regs s66: USA

Under the Uniform Securities Act, the threshold where a State-registered adviser is considered to have taken custody of client funds if it charges prepaid advisory fees, is:

$500, 6 months or more in advance of rendering services If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers).

Excluded from the definition of an investment adviser are:

- investment adviser representatives, - broker-dealers, - depository institutions (banks, trusts, savings and loans), - professionals (lawyers, accountants, teachers, engineers) - and newsletters that do not render advice based upon a specific client situation. NOT EXCLUDED: Insurance companies and investment companies they are not excluded from the definition (though they *may be exempt* from registration under certain circumstances).

The Administrator will deny registration if the applicant has:

-filed a misleading application, which is interpreted as a materially incomplete application or one that is misleading with respect to any material fact. - willfully violated the provisions of the Act. - been convicted of a misdemeanor involving any aspect of the securities business; or any felony; within the past 10 years. - been enjoined by any court from engaging in or continuing to conduct any aspect of the securities business. - been suspended or had its registration revoked by any State or the Securities and Exchange Commission within the past 10 years. - engaged in dishonest or unethical business practices. been found to be insolvent, defined as not being able to meet obligations as they mature. - been found to be unqualified due to lack of training, experience, or knowledge of the securities business. However, lack of experience alone is not sufficient to deny registration. - failed to reasonably supervise subordinates. This provision applies to broker-dealers and investment advisers. This does not apply to agents. (The Administrator cannot deny a registration application of a broker-dealer, investment adviser or their agents unless it is in the public interest and the applicant is subject to "statutory disqualification" as detailed in the Uniform Securities Act.)

Under NASAA recordkeeping rules for investment advisers, a communication to a client must be retained if it is circulated to MORE than:

1 persons NASAA does not set recordkeeping rules for broker-dealers and for federal covered advisers, because these are set under federal law. NASAA does set recordkeeping rules for state-registered advisers. Under the NASAA model rule, advertisements, circulars, bulletins or other communications circulated by the adviser to 2 or more persons must be retained for 5 years.

An investment adviserthat has no office in State B would be required to be registered in State B if a representative associated with that firm sells advisory services in State B to: 6 relatives an investment advisory firm and 2 individuals an investment advisory firm and 6 private individuals, of which 3 are officers of an investment advisory firm 6 investment advisory firms

6 relatives An adviser that only sells its services to other investment advisers (who the law considers to be "professionals" and not in need of protection) is not required to be registered in a State, as long as the adviser is not physically located in that State. Officers of advisory firms to whom another adviser offers its services fall under the same "professional" exemption. Offering services to 5 individuals or less allows the adviser with no office in that State to claim the "de minimis" exemption in the State. There is no exemption for offering advisory services to relatives.

Which of the following statements is TRUE regarding the compensation of an unlicensed solicitor for referring a customer to an investment adviser? A) A referral fee cannot be paid to an unlicensed solicitor B) A referral fee may be paid to an unlicensed solicitor only if there is a prior written agreement detailing work to be performed and compensation to be paid C) A fixed fee may be paid to an unlicensed solicitor only if the investment adviser is a "federal covered adviser" D) The referral fee can be paid as long as the amount is fair and reasonable

A) A referral fee cannot be paid to an unlicensed solicitor

An agent of a broker-dealer has hired a sales assistant who is not registered. The sales assistant will answer the telephone, handle customer queries, and perform other clerical duties. What arrangement is acceptable for compensating the unregistered sales assistant under this employment arrangement? A) Hourly wage plus a bonus based on an annual performance evaluation B) Base salary plus a percentage of the agent's gross commissions C) Base salary plus a percentage of any increase in the agent's gross commissions from the time the sales assistant was hired D) Percentage of commissions based on the agent's average commissions prior to hire date; and a higher percentage of the agent's average commissions from the time the sales assistant was hired

A) Hourly wage plus a bonus based on an annual performance evaluation An unregistered person cannot be compensated with commissions or pay based on production. An unregistered sales assistant, therefore, is not permitted to share commissions, or share in any business increase, with the registered representative for whom he or she works.

Which statement is TRUE regarding the State Administrator's authority to establish recordkeeping rules for broker-dealers? A) The Administrator can only establish recordkeeping rules that are the same as those set by the SEC B) The Administrator cannot establish recordkeeping rules for broker-dealers C) The Administrator has the power to set recordkeeping rules if it is in the public interest D) The Administrator can neither establish nor enforce recordkeeping requirements for broker-dealers

A) The Administrator can only establish recordkeeping rules that are the same as those set by the SEC NSMIA made clear that *Federal law has supremacy over State law regarding net capital rules, custody rules, margin rules, financial responsibility rules and record keeping rules*. Since the SEC sets recordkeeping rules for broker-dealers, the State Administrator can only create rules that agree with those created by the SEC.

An agent for a broker-dealer tells a customer that the price of a stock is higher than it actually is. Based on this information, the customer sells the stock. Which statement is TRUE? A) The agent is subject to civil action taken by the Administrator B) The agent is only subject to civil action taken by the Administrator if the customer loses money C) The agent's actions are acceptable if the customer is given the opportunity to make up for the trade with purchases of stocks at prices below the current market D) The agent's actions are acceptable if the agent buys the shares back from the customer at an agreed upon price

A) The agent is subject to civil action taken by the Administrator Giving fictitious quotes and then trading based on erroneous information is considered a manipulative practice subjecting the agent to civil action.

A customer has a free credit balance at a broker-dealer. The customer makes a verbal request over the phone that the broker-dealer pay the amount of the balance immediately, in check form. Which statement is TRUE? A) The request should be honored as given B) The broker-dealer cannot honor the request unless it is in writing C) The broker-dealer cannot honor the request unless the customer makes it in person D) The request cannot be honored since free credit balances are not payable to the customer

A) The request should be honored as given A free credit balance is an uninvested cash balance. The customer can request that the firm pay this amount at any time - there is no need for a written request. The firm must make the payment promptly to the customer, if a request is made.

All of the following actions by a representative are violations of the Uniform Securities Act EXCEPT: A) failing to state all known facts relating to a transaction B) inducing trades for the purposes of increasing commissions C) commingling customer funds with the representative's funds D) recommending unsuitable transactions to the customer

A) failing to state all known facts relating to a transaction The best answer is A. It is not an unethical practice for a representative to fail to state all known facts relating a transaction; failure to state the material facts is the unethical practice. Inducing trades for the purposes of increasing commissions (churning) is unethical; commingling customer and representative's monies is unethical; and recommending unsuitable transactions to customers is unethical.

In relation to NASAA's Statement on Records Retention for Registered Investment Advisers, an RIA: A) must retain both personal and business e-mails B) must retain business e-mails for 3 years, but personal e-mails may be discarded C) must retain outgoing e-mails, both business and personal, for a period of 6 years D) does not have to retain any e-mails as they are not considered to be correspondence under NASAA rules

A) must retain both personal and business e-mails NASAA has a recordkeeping rule for investment advisers that are State-registered; in contrast, the recordkeeping rules for broker-dealers are set under the Securities Exchange Act of 1934. NASAA requires retention of both personal and business e-mails. It does this because agents often send e-mails to clients, or receive e-mails from clients, while at home (note that Federal law for broker-dealer records is the same on this point.) *NASAA requires that all such records be retained for 5 years*, not 6 years, making Choice C incorrect. (Also note that on this point, federal law for broker-dealers differs, only requiring that e-mails be retained for 3 years.)

