Series 63 F3

An investment adviser will always be considered to have taken custody if the adviser: A-is the trustee for the client in a trust account B-has been given a power of attorney by the client permitting the adviser to trade the client's account Incorrect answer C. You chose this answer. C-has the authority to transfer client funds between different accounts of that client maintained at a custodian D-accepts payment for services rendered from clients

INCORRECT The best answer is A. Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have the ability to withdraw funds. Similarly, a power of attorney that permits an adviser to transfer funds between different accounts for the same client at the custodian is not taking custody because the adviser cannot withdraw funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

The Administrator examines the books and records of an investment adviser and notices that there appears to be an excessive level of trading in customer accounts. To determine if there is a violation of the Uniform Securities Act, the Administrator would: A-compare the transactions to the customers' stated investment objective(s) B-see if the adviser has taken custody of customer funds or securities C-review whether the adviser acted as the executing broker in these transactions Incorrect answer D. You chose this answer. D-ascertain the compensation received for the trades effected in these customers' accounts

INCORRECT The best answer is A. Any trades that are effected in a customer account must be suitable based on the customer's investment objective, investment experience, financial situation and financial needs. Matching the trading level in a customer's account to that customer's investment objective would be the primary determinant of whether the investment adviser has been "churning" the account (for example, a customer account that has an investment objective of "speculation and growth" would be expected to have a greater level of trading activity). Another factor would be whether the adviser acted as the executing broker in these transactions (this is not prohibited, but it must be disclosed to the customer). This would give the adviser the incentive to overtrade an account, since commissions are earned on each trade (in addition to the advisory fees earned). However, this would be a secondary consideration in the Administrator's examination.

All of the following information must be included on a customer confirmation EXCEPT: Correct answer A. You did not choose this answer. A whether the transaction was solicited or unsolicited Incorrect answer B. You chose this answer. B whether a payment for order flow was made Incorrect answer C. You did not choose this answer. C the customer name and account number Incorrect answer D. You did not choose this answer. D the price of execution

INCORRECT The best answer is A. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of commission charged and if a payment was made for order flow must be disclosed. Finally, the customer name, account number, size of the trade, and price of execution must all be on the confirmation.

An Investment Adviser falls below the minimum net capital required by the State on Monday. The IA must file a report with the Administrator no later than: Incorrect answer A. You chose this answer. A Tuesday of that week Correct answer B. You did not choose this answer. B Wednesday of that week Incorrect answer C. You did not choose this answer. C Thursday of that week Incorrect answer D. You did not choose this answer. D 10 business days after the event

INCORRECT The best answer is B. The NASAA model rule for investment adviser financial requirements (Rule 202(d)-1) states that "every adviser required to be registered in the State shall, by the close of business the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required." After transmitting such notice, each investment adviser shall file, by the close of business on the next business day, a report with the Administrator of its financial condition, including a: trial balance of all ledger accounts; statement of all client funds which are not segregated; compilation of the aggregate amount of client ledger debit balances; and statement as to the number of customer accounts. Since this IA's net capital fell below the minimum on Monday, notice to the Administrator must be given on Tuesday and the report filed on Wednesday.

A customer may be charged a higher than normal commission in a transaction that is difficult for the broker to execute: A-under no circumstances B-if the additional charge is disclosed to the customer prior to the placement of the order Incorrect answer C. You chose this answer. C-if the additional charge is disclosed to the customer no later than on the trade confirmation D-at the discretion of the broker-dealer

INCORRECT The best answer is B. Unusual charges or fees involved with a transaction must be disclosed to the customer at the time that the order is placed. Disclosure cannot be made "after the fact" - which would be the case if the fee were disclosed on the trade confirmation or on the next account statement.

An Investment Adviser Representative enters into a contract with a new client for advisory services and provides the client with a glossy copy of Form ADV Part 2 (the "Brochure") and the Brochure Supplement. When he gets back to the office, he realizes that he forgot to have the client sign that the Brochure was received. The IAR: A-is not required to do anything because the customer received the Brochure and Brochure Supplement [B]-must have the customer sign within 48 hours that the Brochure was received C-must have the customer sign the contract and give the customer 5 business days to terminate the contract without penalty D-must rescind the contract immediately

INCORRECT The best answer is C. Under NASAA Rules, the Form ADV Part 2A ("Brochure") and Part 2B ("Brochure Supplement") must be delivered to customers: no less than 48 hours prior to entering into either an oral or written advisory contract with a customer (a "2 day free look") - meaning the customer gets the Brochure and Supplement 48 hours prior to signing the contract; or alternatively the customer can sign the contract and be given the Brochure and Supplement, and then has 5 business days to terminate without penalty. In this case, because the customer did not receive the brochure 48 hours to signing the advisory contract, the customer must be given 5 business days to rescind. (Note: This is the NASAA rule - the SEC rule under the Investment Advisers Act of 1940 is NOT the same - it simply requires delivery of the Brochure and Supplement, at or prior to, entering into any advisory contract.)

