Series 63
What would be found on an order ticket?
Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order
Under the Uniform Securities Act, the definition of a broker-dealer includes
a person in the business of making trades in his own account or for the accounts of others.
Rule 501 of the federal Securities Act of 1933 defines certain investors who are capable of making investments involving higher risk than normal. The term used to describe them is
accredited investors
Form ADV Part 2B
1. Cover page 2.Educational Background and business experience 3. Disciplinary Information 4. Other business activates 5. Additional compensation beyond that paid by the client (such as a sales award or other prize); and 6.Supervision, including providing the name, title, and telephone number of the individual responsible for supervising the supervised person's advisory activities on behalf of the firm.
An investment adviser, unless one of the exceptions discussed below applies, must deliver within 120 days of the end of its fiscal year:
1. a free, updated brochure and related brochure supplements, which include or are accompanied by a summary of material changes; or 2. a summary of material changes that includes an offer to provide a copy of the updated brochure and supplements and information on how the client may obtain a copy of the brochures and supplements.
The Uniform Securities Act also prohibits certain performance fee arrangements contingent on capital gains or appreciation being part of the advisory contract. There is an exception, however, from the performance fee provisions for contracts with a qualified client defined as:
1. a natural person or company that immediately after entering into the contract has at least $1.1 million under the management of the investment adviser; or 2. a natural person or company that the IA has reason to believe that immediately before entering into the contract has a net worth exclusive of the primary residence (in the case of individuals, assets held jointly with a spouse, but no one else, can be used) in excess of $2.2 million.
If the client's case is proven, at the direction of the Administrator, the client may recover:
1. the original purchase price of the securities ("made whole"); 2. plus interest at a rate determined by the Administrator (generally referred to as the state's legal rate); 3. minus any income received while the securities were held.
Guaranteed security
The terms offer and offer to sell include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. The offeror is the person attempting to make the sale to the offeree.
Any person affected by an order of the Administrator may obtain a review of the order in an appropriate court by filing a written petition within
60 days. In general, filing an appeal does not automatically act as a stay of the penalty. The order will go into effect as issued unless the court rules otherwise.
Which of the following oral orders can be accepted from a customer without additional documentation? A)Buy 100 shares of ABC when the price is right B)Increase my position in ABC C)Buy 200 shares of computer stock D)Buy $20,000 of quality bank stocks
A Prices and time of execution do not require discretionary authority.
Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act? A)The publisher of a weekly news-magazine, sold on newsstands, that contains at least five stock recommendations per issue B)A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims C)A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price D)A broker-dealer charging a separate fee for investment advic
A Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice, as would appear to be the case here. On this examination, the term comprehensive financial planning always includes securities advice.
Which of the following may an agent determine without written discretionary authority? A)The time or price at which to enter an order B)Whether to buy or sell a particular security C)Which security to purchase D)How many shares of a particular security to purchase
A An agent must have written discretionary authority to determine which security, what action, and how many shares to purchase or sell; time or price decisions alone do not require discretionary authority.
One of the powers of the Administrator is known as acting summarily
Acting summarily means that he may order, without going through the hearing process, a postponement or suspension of a registration pending final determination of any proceeding based upon actions described above. Once the summary order is entered, the Administrator will promptly notify the applicant or registrant, as well as the employer or prospective employer if the applicant or registrant is an agent or investment adviser representative, that it has been entered and of the reasons for it. If the applicant wishes a hearing, written request must be made and, within 15 days after the receipt of the written request, the matter will be set down for hearing. If no hearing is requested and none is ordered by the Administrator, the order will remain in effect until it is modified or vacated by the Administrator.
The Uniform Securities Act grants many powers to the Administrator. Among them is the ability to inspect the records of a broker-dealer registered in the Administrator's state A)as long as not done more often than quarterly. B)during normal business hours without any prior notice. C)when in receipt of a warrant from a court of competent jurisdiction. D)during normal business hours with reasonable prior notice
B If a broker-dealer is registered in the Administrator's state, the Administrator has the authority to inspect the BD's records at any time during normal business hours. Advance notice is not required (which is why these are known as surprise inspections).