An agent of a broker-dealer with discretionary authority has a customer that currently is invested in ABC Speculative Fund. The agent enters an order to sell the ABC Speculative Fund holding and, using the proceeds, enters another order for the client to buy XYZ Speculative Fund. The agent: A) must show that there is a marked difference between the two funds and that the trade was justified B) must show that the commissions earned on the transactions were not a factor in the investment decision C) has committed an unethical practice because the account is being churned D) will be ordered by the Administrator to reverse the trades and refund commissions earned to the client

A) must show that there is a marked difference between the two funds and that the trade was justified The issue here is that the agent is selling one "speculative" fund for this customer and is using the money to buy another "speculative" fund for the same customer. On its face, there is no reason to do this, since they have the same investment objective. Choice Ais the best one offered - the agent must be prepared to justify the transactions - for example, maybe the ABC Fund manager has left and has become the manager of the XYZ fund and this manager has a very good track record. A good argument can be made for Choice B, but the overriding consideration when making discretionary trades for clients is that they be suitable. It is true that the agent should not be considering the commissions to be earned when making these trades, but that is not a defense as to why the trades were made. The only justifiable reason for making the trades is that they were best for the customer. Choice Cmight also be true, but we don't have enough information to know if the agent is really churning the account. Choice Dis false - the Administrator will only take action in such a case if there is a customer complaint and it is found that the agent's actions violated State law.

A market maker in ABCD stock is currently quoting the stock at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to buy 800 shares of ABCD at $42.50, the market maker: A) must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B) must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C) must send the order to a stock exchange floor for execution D) is not required to take any action

A) must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently bidding the stock at $42.00 - this is the price at which he is willing to buy up to 500 shares. Since this customer is willing to pay more to buy - $42.50 for up to 800 shares, the customer's bid must be displayed in the market. Note that NYSE, AMEX (NYSE American), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB.

If an agent opens a joint account with a customer, the agent is permitted to: A) place a trade in the account without having a written power of attorney from the customer B) withdraw funds from the account in the form of a check made payable to the agent's name C) share in investment gains in the account but not in investment losses D) effect transactions in the account only at the direction of the customer

A) place a trade in the account without having a written power of attorney from the customer An agent can open a joint account with a customer, as long as sharing is proportional to capital contributed and sharing occurs in both gain and loss. In addition, the employing firm must approve of the arrangement. Regarding the operation of any joint account, any single owner can enter a trade (this would be either the customer or agent, in this case). There is no requirement for joint agreement to accept a trade. Any single owner of a joint account can demand that a check be drawn, but checks must be drawn to full account name (this would be the names of both the agent and the customer, thus both would need to endorse the check in order to cash it).

An investment adviser representative is preparing a comprehensive investment plan for a customer. After completing the plan, the representative finds out that, unless precautions are taken, implementation of the plan could have severe tax consequences for the client. The first step that the investment adviser representative should take is to: A) refer the client to a tax consultant for plan review B) refer the client to a new investment adviser C) create a new investment plan for the client D) present the plan as created to the client

A) refer the client to a tax consultant for plan review This question is very judgmental. There are really 2 correct answers and you must pick the "better" of the choices. The question states that the investment plan prepared by the representative could have severe tax consequences for the client "unless precautions are taken." So if precautions are taken, then this plan is OK. The first step would be to have a tax professional review the plan to make sure that the "proper precautions" are taken (remember, IARs cannot give tax advice). If, in the opinion of the tax professional, there is no way around the adverse tax consequences, then a new plan would have to be created that avoids this tax consequence. Therefore, this would be the second step that would be taken, if this occurred.

If an investment adviser is an individual, which of the following items would be included in the computation of adviser's net capital? Goodwill Automobile Accounts receivable Copyright

Accounts receivable Net capital is really the adviser's "liquid net worth." It is liquid assets minus all liabilities. For an adviser that is an individual, excluded from assets that count in net capital are any non-liquid assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, home, home furnishings, automobiles and any other personal items that cannot be readily converted to cash. *Basically, this means that the only assets that count in the computation for an individual adviser are cash, accounts receivable and marketable securities positions*.

rules regarding customer funds or securities and broker-dealer's funds or securities:

Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.

Under the NASAA Statement of Policy on unethical practices, which of the following orders may be accepted in a customer's account without a written trading authorization from that customer? An order entered by the customer An order entered by an immediate family member of the customer An order entered by the customer's investment adviser An order entered by the customer's attorney

An order entered by the customer the only person who is authorized to trade a customer's account is the customer whose name (or names for a joint account) appears on the account. To have anyone else trade the account would require that the customer sign a "Third Party Trading Authorization" - naming that other person as authorized to trade the account. Please note that a customer's attorney does NOT have an implicit power of attorney over a customer's account. The customer must give a written power to anyone that the customer wishes to have trade his or her account.

Joe Jones, the proprietor of Joe Jones Financial Planning Inc., which is registered as an investment adviser in New York State, has decided that he can expand his business by setting up an Internet website. He includes a questionnaire that solicits individuals to transmit information about their investment objective, financial situation, financial needs, risk tolerance level and investment time horizon, which he will use to create a financial model and plan for a fee. Which statement is TRUE? A) Joe Jones Financial Planning Inc. must register with the SEC as an investment adviser, but is not required to register as an investment adviser in each State where customers complete the questionnaire B) Joe Jones Financial Planning Inc. is not required to register with the SEC as an investment adviser, but the firm is required to register as an investment adviser in each State where customers complete the questionnaire C) Joe Jones Financial Planning Inc. is required to register with the SEC as an investment adviser, and the firm is required to register as an investment adviser in each State where customers complete the questionnaire D) Joe Jones Financial Planning Inc.'s current New York State registration is the only requirement

B) Joe Jones Financial Planning Inc. is not required to register with the SEC as an investment adviser, but the firm is required to register as an investment adviser in each State where customers complete the questionnaire Since this is a State registered investment adviser, the firm is "small" and is not a federal covered adviser - therefore federal registration does not apply. Registration only occurs at the State level. If an investment adviser or broker-dealer uses a website to induce potential customers to buy "personalized services" (as is the case here) or to effect securities transactions, then an "offer" is being made to that person and the investment adviser, broker-dealer, and their agents, would be required to be registered in the State where the customer received the Internet Communication.

A broker-dealer is physically located and registered in State A. The broker-dealer has an existing client in State A who is a student finishing undergraduate studies. The client has just been accepted to medical school in State B. Which statement is TRUE about the broker-dealer contacting the client while she is in medical school in State B? A) The broker-dealer can contact the client while she is in medical school in State B without having to register in State B using the "existing customer" exemption B) The broker-dealer can contact the client while she is in medical school in State B without having to register in State B because students are considered to be residents of the State where they live with their parents; not the State where they go to school C) The broker-dealer can contact the client while she is in medical school in State B without having to register in State B because of the reciprocity agreements that all States maintain regarding registration requirements D) The broker-dealer must be registered in State B in order to contact the client while she is in medical school in State B

B) The broker-dealer can contact the client while she is in medical school in State B without having to register in State B because students are considered to be residents of the State where they live with their parents; not the State where they go to school Students are considered to be residents of the State where they live with their parents; not the State where they are going to school. Therefore, the broker-dealer is only required to be registered in State A in this example, but not in State B. Note that if the student actually became a resident of State B, such as by renting an apartment in State B, changing the mailing address to that apartment, changing her voter registration to State B and changing her driver's license to one issued in State B, then she becomes a resident of State B. But this is not where the question is going!

