA is not a security. The key to questions like this is to remember those things that are not securities. Reference: 2.5.1 in the License Exam Manual
Which of the following would meet the definition of investment adviser under the Uniform Securities Act? I.A broker-dealer charging a separate fee for investment advice. II.The publisher of a weekly newsmagazine, sold on newsstands, that contains at least 5 stock recommendations per issue. III.A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims. IV.A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price.
I, III and IV. Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice as would appear to be the case here. On this examination, the term "comprehensive financial planning" always includes securities advice. Reference: 3.2.3 in the License Exam Manual
To protect the public, the Administrator may: I.deny the registration of an agent with insufficient net capital. II.require an applicant for registration as both a broker-dealer and an investment adviser to limit activities to those of a broker-dealer due to lack of qualifications to render investment advice. III.require an applicant for registration to submit to an oral examination.
II and III. Agents never have a net capital requirement, but broker-dealers do. It is not uncommon for an Administrator to deny an application for registration as an investment adviser to a firm that does not appear to have the necessary qualifications. The Administrator will permit the firm to function as a broker-dealer, and resubmit its request for adviser status at a later time. While it is rare, the USA does reserve the right to require a potential registrant to submit to an oral examination in addition to or instead of a written test. Reference: 2.14.4.1 in the License Exam Manual
According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE? I.It must be filed with the state Administrator. II.A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, six or more months in advance. III.Certain minimum business and education qualifications must be met before an investment adviser can file. IV.It may be used to satisfy the brochure requirements of the act.
II and IV. An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients. Reference: 3.6.2 in the License Exam Manual
Which of the following is (are) unethical business practices if conducted by a broker-dealer? I.Acting as agent for both buyer and seller on a transaction. II.Conducting transactions that do not result in the transfer of ownership between buyers and sellers. III.Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security. IV.Engaging in trades between other broker-dealers to increase or decrease the price of securities.
II, III and IV. A broker-dealer may act as agent for both buyer and seller in a transaction. All the other activities represent market manipulation and are therefore unethical practices. Reference: 2.10.1 in the License Exam Manual
Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act?
Variable annuities issued by an insurance company authorized to do business in this state. Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA. Reference: 2.8.1 in the License Exam Manual
All of the following are examples of investment adviser fraud under the Investment Advisers Act of 1940 EXCEPT:
an adviser who has custody of client assets and deposits them into separate bank accounts. The adviser who has custody of a client's assets must deposit them into separate accounts at the custodial bank as required by the Investment Advisers Act of 1940. An adviser exercising discretion or maintaining custody must disclose the fact that he has liabilities that exceed his assets. Advisers, whether or not they are exempt from the act, are subject to the antifraud provisions. Failing to disclose material facts to clients is considered fraud under the act. Reference: 3.11 in the License Exam Manual
Exempt transactions, as defined in the Uniform Securities Act, would include all of the following EXCEPT
an agent selling U.S. Treasury bonds to an individual client Even though Treasury bonds are an exempt security, a solicited sale to an individual is NOT an exempt transaction. Reference: 2.8.2 in the License Exam Manual
An agent registered in one state may solicit business in another state provided:
both the agent and the firm are properly registered in the other state. An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available. Reference: 2.3.2.3 in the License Exam Manual
If persons other than the original person entering the post can comment on social media, the content is considered
interactive One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments. Reference: 2.4.8.1* in the License Exam Manual
A new client, referred by his friend, just realized a sizable capital gain on a real estate investment. This person has never invested in the financial markets and has always believed that investments in real estate had better upside returns. As you gather information on this client, he states that he does not trust the government and that he keeps a great deal of cash in a safe deposit box at a local bank. He also discloses that a friend strongly urged him to put his money in the PQR Small Cap Growth Fund you had previously recommended and that is why he decided to meet with you. When making a recommendation to this client, it would be least suitable to recommend that he invest:
the entire proceeds in PQR Small Cap Fund. Even when the client believes the investment recommendation made to his friend is attractive and suitable, it is the representative's job to make recommendations that are tailored to the client's specific needs and objectives. Blanket recommendations are never suitable and diversification should also be recommended. Reference: 2.11.3 in the License Exam Manual
An investment adviser is sued by a client. If the client is successful in the civil proceeding, under the Uniform Securities Act, the client may be awarded:
the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice. Securities professionals may be sued by their clients under civil law if they lose money and the securities professional has violated the Uniform Securities Act in connection with the loss. In the case of an investment adviser, (or IAR), the client is entitled to recover the consideration (money) paid for such advice and any loss due to such advice, together with interest at the state's legal rate from the date of payment of the consideration plus costs and reasonable attorney's fees, less the amount of any income received from such advice. Reference: 2.15.1.3 in the License Exam Manual