The Uniform Securities Act gives the Administrator the power to examine a broker-dealer's business records A)only after obtaining a court order. B)only after providing one week's advance notice to the broker-dealer. C)at any time, even across state lines. D)only after providing one week's advance notice or, if necessary for the protection of investors, after obtaining a court order to make an unannounced examination.
C There are no limitations on the Administrator's authority to examine a broker-dealer's records other than that the examination be held during normal business hours.
National Securities Markets Improvement Act of 1996 (NSMIA)
Congress enacted the NSMIA in 1996 to promote efficiency in capital formation in the financial markets. In effect, the act generally preempts states' blue-sky laws, eliminating the dual system of state and federal registration of certain securities and investment advisers.
Under the Uniform Securities Act, which of the following are not considered investment advisers or investment adviser representatives in this state? I. An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. II. United Trust Company of America III.An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management IV. An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state
II and IV An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an IAR. A trust company is not an investment adviser under the USA. An IA with no office in the state, that does business exclusively with other IAs located in that state, is also excluded as an IA under the USA.
Natural persons who wish to meet the qualified purchaser definition must have
Natural persons who wish to meet the qualified purchaser definition must have not less than $5 million in investments.
Civil Liabilities
Persons who sell securities or offer investment advice in violation of the USA are subject to civil liabilities (as well as possible criminal penalties). The purchaser of securities sold in violation of the act may sue the seller to recover financial loss. The purchaser can sue for recovery if the: 1.securities were sold in violation of the registration provisions of the USA; 2.sale was of an unregistered nonexempt security in violation of the registration provisions of USA; 3. the securities professional omitted or made an untrue statement of material fact during a sales presentation; 4. the agent was named along with the broker-dealer for a civil infraction; 5. the securities were sold by an agent who should have been but was not registered under the act; or 6. the securities were sold in violation of a rule or order of the securities Administrator.
Limited Registration of Canadian Broker-Dealers and Agents
Provided the following limited registration requirements are met, a broker-dealer domiciled in Canada that has no office in this state may effect transactions in securities with or for, or attempt to induce the purchase or sale of any security by: 1. a person from Canada who is temporarily resident in this state and who was already a client of the broker-dealer; or 2. a person from Canada who is a resident in this state and whose transactions are in a self-directed tax-advantaged retirement plan in Canada, of which the person is the holder or contributor. Canada's equivalent of our IRA is called a Registered Retirement Savings Plan (RRSP).
SEC Release IA-1092
SEC Release IA-1092 interprets the definition of investment adviser under the Investment Advisers Act of 1940 to include financial planners, pension consultants, and others who offer investment advice as part of their financial practices. Release IA-1092, in short, identifies as an investment adviser anyone who: 1. provides investment advice, reports, or analyses with respect to securities; 2. is in the business of providing advice or analyses; and 3. receives compensation, directly or indirectly, for these services.
So, what happens if a person who is the subject of an investigation refuses to furnish the required evidence or just ignores the subpoena? After all, the Administrator is not a police officer—she doesn't wear a badge and cannot arrest anyone. There is a legal term that describes this type of disobedience. what is term?
That term is contumacy This means that the Administrator may apply to the appropriate court in her state and ask for help. Upon application by the Administrator, the court can issue an order to the person requiring compliance with the request. Failure to obey the order of the court may be punished by the court as a contempt of court. Contempt of court can, of course, lead to jail time.
A margin account is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities using marginable securities in the account as collateral. What document is this?
The credit agreement It is the credit agreement, sometimes referred to as the margin agreement, that contains all of the terms of the loan. In addition to explaining how the interest is charged and the right of the firm to liquidate collateral if a call for additional funds is not made, the credit agreement contains the terminology authorizing the broker-dealer (BD) to use the value of the account as collateral for the margin loan made by the BD to the client. The hypothecation agreement permits the BD to pledge the client's margin securities as collateral for a loan that the BD takes out. In simple terms, there are two loans taking place: 1. The loan from the BD to the client, with the client's securities used as collateral. That is covered in the credit agreement. 2. The loan from a bank to the BD, with the client's securities used as collateral for the BD's loan. The authorization for the BD to use those securities is found in the hypothecation agreement.