An existing customer of a broker-dealerregistered in State "A" is vacationing in State "B." Which statement is TRUE? A) The broker-dealer may only solicit the customer in State "B" if it has been registered in State "B" B) The broker-dealer may solicit the customer in State "B" without registering in State "B" C) The broker-dealer is prohibited from making any communication into a State unless it has a branch office in that State D) The broker-dealer must notify the Administratorin State "B" prior to any solicitation in that State

B) The broker-dealer may solicit the customer in State "B" without registering in State "B" If a broker-dealer effects a transaction in a State, unless an exemption is available, the broker-dealer must be registered in that State. One of the exemptions available covers the instance where an existing customer of a registered broker-dealer is vacationing in another State. That customer may be contacted while on vacation in the other State, without the broker-dealer being required to register in that State.

An Investment Adviser Representative has started a blog on the Internet to promote her services to interested parties. The blog discloses that the IAR is associated by DEF Advisers, an RIA registered in the State where the IAR is also registered and conducts business. Which statement is TRUE about this? A) This action is prohibited under NASAA rules because blogs can only be sponsored by RIAs, not IARs B) This action is prohibited because the RIA must approve the content of the blog and authorize its distribution C) This action is prohibited because FINRA has jurisdiction over Internet communications and FINRA approval is required D) This action is permitted because both the RIA and IAR are State-registered

B) This action is prohibited because the RIA must approve the content of the blog and authorize its distribution If an agent of a broker-dealer or an investment adviser representative wishes to publish any content on the Internet, either as a website or on a blog, the Agent or IAR: - must disclose his or her affiliation with the Broker-Dealer or Investment Advisory firm; - the Broker-Dealer or Investment Adviser (the firm) must approve the content of the Internet Communication; - the Broker-Dealer or Investment Adviser (the firm) must authorize the distribution of the Internet Communication; and - the Agent or IAR must act within the scope of authority granted by the Broker-Dealer or Investment Adviser (the firm).

An Investment Adviser Representative engages in a policy of placing block tradesfor securities that he wishes to purchase, which are allocated to both the adviser's proprietary account and the adviser's customers' accounts. Which statement is TRUE? A) This is an unethical business practice under NASAA rules because advisers are not permitted to trade for their own proprietary accounts B) This is permitted if it leads to lower commission costs and higher potential rates of return C) This is an unethical business practice because the adviser is breaching his fiduciary duty to the customer D) This is permitted if the Administrator does not have a rule prohibiting the adviser from engaging in block trading

B) This is permitted if it leads to lower commission costs and higher potential rates of return There is no prohibition on an adviser placing block trades for securities in order to lower execution costs. There is also no prohibition with allocating shares purchased between the adviser's proprietary account and customer accounts, as long as the allocation method is fair and reasonable, does not favor the adviser over the customers, and the allocation method is disclosed to the customers. This question only addresses the "lower" cost portion of the rule.

All of the following real estate investments would be defined as a "security" under the Uniform Securities Act EXCEPT: A) a condominium time share unit that will be rented for 50 weeks per year by an outside manager and will be used personally for 2 weeks per year B) a condominium apartment that will be used as a vacation home by the purchaser for 2 weeks per year and will be held open for rental by the purchaser for the remaining 50 weeks per year C) shares of a real estate investment trust that buys rental apartment complexes to generate income using third party management D) promissory notes issued by a borrower secured by real estate investments

B) a condominium apartment that will be used as a vacation home by the purchaser for 2 weeks per year and will be held open for rental by the purchaser for the remaining 50 weeks per year The most basic definition of a security is "an enterprise entered into for profit managed by a third party." Under this definition, condominium time shares that are being managed by a third party are defined as a security in many States. On the other hand, the purchase of a condominium that will be held out for rent (a business purpose), but that will be managed by the purchaser (not by a third party), is simply a real estate investment - it is not a "security." Shares of stock (in this case, in an REIT) are a security; as are bonds and notes.

A new broker-dealer has filed a registration application in the State. One of the officers listed in the application suddenly dies and another officer is appointed. This is: A) not a material event and no amendment need be filed with the Administrator B) a material event that requires a prompt amendment filing with the Administrator C) a material event that requires an amendment filing with the Administrator within 30 days of occurrence D) an event that only requires filing with the Administrator if the broker-dealer has been formed as a partnership

B) a material event that requires a *prompt* amendment filing with the Administrator The Uniform Securities Act requires that if the information contained in any document filed with the Administrator becomes inaccurate or incomplete in any material respect, the registrant shall file a correcting amendment "*promptly*." A change in the officers of the BD is a material event.

The Administrator can require all of the following regarding federal covered securities offered in a State EXCEPT: A) notice filing for the issue in the State B) registration of the issue in the State C) filing of documents relating to the issue in the State D) payment of a filing fee in the State

B) registration of the issue in the State The Administrator cannot require registration of federal covered securities in the State (unless the issuer fails to comply with State requirements for these issues). The State can require a notice filing; can require that the documents filed with the SEC for federal registration (or federal exemption) of the issue be filed in the State; and can require that a filing fee be paid to the State.

An investment adviser registered in State Y effects all of its portfolio transactions through a broker-dealer registered with the SEC and State Y. Regarding required filings from the broker-dealer in State Y, the Administrator of State Y: A) can only require the same filings as it requires from the investment adviser that does its portfolio trades through that broker-dealer B)can only require the filing of the broker-dealer's reports that are filed with the SEC C) can require the filing of any records demanded by the Administrator of State Y D) cannot require the filing of any records because of the federal supremacy of the broker-dealer filings that are required with the SEC

B)can only require the filing of the broker-dealer's reports that are filed with the SEC Broker-dealers are registered federally with the SEC under the Securities Exchange Act of 1934 and, additionally, must register in each State where they have a physical presence or where they solicit securities business. As part of the National Securities Markets Improvements Act of 1996, it was made clear that because broker-dealers are regulated at the federal level, the States cannot require anything that is already required federally. Broker-dealer recordkeeping and reporting rules are set under Section 17 of the Securities Exchange Act of 1934 - so these rules prevail. All that the State can do is ask for a copy of any record or report that the broker-dealer keeps in accordance with the 1934 Act.

Who does NOT have to be registered in the State as an agent of a broker-dealer? A) A secretary that answers the phone and who takes orders B) A trading assistant who only accepts unsolicited customer orders C) A director of the company that is not involved in sales D) An officer of the company that oversees the firm's marketing

C) A director of the company that is not involved in sales An agent is someone who is engaged in effecting securities transactions with the public. It makes no difference if the transaction is solicited or unsolicited. Thus, the individual in both Choices Aand Bmust be registered. A director of the broker-dealer that is not involved in sales is not an agent and is not required to be registered in the State as such. Note, however, that this individual is still named as an officer on the firm's State registration. An officer or director who oversees marketing is engaged in selling securities to the public and must be registered as an agent in the State.

An agent is conducting securities activities on the premises of a bank. Which statement is TRUE? A) Oral disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal B) Written disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal C) Both oral and written disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal D) This is an unethical business practice

C) Both oral and written disclosure is required that the products offered are not FDIC insured; are not deposits; and are subject to risk of loss of principal When a broker-dealer has a branch location in a bank office, any customers who wish to effect securities transactions must be told orally and in writing that securities products are not FDIC insured; are not deposits; and are subject to risk of loss of principal. In addition, at the time that an account is opened for a customer in such a location, NASAA requires that the member make reasonable efforts to get the customer's written acknowledgment of receipt of these disclosures.

An IAR who is registered only in State X conducts an investment seminar in State Y. An individual that attends the seminar likes what she hears and makes a $10,000 investment with the IA firm. This individual gets her first account statement and sees that her investment value is now $3,000. She is upset and contacts the Attorney General's office of State Y, who tells her to file a written complaint with the State X and State Y Securities Administrators. Which statement is TRUE? A) The Administrator of State Y cannot conduct an investigation of the complaint because the IAR is only registered in State X B) The Administrator of State X cannot conduct an investigation of the complaint because the IAR conducted the seminar in State Y C) Both the Administrators of State X and the Administrator of State Y can investigate the complaint D) Neither Administrator has the authority to investigate the complaint unless a court order is issued

C) Both the Administrators of State X and the Administrator of State Y can investigate the complaint Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: originates in the Administrator's State; is directed into the Administrator's State; or is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. Because the investment adviser and investment adviser representative are located in State X, that Administrator has jurisdiction. Because the customer was initially contacted in State Y, that Administrator has jurisdiction.

An Investment Adviser Representative manages the accounts of high net worth individuals, with account sizes ranging from $500,000 to $10,000,000, on a discretionary basis. The representative has been contacted by a limited partnership promoter that is offering real estate partnerships that require a minimum $50,000 investment. The promoter offers the representative an all expenses paid trip for 2 to Las Vegas, where the partnership sponsor will be holding a seminar that covers all of the details of the investment. The representative wishes to perform due diligence on the offering and believes that taking the trip is important. The representative contacts each of his best clients and discloses the fact that he is taking the trip paid by the sponsor and buys a partnership unit for each of them. Which statement is TRUE? A) The representative's actions and disclosures to his customers appear to be appropriate B) The representative has failed to give full disclosure of the conflict of interest to his customers C) The representative has not adequately determined the suitability of the investment for each of his customers D) The representative has accepted a bribe from the partnership sponsor and is subject to criminal penalties

C) The representative has not adequately determined the suitability of the investment for each of his customers The representative disclosed the fact that he was taking this all expenses paid "fact finding" trip to his customers, so this is not an issue. However, he bought a partnership unit for each of his best clients. It appears that the units were purchased without first determining the suitability of the investment for each of those clients - a major rule violation.

Under Uniform State Law, all of the following statements about an Administrative order denying or revoking registration of securities are true EXCEPT: A) the burden of proof of showing that a security is exempt is on the person claiming the exemption if the issue is registered by qualification B) an order revoking registration usually cannot be made retroactive by the Administrator C) a summary order issued by the Administrator is final and cannot be appealed D) a person cannot be found in violation of a summary order if he did not know, and in the exercise of reasonable care, could not have known, about the order

C) a summary order issued by the Administrator is final and cannot be appealed An order issued by the Administrator revoking a securities registration, can be appealed to that State's court. These orders cannot be made retroactive (with one minor technical exception involving registration by coordination). If the person who is the subject of the order never receives the order from the Administrator, then that person cannot be found in violation of the order. So if the order is mailed by the Administrator by certified mail, and the post office loses it and it is never delivered, then that person cannot be found in violation. Finally, to get the order reversed, the burden of proof is on the person claiming the exemption, not on the Administrator. (A minor note: If the Administrator wishes to deny or revoke an exemption from State registration to an issue registered by coordination, then the burden of proof shifts to the Administrator - supremacy of Federal law again, since the State accepts the SEC registration as the State filing document.)

An investment adviser personally has a short position of 10,000 shares of ABC stock. The investment adviser believes that the short ABC Corp. position would be a good investment for one of his customers who is bearish on the stock and transfers his short ABC Corp. stock position to that customer at the current market price. This action is: A) prohibited because short sales can only be effected on an up-tick B) permitted since the adviser believes that it is in the best interests of the client C) an unethical business practice unless the conflict of interest was disclosed in advance to the client and the client gave written consent D) an unethical business practice because all securities transactions for customers must be effected in the public market

C) an unethical business practice unless the conflict of interest was disclosed in advance to the client and the client gave written consent It is an unethical business practice for an investment adviser to take an opposite position to that being recommended to the customer. To close out the short position, the investment adviser is "buying" this stock that is being "sold short" by his customer. To do so, the conflict of interest must be disclosed in advance to the customer. In addition, when an adviser takes the opposite side of a recommended transaction to a client, the client must give written consent to that trade.

An agent of a broker-dealer registered in all 50 States is located in the State of Missouri, where the broker-dealer maintains a call center. The agent is only registered in the State of Missouri. A new customer that is a resident of Florida has seen one of the broker-dealer's television advertisements and calls the "800" number in the advertisement, reaching this agent. The customer states that she wants to "Buy some good stocks - what do you recommend?" Under the Uniform Securities Act, the agent: A) can recommend securities to the customer because the broker-dealer is registered in the State of Florida B)can recommend securities to the customer because the call was received in the State of Missouri where the agent is registered C) cannot recommend securities to the customer because the agent is not registered in the State of Florida D) cannot recommend securities to the customer unless the securities recommended are exempt from registration

C) cannot recommend securities to the customer because the agent is not registered in the State of Florida In order to recommend securities to a customer or to accept an unsolicited trade from a customer, both the broker-dealer and the agent must be registered in the State where the customer resides (in addition to being registered in the State where the agent resides). *Note that the unsolicited customer exemption cannot be used because this exemption only applies to registration of securities. It does not apply to registration of broker-dealers and agents*.

Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT: A) registration requirements applicable to securities offerings B) registration requirements applicable to investment advisers C) investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct D) broker-dealer capital, custody, financial responsibility and recordkeeping requirements

C) investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct the National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

An investment adviser wishes to charge a "2 and 20" management fee, consisting of a management fee equal to 2% of annual average net assets and a performance fee equal to 20% of the asset appreciation. This fee arrangement is: A) prohibited under all circumstances B) permitted only if the clients are accredited investors as defined by Regulation D of the Securities Act of 1933 C) permitted only if the clients invest at least $1 million or have a net worth, exclusive of residence, of $2.1 million D) permitted only if each client is a general partner in the venture

C) permitted only if the clients invest at least $1 million or have a net worth, exclusive of residence, of $2.1 million Investment advisers cannot charge fees based on asset appreciation under both NASAA and SEC rules. However, if the adviser limits its clientele to very wealthy investors (a client who invests at least $1 million or has a net worth, exclusive of residence, of $2.1 million), then a performance fee can be charged under SEC rules and because of "federal supremacy," NASAA rules cannot override this exemption. (Note: The dollar threshold for qualified customers is adjusted upwards for inflation every 5 years. The next adjustment is scheduled for mid-2021.)

An IAR discusses a trading strategy with one of her clients, who tells the IAR to sell her ABC stock position whenever you see an opportunity. After this conversation, the client leaves the IAR's office for a vacation. Two days later, the IAR sees that ABC stock has risen in price and believes that this is an opportune time to sell the position. The IAR should: A) not place the order and try and contact the client B) place the trade and notify the client in writing within 2 business days C) place the trade and get written discretionary authority from the customer within 10 business days D) get approval from his or her direct manager before placing the trade

C) place the trade and get written discretionary authority from the customer within 10 business days Unlike the rule for broker-dealers written by FINRA, where a written power of attorney is required prior to exercising discretion, the NASAA rule for investment advisers is that verbal discretion can be exercised, as long as the written power of attorney is obtained from the customer within 10 business days.

An agent tells a customer interested in purchasing mutual funds that "because dividends are automatically reinvested in new shares, you can always sell at a profit." This statement is: A) acceptable as long as the agent does not guarantee that there will be profits B) acceptable since it does not make exaggerated claims for the fund C) prohibited under the Act since the statement is misleading D) acceptable since mutual funds are an exempt security

C) prohibited under the Act since the statement is misleading Stating that "you can always sell at a profit" is misleading, exaggerated, and prohibited.