Qualified Purchaser
The term qualified purchaser means an individual or a family business that has over $5 million in investments or an individual/entity that invests over $25 million on their own account or on others' behalf.
Registrant
The term registrant is used in legal circles to refer to those securities professionals (BDs, IAs, agents, and IARs) or securities issuers who are in the process of registering or who have registered with the Administrator
Solicitor
The term solicitor means any individual who, for compensation, acts on behalf of an investment adviser in referring potential clients. In most cases, solicitors must be registered as investment adviser representatives.
Effectiveness of Registration for Broker Dealers
Unless a legal proceeding is instituted or the applicant is notified that the application is incomplete, the registration of a broker-dealer, agent, investment adviser, or investment adviser representative becomes effective at noon, 30 days after the later of the date an application for licensing is filed and is complete or the date an amendment to an application is filed and is complete.
When a broker-dealer is acting as a principal in a securities transaction, it is
a contra party to the trade. A securities transaction is, in essence, a contract. One side is selling and the other is buying. Those are the two principals—the buyer and the seller. When a broker-dealer is acting as a principal in the trade, it is taking one of those roles. That means acting as a contra party (part of the contract). Acting as an agent or broker is two ways of saying the same capacity. In an agency capacity, the broker-dealer is representing someone else in the trade. Commissions are the form of compensation when acting in an agency capacity.
The term qualified client would include a natural person who has
a net worth, together with their spouse but excluding the equity in a primary residence, exceeding $2.2 million. A qualified client can meet one of two standards. Either the natural person has at least $1.1 million under the investment adviser's management or has a net worth (spouse can be included) of more than $2.2 million exclusive of the equity in a primary residence. It is the accredited investor who has the $200,000 annual income or $1 million net worth requirement.
The NASAA Model Rule on agency cross transactions requires that an investment adviser send a written disclosure document to affected clients (including such items as the total number of agency cross transactions during the period for the client and the total amount of all commissions or other remuneration the investment adviser received in connection with agency cross transactions for the client during the period) no less frequently than
annually The NASAA Model Rule requires that these disclosures regarding agency cross transactions by an investment adviser (IA) be made no less frequently than annually. Most students choose quarterly and with good reason—you've seen quarterly requirements before. For example, when an IA maintains custody of client assets, reports must be sent no less frequently than quarterly. Broker-dealers must send account statement to clients no less frequently than quarterly. When there is a new issue, the Administrator can request reports on a quarterly basis. But this is different and the rule says annually.
According to the Uniform Securities Act, the investment adviser brochure must include the business backgrounds of
each member of the investment committee or group that determines general investment advice to be given to clients. The business backgrounds of these key individuals must be included in Part 2 of Form ADV and in the disclosure brochure. The business backgrounds of other employees, affiliated broker-dealers, and institutional clients need not be included in the brochure.
On the Series 63 exam, the term solicitor is used to describe persons who refer business to
investment advisers. As found in the Uniform Securities Act, and therefore relevant to this exam, solicitors are persons who refer business to investment advisers. There is no comparable term for those referring business to broker-dealers and their agents.
Wash Trade
is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. This is done by an investor buying in one brokerage account and simultaneously selling through another. No beneficial change in ownership has occurred (because the buyer and seller are the same person), but to the marketplace, it appears that volume or price is increasing.
The statute of limitations for criminal offenses under the USA
is five years from the date of the offense. The most common criminal case involves fraud. Some students remember the five year statute of limitations from noting that fraud has five letters. If it works for you, great.
What is an Agent
it means any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. You must know that these are always individuals (natural persons), and their function is to be involved in securities sales or supervise those who do. Those who perform clerical or ministerial functions are excluded from the definition. On FINRA exams, agents are referred to as registered representatives.