A registration application filed by a new investment adviser with the State Administrator details that the adviser "will solely employ contrarian indicators and other non-traditional factors, including market psychology and investor sentiment measures to select investments." Under the Uniform Securities Act: A) registration must be denied since the applicant has not demonstrated a track record using this investment methodology B) registration must be denied because the use of non-traditional indicators is not in the public interest C) registration cannot be denied unless such an order is in the public interest and the applicant is subject to statutory disqualification D) registration cannot be denied unless the Administrator makes a determination that the business of the adviser is fraudulent

C) registration cannot be denied unless such an order is in the public interest and the applicant is subject to statutory disqualification The Administrator cannot deny a registration application of a broker-dealer, investment adviser or their agents unless it is in the public interest and the applicant is subject to "statutory disqualification" as detailed in the Uniform Securities Act. The Administrator will deny registration if the applicant has: filed a misleading application, which is interpreted as a materially incomplete application or one that is misleading with respect to any material fact. willfully violated the provisions of the Act. been convicted of a misdemeanor involving any aspect of the securities business; or any felony; within the past 10 years. been enjoined by any court from engaging in or continuing to conduct any aspect of the securities business. been suspended or had its registration revoked by any State or the Securities and Exchange Commission within the past 10 years. engaged in dishonest or unethical business practices. been found to be insolvent, defined as not being able to meet obligations as they mature. been found to be unqualified due to lack of training, experience, or knowledge of the securities business. However, lack of experience alone is not sufficient to deny registration. failed to reasonably supervise subordinates. This provision applies to broker-dealers and investment advisers. This does not apply to agents. The fact that this adviser will use "non-traditional" methods to select investments has no bearing. As long as the adviser discloses the methodology used to clients, all is OK! Also note that Choice Dwould be one of the listed reasons to deny registration, but Choice Ccovers all of the possible reasons to deny registration and thus is the better choice.

The fiduciary engaged in the administration of a trust finds that, under the directions of the trust document, there is a conflict of interest relating to a proposed investment. Under the provisions of the Prudent Investor Act, the fiduciary: A) should do nothing and permit the investment to be made B) is permitted to allow the investment as long as it is made in accordance with the Prudent Investor rule C) should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment D) should not permit the investment, otherwise the fiduciary is subject to liability for breach of fiduciary responsibility

C) should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment There can be different types of conflicts of interest regarding a trust investment. The trustee cannot "self-deal" - an example of such a conflict is the trustee borrowing money personally from the trust account. This is outright prohibited. The trustee is supposed to make investments to meet the needs of the account beneficiaries. There can be conflicts between the beneficiaries' needs - and the trustee is supposed to choose investments to best meet the needs of ALLof the beneficiaries. If the document does not give enough guidance for the investments that are permitted to meet these needs where there is such a conflict, then the trustee should go to the trust grantor or settlor for specific guidance on the permitted investments and the trust document must be amended for this.

An agent is permitted to say which of the following? A) "Because I have passed the Series 63 examination, I am approved as an agent in the State" B) "Because I am registered in the State, this means that the State Administrator has approved me" C)"To be registered in the State, I had to qualify by passing the Series 63 (or Series 66) examination" D) "I am one of the few persons who has qualified for registration in the State by passing the extremely difficult Series 63 (or Series 66) examination"

C)"To be registered in the State, I had to qualify by passing the Series 63 (or Series 66) examination" As a general rule, an agent cannot state that he or she is approved by the Administrator; he or she is simply registered in the State. However, it can be stated that the agent has passed the required qualification examination (the Series 63 or 66), since this is a true statement. Choice Dis untrue - many, many persons have passed the Series 63 and Series 66 examinations - they may be hard tests, but not extremely difficult ones.

Which of the following would MOST likely be an investment adviser that is State registered? Certified Financial Planner Adviser with assets under management of $100 million Investment Company Trust Company

Certified Financial Planner A Certified Financial Planner is the type of "smaller" investment adviser that is likely to be State registered. Remember that it is only the "big guys" that are Federal covered advisers - these are advisers with $100 million or more under management and advisers to investment companies. Trust companies are excluded from the definition of an investment adviser at both the Federal and State level, since they are already regulated as depository institutions under both Federal and State law.

Registration by Coordination can be stopped by the Administrator if it is in the public interest and the: A) applicant cannot show that the registration is not incomplete in any material respect B) applicant can show that the registration is incomplete in any material respect C) Administrator cannot show that the registration is not incomplete in any material respect D) Administrator can show that the registration is incomplete in any material respect

D) Administrator can show that the registration is incomplete in any material respect *Registration by Coordination* in a State permits the applicant to coordinate an SEC registration with the registration requirement in each State. Essentially, the State accepts the SEC registration statement as the State filing document. Registration becomes effective in the State when the SEC registration is effective. In such a registration, the State Administrator can only issue a stop order if "it is in the public interest" and the Administrator can prove that the offering would be illegal in the State, is not complete, or required filing fees have not been paid (*thus, the burden of proof is on the Administrator*). On the other hand, in a *Registration by Qualification or Filing*, there is no concurrent SEC registration. The security is only being registered in the State. In such a case, the Administrator can issue a stop order "if it is in the public interest" and the applicant cannot prove that the offering would not be illegal in the State (*the burden of proof is on the applicant*).

A customer wishes to open a margin account at a broker-dealer. The customer provides all of the necessary information to open the account, but refuses to sign the margin agreement when the agent gives it to the customer. Which statement is the correct course of action to be taken? A) The firm should approve the opening of the account since the customer provided all of the necessary information B) The agent should have the customer sign a waiver, obviating the need for the customer to sign a margin agreement C) The agent should sign the customer's name to the margin agreement, since all of the necessary information has been provided by the customer D) The account cannot be opened because the customer did not sign the margin agreement

D) The account cannot be opened because the customer did not sign the margin agreement If a customer refuses to sign a margin agreement, then a margin account cannot be opened. When the agreement is signed, the customer is legally pledging the securities in the account to the broker-dealer as collateral for the margin loan made from the broker-dealer to the customer. Unless this agreement is signed, the broker-dealer cannot make the loan!

A Registered Investment Adviser that trades securities on the behalf of customers is required to keep a record of the transaction that includes all of the following information EXCEPT the name of the: A) Investment Adviser Representative (IAR) who placed the order B) broker-dealer to which the order was sent for execution C) person at the Investment Adviser who recommended the transaction D) agent at the broker-dealer who executed the transaction

D) agent at the broker-dealer who executed the transaction NASAA states that Investment Adviser order tickets must contain: Name of the person at the IA who recommended the transaction; - Name of the person who placed the order; - Date of order entry; -Name of account for which order was entered; -Name of broker-dealer or bank to which the order was sent for execution; -Whether the order was discretionary.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that covers all of the following items EXCEPT: A) the protection, backup, and recovery of books and records B) alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel C) minimization of service disruptions and client harm that could result from a significant business disruption D) announcement to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

D) announcement to the public in local newspapers and on the internet the fact that a significant business interruption has occurred NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for: The protection, backup, and recovery of books and records; Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; Office relocation in the event of temporary or permanent loss of a principal place of business; Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and Minimizing service disruptions and client harm that could result from a significant business disruption.

An investment adviser is considered to "take custody" of funds or securities from a customer if it: A) exercises discretionary authority by placing trades of securities for that customer B) accepts a check from the customer made payable to the fund custodian to buy a mutual fund C) accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D) receives quarterly management fees from the custodian by direct deduction with client consent

D) receives quarterly management fees from the custodian by direct deduction with client consent Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

An investment adviser representative is asked by his customer for a small loan. The IAR should: A) offer to co-sign a bank note with the client for the loan amount B) arrange for a loan that is collateralized by the customer's securities positions C) document the loan amount and make the loan to the customer D) refuse the customer's request

D) refuse the customer's request Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser.