Matched Order
occur when market participants agree to buy and sell securities among themselves to create the appearance of activity or trading in a security. Increased volume in a security can induce unsuspecting investors to purchase the security, thereby bidding up the price. As the price rises, participants who initiated the matched orders sell their securities at a profit.
A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer does no business in that state other than with
other broker-dealers. A broker-dealer must be registered in every state it sells or offers to sell securities unless it is excluded from the definition under the USA. If a BD has no office in a particular state and no business is done in that state other than with other BDs, registration there is not required. If the BD's only clients are institutions, the exclusion applies as well. The definition of accredited investor includes institutions, but also includes individuals reaching certain financial standards. Because the choice did not specify institutional accredited investors, the exclusion doesn't work for this BD. There is no de minimis exemption for BDs like there is for investment advisers and their representatives. We know it looks strange, but if a BD's only clients in a state where the BD does not maintain a place of business are registered IAs, the exclusion does not apply.
A broker-dealer registered in States P, S, and U has several clients in State C. If the firm does not have a place of business in State C, the firm would avoid the need to register in State C if its only clients in the state are
savings and loan associations. The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a BD in that state if its customers are exclusively institutional investors or other broker-dealers. Savings and loan associations, banks, and trust companies are part of the institutional definition. No individuals qualify, regardless of net worth or affiliation with securities firms. Although the exclusion applies when the clientele is limited to other BDs, it does not hold true when the clients are investment advisers.
The federal act that essentially eliminated the dual system of state and federal registration of certain investment advisers is
the National Securities Markets Improvement Act of 1996 It is the NSMIA, passed in 1996, that created the category of federal covered investment adviser—an adviser that is not required to register at the state level. The USA is not federal law and the Securities and Exchange Act established regulation of exchanges. There is no Dual Registration Elimination Act.
A stop order
used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement. This applies only to securities, not professionals such as broker-dealers, agents, investment advisers, and investment adviser representatives
For a investment to count as a secuirty, the court held, it must consitute
1. A investment of Money 2.In a common enterprise 3.With the expectation of profit 4.to be primary dervied from the efforts of a person other than the investor
An agent who will be representing a Canadian broker-dealer who registers under these provisions may effect transactions in securities in this state on the same basis as permitted for the broker-dealer. For the Canadian broker-dealer to register in this fashion, it must:
1. file an application in the form required by the jurisdiction where it has its principal office in Canada; 2. file a consent to service of process; 3. provide evidence that it is registered in good standing in its home jurisdiction; and be a member of an SRO or stock exchange in Canada
The four broad powers the Administrator has to enforce and administer the act in his state are to:
1. make, amend, or rescind rules and orders and require the use of specific forms; 2. conduct investigations and issue subpoenas; 3. issue cease and desist orders and seek injunctions; and 4. deny, suspend, cancel, or revoke registrations and license
What is an investment adviser
1. who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities; or 2. who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
Form ADV Part 2A
1.compensation arrangements (fees, commissions, hourly charges); 2. types of clients (individuals, institutions, pension plans); 3. type of investments recommended (equities, corporate debt, municipal securities, U.S. Treasuries, investment companies); 4. types of strategies employed (buy and hold, value, growth); 5. methods of analysis used (technical, fundamental); the consent to service of process; 6. educational and business background of those who formulate investment advice for a client and have direct client contact, as well as those who have discretionary authority over a client's assets; and 7. an audited balance sheet if the investment adviser requires or solicits substantial prepayment of fees or maintains custody
Form ADV Part 1A contains information about the IA, including:
1.location of the principal office; 2. location of books and records (if not at the principal office); 3. form of business organization (sole proprietorship, partnership, corporation); 4. type(s) of advisory activities provided (portfolio management for individuals, portfolio management for investment companies, financial planning services); 5. other business activities (broker-dealer, agent of a broker-dealer); 6. maintaining custody of customer assets and/or exercising discretion; 7. details relating to all control persons (officers, directors, partners, etc.); 8. disciplinary history; and 9. states in which the IA intends to or is already registered Part 1B asks additional questions required by state securities authorities. Federal covered advisers do not complete Part 1B.
A person who buys a security as the result of investment advice received in violation of the USA also has the right to sue. In the case of securities purchased as a result of improper investment advice, the buyer may recover:
1.the cost of the advice; 2. plus losses resulting from the advice; 3. plus all interest costs from the date of fee payment at a rate determined by the Administrator; 4. plus any reasonable attorney's fees; 5. less the amount of any income received from such advice.
If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within
15 days. When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day, and an appeal for review of an Administrator's order must be filed within 60 days.
Which of the following statements regarding discretionary accounts is true? A)The rules regarding churning of accounts do not apply to discretionary accounts. B)Most discretionary orders are unsolicited. C)An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time or price only is not considered discretionary. D)A designated supervisory person must approve discretionary orders before entry.
C An order is discretionary only if an agent selects the size of the trade, the security, or whether to buy or sell. Selecting only price and/or time does not constitute discretion. Churning rules apply to discretionary accounts, and the appropriate supervisory individual must approve order tickets after the trades, not before. By definition, discretionary orders would not be unsolicited. Unsolicited orders are those initiated by the customer and discretionary orders are placed by the securities professional having the discretionary authorization.
A broker-dealer with no place of business in a state is not defined as a broker-dealer in that state when its only clients in that state are A)an individual who meets the definition of accredited investor. B)non-profit organizations. C)registered investment companies. D)an employee benefit plan with assets of $800,000
C As long as there is no place of business in the state and the BD's only clients are those meeting the USA's definition of institutional investor, the firm is not defined as a BD in that state and registration is not required. Registered investment companies are in that list of institutions. Employee benefit plans are as well, but the minimum size is assets of at least $1 million. No individual is an institution. Although there can be exceptions, in general, a non-profit organization would not be considered an institutional investor.
While the Administrator has great power, the Uniform Securities Act does place some limitations on the office. Which of the following statements regarding those powers is not true? A)An Administrator may, by order, deny the registration of a securities professional who has been convicted of any felony within the past 10 years. B)In conducting an investigation, an Administrator can compel the testimony of witnesses. C)Investigations of serious violations must be open to the public. D)An Administrator in State A may only enforce subpoenas from State B if the alleged violation would be a violation of State A's statutes.
C Investigations of serious violations do not have to be public hearings; there can be public or private hearings. An Administrator can compel the testimony of witnesses when conducting an investigation. An Administrator in State A may enforce subpoenas from another state only if the alleged violation would also be a violation in his state. Conviction of any felony within the past 10 years is one of a number of reasons the Administrator may deny a registration.
A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true? A)The maximum contribution permitted is $3,000 annually. B)The customer may take a deduction for the amount contributed. C)The funds must be distributed by the time the grandchild reaches age 30 unless they are rolled over. D)The customer may make annual contributions until the grandson graduates from college.
C The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary reaches age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.
Which of the following persons meets the Uniform Securities Act's definition of an agent? A)Hercule, who has been hired by the local savings institution to solicit purchase of shares of the institution's new public offering B)Hugo, who has been hired by the local public utility to accept orders to purchase the company's bonds submitted by existing customers C)Henri, who has been hired by the local public utility to solicit purchases of the company's bonds from existing customers D)Hélène, who is employed by the city government to solicit city residents to purchase the newly issued library funding bond
C The securities issued by the local public utility are exempt from registration with the Administrator. However, they are not included in the list of exempt securities excluding individuals from the agent definition when their role is soliciting the sale of those securities. The Uniform Securities Act excludes from the definition of agent an individual who represents the issuer in an exempt transaction. Probably the most common exempt transaction is when the customer initiates the trade. That would be the case for Hugo, who is simply responding to customers' unsolicited orders. The exclusion also applies when representing the issuer of certain exempt securities, such as savings institutions and municipal governments. Please learn the list in your LEM.