A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 20 days following the effective date for an initial public offering III 3 days following the effective date for a secondary offering IV 5 days following the effective date for a secondary offering

I 10 days following the effective date for an initial public offering III 3 days following the effective date for a secondary offering A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.

Which statements are TRUE regarding investment advisory contracts under the Uniform Securities Act? I Assignment of the contract is not permitted unless the customer consents II If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment III If the investment adviser is a partnership, the death or withdrawal of a minority of the partners constitutes an assignment IV If the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time

I Assignment of the contract is not permitted unless the customer consents II If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment IV If the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time It is true that assignment of an investment advisory contract is not permitted unless the customer consents (after all, the customer hired a specific firm as the adviser for that firm's expertise; he does not want someone else to manage his funds unless he approves!). If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment. However, the death or withdrawal of a minority of the partners does not constitute an assignment. Finally, if the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time.

Which of the following statements are TRUE regarding registration requirements under the Uniform Securities Act? I Minimum net capital can be required for broker-dealers II Minimum net capital can be required for agents III Surety bond coverage can be required for broker-dealers IV Surety bond coverage can be required for agents

I Minimum net capital can be required for broker-dealers III Surety bond coverage can be required for broker-dealers IV Surety bond coverage can be required for agents There is no minimum net capital requirement for agents associated with investment advisers and broker-dealers. This is a requirement only for the broker-dealer firm or the investment adviser firm. Broker-dealers and investment advisers can be required to maintain a minimum net capital requirement; post a surety bond; and the officers of these firms can be required to pass an examination to register in that State. *Only agents* of *broker-dealers* can be required to post a *surety bond*; this is *not a requirement for investment adviser representatives*. Both agents of broker-dealers and investment adviser representatives can be required to pass an examination.

An agent of a broker-dealer wishes to create a website to solicit securities business from customers. Based on each customer's responses to questions asked, appropriate investment recommendations will be made. Which statements are TRUE? I The broker-dealer must review and approve the content of the website II The Administrator must review and approve the content of the website III The broker-dealer must be registered in each State where a customer responds to the website IV The agent must be registered in each State where a customer responds to the website

I The broker-dealer must review and approve the content of the website III The broker-dealer must be registered in each State where a customer responds to the website IV The agent must be registered in each State where a customer responds to the website If individualized offers are being made to customers via the Internet (as is the case here), then both the broker-dealer and the agent must be registered in each State where the offer is made. In addition, the broker-dealer is always responsible for the actions of its agents - so it must review and approve the content of all communications to the public made by agents. While the Administrator can require the filing of Internet websites, the Administrator does not review and approve their content.

The purchase of a security on one exchange and the simultaneous sale of the same security on another exchange is: I known as "arbitrage" II known as "churning" III considered to be a fraudulent transaction IV not considered to be a fraudulent transaction

I known as "arbitrage" IV not considered to be a fraudulent transaction Simultaneously buying a security on one exchange and selling it on another exchange is a legitimate trading technique called "arbitrage" and is performed to profit from small price differences that may arise between exchanges.

Which of the following are unethical practices by an investment adviser under the NASAA Statement of Policy? I An adviser exercising discretion under verbal authority from a customer given 5 business days ago II An adviser placing an order to sell a position that is dropping rapidly in price without discretionary authority III An adviser selling all of a security position when the customer authorized the sale of only part of the position IV An adviser selecting the best time to sell a position when the customer authorized the sale

II An adviser placing an order to sell a position that is dropping rapidly in price without discretionary authority III An adviser selling all of a security position when the customer authorized the sale of only part of the position A representative can exercise discretion over the time or price of a securities transaction without needing a discretionary authority from the customer. A representative cannot exercise discretion over the size of a trade or the security to be traded without discretionary authority from the customer, making Choice II unethical. *Verbal discretion* may be accepted from a customer under *NASAA rules for up to 10 business days*, at which point a written power of attorney must be obtained from the customer - so Choice I is permitted. Deliberately failing to follow the customer's instructions is also unethical - making Choice III unethical.

Under NASAA rules, which of following are unethical practices when recommending a mutual fund to a customer? I Recommending a letter of intent if the customer does not have the immediate funds to reach a breakpoint II Not disclosing to a customer the sales charge discount if a purchase is made at the breakpoint level III Not disclosing to a customer that dividends can be automatically reinvested without any sales charge imposed IV Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives

II Not disclosing to a customer the sales charge discount if a purchase is made at the breakpoint level IV Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives If a customer is getting "close" to the purchase amount needed to qualify for a breakpoint (a reduced sales charge), it is unethical under NASAA rules not to make the customer aware of the relevant sales charge discount on the purchase of shares in dollar amounts at or above the breakpoint. Thus, the agent must tell the customer the amount of any additional investment needed to qualify for the next breakpoint. Furthermore, the customer must be made aware of any letter of intent (LOI) feature that can be used to reduce the sales charge (the LOI gives the customer 13 months to complete the breakpoint). A way that an agent could maximize his or her compensation would be to recommend that the customer buy mutual fund shares with similar objectives in different fund families, so that the customer does not reach a breakpoint (Choice IV). This is an unethical practice. There is no requirement to make the customer aware of automatic dividend reinvestment when recommending mutual funds.

A sales representative who fails to register as an agent of a broker-dealer: I has committed a felony II has committed a misleading Act III is subject to civil liability IV is subject to criminal liability

II has committed a misleading Act III is subject to civil liability If a sales representative fails to register in a state, this is not deemed to be a serious enough offense for criminal action. This person is subject to civil liability.

Chinese Walls to stop information flow must be maintained between:

Investment Banking and each of the following: Trading, Sales and Research Trading and each of the following: Research and Sales (*NOT sales and back office*) The intent of the information barriers around investment banking is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups. The intent of the information barrier between research and trading is to stop a trading desk from getting advance knowledge of a research report that the firm will issue and trading on that information before it is publicly released. The intent of the information barrier between trading and retail sales is that if retail brokers know in advance of a broker-dealer's trading strategy, they could use the information to front-run those trades.

If an investment adviser wishes to take custody of client funds or securities:

It must notify the Administrator in writing on Form ADV that it has, or may have, custody; Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients; Prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; Account statements must be sent at least quarterly to clients; The IA must be audited annually on a surprise basis to verify customer funds and securities positions.

items would be included in the computation of an investment adviser's net capital:

Net capital is really a firm's "liquid net worth." It is liquid assets minus all liabilities. Excluded from assets that count in net capital are any intangible assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, and marketing rights. Believe it or not, an automobile used in the business or office buildings or furnishings used in the business *ARE* included in the computation if the adviser is *NOT an individual*. The question does not state whether the adviser is an individual, so we cannot assume this. All intangibles are automatically excluded, so goodwill, marketing rights and copyrights are all deducted, However, conference room furniture is included for an adviser that is a corporation or a partnership, so this is the best choice. Finally, note that if the adviser were an individual, any "personal" assets that are not readily marketable such as home, home furnishings and automobiles, ARE excluded.

Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain

Order ticket information required for investment advisers is different than that required for broker-dealers. The IA writes an order and sends it to a broker-dealer or bank for execution. -The IA must keep a record of the order as it was sent; -The record must contain the terms and conditions of the order; - name of the person at the IA who recommended the transaction; - name of the person who placed the order; - date of order entry; - name of account for which order was entered; - name of broker-dealer or bank to which the order was sent for execution; - and whether the order was discretionary. *the IA does not keep the record of the actual execution of the order - this is the responsibility of the executing broker-dealer*

Password protected websites vs non-Password protected websites:

Password protected websites are seen by a specific audience, so they are defined as *sales literature*. In contrast, a non-password-protected website is defined as *advertising*, because it is seen by the general public. The Administrator has the power to require filing of advertising and sales literature.

Which of the following is considered to be "churning"? Exchanging income fund shares for growth fund shares for a customer who has a capital gains investment objective Day trading by an agent with discretionary authority in a customer margin account where the customer has a speculative investment objective Recommending trades in a customer account with the objective of producing commissions for the agent Swapping a municipal bond for another municipal bond to obtain a capital loss deduction

Recommending trades in a customer account with the objective of producing commissions for the agent Churning is the excessive trading of a customer's account with the intention of generating commissions for the agent. Exchanging mutual fund shares for a customer (Choice A) is not churning. Day trading in a discretionary account for a customer who wishes to speculate would be churning only if the trading was considered to be excessive - so Choice Bis not churning. Performing a municipal bond tax swap for a customer (Choice D) is not churning either.

Regulation SP (Statement of Privacy):

Regulation SP (Statement of Privacy) requires that non-public customer information cannot be divulged to third parties unless the customer approves. This privacy rule applies to information obtained about a customer from the customer himself; from examination of the customer; or from observation of the customer. These are deemed to be "non-public" sources of information. It does not apply to information about a customer obtained from public sources, such as from a telephone directory.

requirements for an internet communication (a website) posted by a broker-dealer, agent, investment adviser or investment adviser representative:

Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site: "The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). The internet communication cannot be overtly promotional; The communication must be limited to the dissemination of general information on products or services The communication must include a firewall or other implemented procedure to ensure that prior to any subsequent communication with prospective clients in the State, that the broker-dealer, agent, investment adviser, or investment adviser representative are registered in the State, or are exempt or excluded from registration and the broker-dealer or investment adviser must put in a firewall or procedures that make sure that viewers of the site are not contacted by agents or investment adviser representatives to buy securities or advisory services unless the agent or IAR is appropriately registered in the State.

"dont B.L.A.T.E."

Specifically excluded from the definition of an investment adviser under the Uniform Securities Act are lawyers, accountants, teachers, and engineers who give advice about securities that is incidental to their professional practice.

An agent and her customer reside in State A, where the agent is registered. The agent is vacationing in State B, where her client also happens to be vacationing. While in State B, the agent makes an offer of securities to the client. Who has jurisdiction over the transaction? State A only State B only Both States A and B Any State that has adopted the Uniform Securities Act

State B only Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: - originates in the Administrator's State; - is directed into the Administrator's State; or - is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. In this scenario, the "vacationing" exclusion does not apply because it ONLY applies when an agent registered in another State makes an offer into a State where the customer is vacationing. It does NOT apply if both the agent and the customer are both in another State, where the offer is made. Both the agent and the customer are vacationing in State B, where the offer of securities is made. Therefore, State B has jurisdiction. The agent did not make an offer of securities from State A and the offer was not accepted in State A, so State A does not have jurisdiction in this instance.

the Administrator may revoke a registration if it is in the public good *AND* the person has violated some aspect of the Act. Registration cannot be revoked solely because it is in the public good.

The Administrator may revoke a registration if it is in the public good *AND* the person has violated some aspect of the Act. Registration cannot be revoked solely because it is in the public good.

An investment adviser wishes to borrow money on behalf of his advisory business. Which statement is TRUE? The adviser is prohibited from borrowing money The adviser may borrow the money from any customers that have free credit balances in their accounts The adviser may borrow the money from a bank The adviser may borrow the money from any customer that gives written consent

The adviser may borrow the money from a bank Investment advisers are prohibited from borrowing money from customers. They can borrow from parent companies; and they can borrow from third party lenders in an arm's length arrangement.

The financial officer of a local not-for-profit religious organization calls an agent of a broker-dealer and says that: "If you split your commission and rebate ½ of it back to our church, I will tell all of our congregants to do business with you." Which statement is TRUE? The agent can accept the offer because the church is a not-for-profit organization The agent can accept the offer because the portion of the commission rebated to the church is a charitable contribution The agent cannot accept the offer because commissions can only be split with other agents that work at the same broker-dealer The agent cannot accept the offer because a church can only receive funds through voluntary charitable contributions

The agent cannot accept the offer because commissions can only be split with other agents that work at the same broker-dealer NASAA's rule on sharing of commissions is quite clear - commissions can only be split or shared with registered agents that work at the same firm. Therefore, the agent could not split his commissions with the church.

The basic definition of an "Administrator" is a person:

The basic definition of an administrator is the person designated by the state to enforce the provisions of the Uniform Securities Act. The Administrator is typically the state securities commission or commissioner, or the secretary of state.

joint accounts rules (placing orders):

The rules for joint accounts are that orders can be entered by any single owner of the account (either to buy or sell); an order to draw a check can be made by any single owner; however any checks must be drawn to full account name - that is, they must be made payable to all of the owners of the account.

Investment advisory contracts are prohibited from basing investment adviser compensation on: a fixed percentage of assets under management a fixed percentage of profits achieved a fixed dollar annual fee any of the above choices

a fixed percentage of profits achieved Investment advisory contracts cannot allow for the adviser to be compensated based on profits or capital gains in the account. Advisers can be compensated based on a percentage of assets under management; or under a fixed fee arrangement.

Registration by Filing:

a method of registering securities in a State, this is used by "seasoned" companies that have previously registered securities with the SEC. The State allows the latest SEC filed prospectus (for a previous securities offering) to be the principal filing document in the State. Registration becomes effective on the *5th business day after filing* (but no earlier than when the SEC registration becomes effective).

Registration by Coordination:

a method of registering securities in a State, this is used by a new company that is also registering the securities with the SEC. This is a somewhat more rigorous registration method than Registration by Filing (which can only be used by "seasoned" companies). The State allows the SEC filed prospectus to be the principal filing document in the State. Registration becomes effective when the SEC registration becomes effective.

Registration by Qualification:

a method of registering securities in a State, this is used by new companies that have never previously registered securities with the State. This is the most rigorous method of registering securities, since there are no previous filings on which the Administrator can rely. Registration becomes effective when the Administrator so determines.

An agent moves from one broker-dealer to another. Notification of the change of employer must be made by the:

agent, old broker-dealer and new broker-dealer When an agent moves from one broker-dealer to another, the old broker-dealer, the new broker-dealer, and the agent must notify the Administrator.

If an investment adviser is found to be insolvent, the Administrator has the power to: I issue a cease and desist order, with or without a prior hearing, directing the investment adviser stop dealing with clients II petition the court to issue a permanent injunction against a person from engaging in the investment advisory business III make the showing required to appoint a receiver to protect the assets of customers held in custody of the investment adviser

all

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices is (are) prohibited? A) Guaranteeing a customer against loss for non-exempt securities B) Guaranteeing a customer against loss for exempt securities C) Borrowing money from a customer D) All of the above

all Agents may not personally guarantee a customer's account against loss, regardless of the securities being exempt or non-exempt. Borrowing money or securities from a customer; or lending money or securities to a customer; is a prohibited practice.

A customer opens an advisory account by depositing $3,000,000. Under Uniform State Law, which of the following fee arrangements is permitted? Annual account fee Performance fee Hourly fee All of the above

all Because the Investment Advisers Act of 1940 permits the charging of performance fees to qualified customers (those with either $1,000,000 invested or a net worth of $2,100,000), NASAA cannot prohibit the charging of a performance fee for this customer who is investing $3,000,000. (Remember that Federal law supersedes State law; in the absence of a Federal law, then only that State law applies.) An annual account fee, or an hourly fee arrangement, would always be acceptable.