Under the Uniform Securities Act, the Administrator may do all of the following except A)revoke a previously allowed exemption. B)issue a cease and desist order without a prior hearing. C)issue an injunction to force compliance with an Administrator's rule. D)issue a stop order to revoke the effectiveness of a registration statement.
C Administrators cannot issue injunctions, but they may petition a court to issue an injunction against certain activities. An Administrator may issue a stop order to revoke the effectiveness of a registration, issue a cease and desist order without a prior hearing, and may also revoke a previously allowed exemption.
An applicant for registration as an IAR in this state was convicted four years ago of a nonfinancially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will A)censure the investment adviser for even thinking of employing this individual. B)treat the crime as a nonfinancial felony. C)treat the crime as any felony. D)treat the crime as a nonfinancial misdemeanor.
D Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor; therefore, this individual would not be subject to statutory disqualification.
The recordkeeping rules of the Uniform Securities Act contain specific retention requirements. Among those is a stated period during which the records must be readily accessible. Readily accessible means the records are located A)at the designated office of the Administrator. B)in every branch office of the broker-dealer. C)at the SEC. D)in the broker-dealer's principal office.
D The USA defines the readily accessible location as the principal (or executive) office of the firm. Although some records are kept at branch offices, those are usually copies relating to the operations of that branch. The originals are at the principal office. Regulators (the Administrator or the SEC) do not keep records belonging to registered firms.
A consent to service of process allows the Administrator to A)ensure that the legal appeal process is expedited as a result of the Administrator's access to information. B)terminate a registrant's application. C)verify the accuracy and completeness of registration without obtaining the registrant's prior approval. D)exercise the power of attorney on behalf of the registrant.
D The consent to service of process provides the Administrator with power of attorney for registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will, nor does it empower the Administrator to verify information or expedite the registration process.
As defined in the Uniform Securities Act, every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value is A)a transaction. B)a bid. C)an offer. D)a sale.
D This is the definition of a sale. The offer precedes the sale; it is the attempt to make the sale. Once the deal is made, it is a sale. Isn't it also a transaction? Yes, it is, but on the exam, when you are faced with two possible answers that could be right, only one of them is a more complete response. In this case, a transaction could be a buy or a sell, so answering that a sale took place is more accurate.
One way that a financial institution participates in the fight against money laundering is through the filing of
FinCEN Form 112 for large cash transactions.
Form ADV
Form ADV is the official form used by investment advisers to register. It is used to register on the federal level or on the state level.
Form BD
Form BD is the official form used by broker-dealers to register. It is used to register on the federal and state level
Under the Uniform Securities Act, the term agent would include an individual who sells I. exempt securities on behalf of a broker-dealer in an exempt transaction. II. non-exempt securities on behalf of a broker-dealer in an exempt transaction. III. securities on behalf of an issuer in an exempt transaction. IV. revenue bonds as a representative of the city water authority.
I and II Anyone who sells securities on behalf of a broker-dealer is defined as an agent. Those who sell on behalf of an issuer are excluded from the definition under certain circumstances. If the transaction is exempt or the security is one of a specified group of exempt securities, such as municipal bonds (general obligation or revenue), the individual is not defined as an agent under the Uniform Securities Act.
Federal covered securities I. are exempt from registration under the Uniform Securities Act. II. are nonexempt from registration under the Uniform Securities Act. III. can be required to pay state filing fees. IV. cannot be required to pay state filing fees.
I and III Federal covered securities are exempt from registration under the USA. However, issuers of federal covered securities may be required to pay state filing fees in the states where they are sold and are subject to the antifraud provisions of the USA.
Which of the following statements regarding qualified retirement plans are true? I. Contributions are made with pretax dollars. II. Contributions are made with after-tax dollars. III. Distributions are 100% taxable. IV. Distributions are taxable only to the extent of earnings.
I and III With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
According to the Uniform Securities Act, an offer or a sale does not exist if it is I. a reclassification of the issuer's securities. II. a bona fide pledge or loan. III. an act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares. IV. any stock dividend, whether the corporation distributing the dividend is the issuer of the stock or not, if nothing of value is given by the stockholders for the dividend.
I, II, III, IV This exceptionally legal question describes four of the Uniform Securities Act's specific exclusions from the definition of offer and/or sale. Another exclusion would be a gift of nonassessable stock.
Under the Uniform Securities Act, the Administrator is required to provide which of the following in a disciplinary proceeding? I. Appropriate prior notice II. Opportunity for a hearing III. Written findings of fact and conclusions of law
I, II, and III In general, the Administrator must provide appropriate prior notice, opportunity for a hearing, and written findings of fact and conclusions of law. Even if an order is issued summarily—that is, made effective upon issue without prior notice—the registrant must be notified upon issue of the order and given the opportunity to request a hearing.
Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following activities (if performed by an agent) are considered dishonest or unethical? I. Executing a transaction in a margin account without securing an executed written margin agreement from the customer promptly after the initial transaction in the account II. Executing a transaction either with or for a customer at a price not reasonably related to the current market price III. Guaranteeing a customer against loss on securities purchased IV. Personally providing safekeeping and custodial services for clients' cash and securities
I,II,III,IV An agent may not take personal possession of clients' cash and securities. The broker-dealer, however, can provide safekeeping and custodial services. Agents must execute trades at prices related to current market prices and may not guarantee the performance of a security. An agent may execute a trade in a margin account, provided the agent receives a written margin agreement promptly after the initial trade.
Rneual date for licnese in US and Canada
January 1st for US December 1st for Canada
The time limit, or statute of limitations
for violations of the civil provisions of the USA is three years from the date of sale (or rendering of investment advice) or two years after discovering the violation, whichever occurred first.
If the seller of securities discovers that he has made a sale in violation of the USA, the seller may offer to repurchase the securities from the buyer. In this case, the seller is offering the buyer
the right of rescission. To satisfy the buyer's right of rescission, the amount paid back to the buyer must include the original purchase price and interest at a rate determined by the Administrator.
An investment adviser registered with the state who maintains custody of customer funds and securities is generally required to provide the Administrator with a surety bond in the minimum amount of $35,000. The bond provides protection to advisory clients when A)the investment adviser or one of its representatives converts customer funds for personal use. B)a customer following recommendations made by the investment adviser loses more than the fees charged for the advice. C)the investment adviser is operating at a loss. D)the Administrator in one of the states where the investment adviser does business determines that the firm is not properly registered in that state.
A A surety bond is a form of insurance policy protecting customers of an investment adviser from losses due to the IA or one of its IARs committing a criminal act, such as theft of a customer's money. It has nothing to do with losses in the market or the advisory firm losing money.
All of the following activities are considered forms of market manipulation except A)improper hypothecation. B)entering matched buy and sell orders to attract attention to the security. C)giving market quotes that can be easily misinterpreted. D)disseminating false information about a trade.
A Improper hypothecation (pledging a client's securities as collateral for a loan without the proper documents) is a prohibited business practice, but it has nothing to do with manipulating prices in the market. Stating falsehoods about trading activity, misrepresenting prices, and matched orders are examples of market manipulation.
A broker-dealer registered in State A has several clients in State Z. If the firm does not have a place of business in State Z, the firm would avoid the need to register in State Z if its only clients in the state are A)employee benefit plans with assets of at least $1 million. B)IRAs with assets of at least $1 million. C)other broker-dealers, as long as they have assets of at least $1 million. D)individuals with assets of at least $1 million.
A The Uniform Securities Act provides that a broker-dealer with no place of business in a state is not defined as a broker-dealer in that state if its customers are exclusively institutional investors or other BDs. Included in the definition of institutional investor is employee benefit plans with assets of no less than $1 million. What about the choice of other BDs? The USA makes no stipulation as to the minimum assets required of those BDs, while the choice limits it to those with assets of at least $1 million. IRAs are not employee benefit plans; they are individual plans and individuals are never included in the listing of institutional investors.