Which of the following is (are) prohibited in a margin account? A customer buying a security without the intention to pay on settlement A customer selling a security without the intention to deliver on settlement A customer selling short a security that cannot be borrowed and delivered on settlement All of the above

all In any account, whether it be a cash or margin account, a customer cannot buy a security without intending to pay on settlement, and cannot sell a security without intending to deliver on settlement. Short sales can only be effected in a margin account. Selling short a security means that the security to be sold is borrowed from another customer of the broker-dealer. A short sale is not permitted unless it is first determined that the security to be sold can be borrowed and delivered by settlement.

A "person," as defined under the uniform securities Act:

can be just about anyone who has legal authority to issue or trade securities. A custodial account opened for a minor is a person (note that a minor acting on his or her own is not a "person" since a minor has no legal authority to trade securities). An adult couple is a "person" (when they open a joint account). A municipality is a person. Finally, a corporation is a person.

A surety bond requirement for registration of a broker-dealer: protects each customer against loss of principal in the event of the failure of the broker-dealer can be met by using the broker-dealer's existing fidelity bond coverage can be used by any person who has an enforceable legal claim against the broker-dealer can be met by giving the State a lien on the broker-dealer's real property in lieu of posting cash, securities, or an indemnity policy

can be used by any person who has an enforceable legal claim against the broker-dealer Broker-dealers, as a condition of registration in a State, can be required to post a surety bond. This must be posted as either cash, securities, or an indemnity policy issued by an insurance company. In the event that there is a legal action taken against the broker-dealer in the State, the bond can be used to pay any claims against the broker-dealer that are affirmed by a court of law.

Investment advisersare prohibited from doing all of the following EXCEPT: assigning a customer's contract without permission charging a retainer fee charging commissions on trades effected for the client changing partnership management without notifying clients

charging a retainer fee

Broker-dealers may charge:

commissions on recommended transactions Broker-dealers charge commissions. Investment advisers charge advisory fees. Each is a legally separate entity. Brokers do not charge advisory fees - to do so they would have to establish a separate investment adviser subsidiary that is registered with the State. Investment advisers do not charge commissions - to do so, they would have to establish a separate broker-dealer that is registered with the State.

A customer has a stated investment objective of safety of principal and a moderate level of income. The customer calls the agent, and tells the agent to buy a speculative new issue investment. The agent informs the customer that he believes that this transaction would be unsuitable. The customer says "Do it!" The agent should:

do it. If a customer specifically directs that a transaction be effected, then the agent must follow the customer's instructions. It makes no difference whether the agent believes the transaction to be suitable or not; it is the customer's account; not the agent's. Please note that the transaction could not be recommended to the customer under State law, since it is unsuitable. Also note that the firm may wish to protect itself by having the customer sign a "non-solicitation" letter before effecting such a transaction.

Churning:

excessive trading in a customer's account by a broker in order to generate commissions. Churning is a prohibited practice.

If a broker-dealer receives an unsolicited customer order to buy a security for a customer, this is a(n):

exempt transaction Unsolicited customer orders are defined as an "exempt transaction" under the Uniform Securities Act, whether the securities involved are exempt or non-exempt.

Changes to the terms of advisory contracts must be:

filed with the Administrator on Form ADV within 30 days & approved by the customer Any changes to an advisory contract are a material change that must be filed with the State Administrator within 30 days. In addition, since this is a contract between the customer and the investment adviser, both parties must agree to any changes.

The Administrator can deny, suspend or revoke registration :

if it is found that the registration application omits a material fact that would have a bearing on the registration; if the agent has intentionally delayed delivery of fully paid customer securities (this is a prohibited practice); if the agent's registration has been suspended in another State; or if the agent has not paid required registration fees.

The State Administrator is empowered, upon discovering a violation of the Uniform Securities Act, to:

issue a cease and desist order, with or without a prior hearing (but the opportunity for a hearing after the order is entered must be provided); seek a permanent injunction (from the appropriate court) against a person from engaging in the investment advisory business; and can make a showing (to a court) so that a receiver is appointed to protect the assets of customers held in custody by the investment adviser. When taking such actions, an opportunity for a hearing must be provided to the investment adviser.

The amount of commission charged to a customer to effect a securities transaction must be disclosed: prior to executing the transaction on the trade confirmation on the account statement on the Form 1099

on the trade confirmation There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade. There is no disclosure of commissions on account statements; nor is there disclosure of commissions on Form 1099s (reports of dividends and interest paid to the security holder for tax reporting).

A firm's proprietary trading desk, aware that the firm is about to publish a bearish research report on XYZ stock, takes a short position in order to profit once the report is released. This action is: permitted without restriction permitted as long as the research report is released within 48 hours of establishing the short position permitted as long as the market listing the stock is notified, in writing, of the impending research report prohibited

prohibited "Trading ahead of research" is prohibited. A member firm cannot alter its inventory position in anticipation of a research report that it is about to release. In essence, the member firm is treated as an "insider." Once the unfavorable report is released, this may cause the general public to become more bearish and sell the stock, pushing the price down. If the firm were to take a short inventory position prior to the release of the report, it could make a nice profit based on the stock's downward movement once the report is disseminated. This is prohibited

Under NASAA rules, a customer MUST sign and return the margin agreement: prior to placing the first trade in the account prior to confirmation of the first trade in the account prior to settlement of the first trade in the account promptly after the initial transaction in the account

promptly after the initial transaction in the account NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!

An individual that has not yet passed the appropriate State licensing examination for agent registration in a State would be permitted to: accept an unsolicited order from a customer make a recommendation to a customer make a cold call to a potential client report a completed trade to a customer

report a completed trade to a customer Prior to being licensed as an agent, an individual can only perform clerical functions. The individual cannot solicit potential customers, cannot make recommendations, cannot perform a suitability determination and cannot write order tickets. These are promotional activities. *What are considered to be clerical functions include the entering of orders that have already been taken from customers; reporting completed trades to customers; taking new account information (such as name, address etc.); and responding to customer questions about account items (such as "What is the current buying power in my account?"*).

The State Administrator is supervised by the:

secretary of state The State Administrator is part of the Secretary of State's office in the majority of States. Also note in some States, the State Administrator is part of the Attorney General's office, or the State Department of Corporations, Commerce, Business Services, or the State Securities Commission, none of which are offered as choices.

The State Administrator has the power to enter an order canceling the registration of any broker-dealer, agent, investment adviser or investment adviser representative if:

the Administrator finds that the registrant has gone out of business (they were supposed to notify the Administrator of this, anyway!); if the registrant has disappeared; or if the registrant is found to be insane (this would only apply to agents and IARs)! These are all pretty logical reasons for canceling that person's registration.

Exempt transactions under the Uniform Securities Act include:

trades of non-exempt securities (corporate bonds are non-exempt) with financial or institutional investors (such as Savings and Loans and Investment Companies). Unsolicited transactions are also exempt under the Act. Also remember that this exemption only applies to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt. (Solicited trades, however, are non-exempt.)

A violation of the Uniform Securities Act will NOT occur if statements made about a security are: true, but omit non-material facts true, but omit material facts untrue, but include material facts untrue, but include non-material facts

true, but omit non-material facts Untrue statements are prohibited - it makes no difference if they contain material or non-material facts. True statements are the only ones that can be made, but remember that a true statement that omits material facts is not really true - it is deceptive and misleading.

Agent, broker-dealer, investment adviser, and investment adviser representative registrations remain in effect:

until dec 31st of that year Agent, broker-dealer, investment adviser, and investment adviser representative registrations expire on December 31st of each year, unless the Administrator designates another date.