Under the Uniform Securities Act, willful violation of the act by an agent does not subject the agent to A)arbitration. B)civil liabilities. C)criminal penalties. D)action taken by the Administrator to deny, suspend, or revoke the agent's registration. Explanation
A There is no arbitration procedure in the Uniform Securities Act, such as exists with FINRA. Persons who are convicted of violating securities laws may find themselves subject to criminal penalties; civil liabilities; and suspension, denial, or revocation of registration.
To transact business in a state as an investment adviser representative, a person must A)be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs. B)be employed by a commercial bank located in the state. C)have passed the agent exam and taken no other exams. D)be registered as an agent of a brokerage house and have passed the appropriate NASAA exam for IARs
A To transact business in a state as an investment adviser representative, a person must be registered as a representative of an investment adviser and have passed either the NASAA Series 65 or Series 66 exam. One is not considered a registered IAR as a result of passing the Series 6 or 7 registered representative exam or by virtue of employment with a bank.
In 1998, NASAA promulgated a Model Rule covering the sales of securities at financial institutions. Under that rule, an advertisement by a broker-dealer would be exempt from meeting the requirements of that rule if A)it was a radio ad not exceeding 30 seconds, as long as the omission of the required disclosures would not cause the advertisement to be misleading in light of the context in which the material is presented. B)the advertisement only related to federal covered securities. C)it was distributed to a limited demographic group. D)the broker-dealer and the bank were affiliated.
A Under this Model Rule, certain disclosures must be made. They include statements that even though the investments are being sold on the premises of a financial institution (typically a bank), they are not FDIC insured, may lose money, and are not an obligation of the bank. However, an exception from those required disclosures is made in the case of a short (no longer than 30 seconds) radio advertisement, as long as there is nothing in that ad that could be construed as misleading without those disclaimers.
Termination Procedures
As is the case with the other securities professionals, unless the Administrator has commenced an investigation, withdrawal becomes effective 30 days after submission of the Form U5. Even after withdrawal, the Administrator can initiate a case against the agent for a period of one year.
Guaranteed Security
As mentioned in the beginning of this course, a guaranteed security is where a party other than the issuer guarantees the payment of principal and interest (on a debt security) or dividend (on an equity security). The important thing about that guarantee is that there is no guarantee on the performance of the investment. That is, gains cannot be part of the guarantee.
Authorized Retirement Investments (ARI) is a registered broker-dealer. ARI publishes a list of securities it approves for inclusion in IRAs. This means A)an agent for the broker-dealer can place these in clients' IRAs, knowing that the suitability requirements have been met. B)the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning. C)the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs. D)the broker-dealer has committed an unethical business practice because use of the word approved is prohibited.
B Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer (BD) creating an approved list of securities is not unethical or prohibited, as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.
An individual currently registered as an agent in State A would not have to register as an agent in State B if she A)accepted an unsolicited order from one of the broker-dealer's customers who is a resident of State B. B)solicited an order from an existing customer currently on vacation in State B. C)solicited an order from one of the broker-dealer's customers who is a resident of State B. D)solicited an order in an exempt security from one of the broker-dealer's customers who is a resident of State B.
B Individuals must be registered as agents in any state in which the firm's customer resides. Existing customers on vacation in another state do not trigger the registration requirement. When customers of the agent's broker-dealer who live in states where that agent is not registered contact the firm, that agent must turn over the customer to a properly licensed agent. It makes no difference if the sale or the security is exempt—that exemption applies only to the status of the security, not the agent.
When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client A)promptly notify the Administrator of the firm's failure to comply. B)not place any assets in the account until it is provided. C)go ahead with the account opening but refrain from trading until its receipt. D)select another broker-dealer and open the account there.
B It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance. Please note that this is only a recommendation from NASAA; it is not a rule and investors are free to choose to ignore it.
Which of the following is included in the Uniform Securities Act's definition of a person? A)A natural person since deceased B)An unincorporated association C)A minor D)A natural person deemed mentally incompetent
B For testing purposes, please remember the three nonpersons: the three incorrect choices here.