The registration of a broker-dealer may be revoked for which of the following reasons? I The firm does not maintain required records II The firm does not file financial reports with the Administrator III The firm does not file advertising with the Administrator IV The firm does not file customer complaints with the Administrator Incorrect answer A. You did not choose this answer. A I and II only Incorrect answer B. You did not choose this answer. B III and IV only Correct answer C. You did not choose this answer. C I, II, III Incorrect answer D. You chose this answer. D I, II, III, IV

INCORRECT The best answer is C. A broker-dealer's registration may be revoked if the firm fails to maintain required records, fails to file financial reports with the Administrator or fails to file advertising with the Administrator, if required to do so. There is no requirement under the Uniform Securities Act for customer complaints to be filed with the Administrator.

Which of the following is an acceptable investment advisory contract provision under the Uniform Securities Act? [A]-"The investment adviser may assign the contract to another party at any time upon verbal notice" B-"The investment adviser shall receive 10% of any capital gains achieved as annual compensation" C-"The investment adviser shall receive 1% of all assets invested as annual compensation" D-"The investment adviser (if a partnership) may change its management structure without notification to customers"

INCORRECT The best answer is C. Investment advisers can receive a fee based on a percentage of all assets under management; however, they cannot be compensated based solely on capital gains achieved. Investment advisers are prohibited from assigning contracts unless written notice is given to the client. Investment advisers must advise their clients of any management changes in writing (if the adviser is a partnership).

Which of the following come under the jurisdiction of the State Administrator? I A mailing of sales literature to a customer in that State II A mailing of sales literature to a customer in a neighboring State III A television broadcast from within that State, received in that State IV A television broadcast from a neighboring State, received in that State A-I and II only B-III and IV only C-I, II, and III Incorrect answer D. You chose this answer. D-I, II, III, IV

INCORRECT The best answer is C. If an offer of securities is directed into a State, it comes under the jurisdiction of that State Administrator. Thus, Choices I and II clearly fall under the Administrator's jurisdiction. Regarding television broadcasts, the interpretation is that if the broadcast originates in the State; and is received in the State; then it falls under the jurisdiction of State Administrator in the receiving State. If the broadcast originates in another State; and is received in the State; then it does not fall under the jurisdiction of the State Administrator in the receiving State. Simplified, this means that only the Administrator in the State from which the broadcast originated has jurisdiction. Thus, Choice III is correct; and Choice IV is incorrect.

An individual who represents an issuer in selling securities of that issuer to the issuer's employees; and who does not earn a commission for this work; is defined under the Uniform Securities Act as a(n): Incorrect answer A. You did not choose this answer. A agent Incorrect answer B. You chose this answer. B broker-dealer Incorrect answer C. You did not choose this answer. C issuer Correct answer D. You did not choose this answer. D none of the above

INCORRECT The best answer is D. An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. Thus, only an individual who represents an issuer selling non-exempt securities (for example, that issuer's common stock) to the public is defined as an agent. An individual who represents an issuer in a transaction with existing employees without taking a commission is engaging in an exempt transaction (since no commission is taken) and therefore is excluded from the definition of agent. The example here is an issuer-employee that works in the pension department of the company and who places employee purchases of company shares into employee 401(k) accounts. This person also does not fall under the definition of an agent; a broker-dealer; or an issuer; so the best choice is D, none of the above.

Under the provisions of the Uniform Securities Act, the Administrator, in connection with a securities registration, is prohibited from revoking a: Incorrect answer A. You did not choose this answer. A registration prior to providing an opportunity for a hearing Correct answer B. You did not choose this answer. B registration retroactively Incorrect answer C. You did not choose this answer. C statutory exemption in a specific sale of securities to a bank Incorrect answer D. You chose this answer. D statutory exemption in a specific sale of securities to a broker-dealer

INCORRECT The best answer is B. The Administrator cannot revoke a registration retroactively; and cannot revoke a registration in the future; based upon facts known at the time that the registration was granted. The Administrator can revoke a registration as long as an opportunity for a hearing is provided within 15 days. The Administrator can modify the definition of an exempt transaction; or can deny an exempt transaction. The Administrator cannot deny the registration in a State of an exempt security, such as a U.S. Government bond or a municipal bond. The Administrator can, however, require the person selling the securities in the State to be registered.

A fee payment is NOT required to be made when a(n): Incorrect answer A. You did not choose this answer. A agent of a broker-dealer registers in a State for the first time Correct answer B. You did not choose this answer. B new broker-dealer files as a successor to a firm that has ceased operations Incorrect answer C. You did not choose this answer. C renewal registration is filed by an investment adviser by December 31st of that year Incorrect answer D. You chose this answer. D notice filing is made in the State by a Federal Covered Adviser

INCORRECT The best answer is B. If a new broker-dealer is created as a successor firm to an existing registered broker-dealer that has ceased business operations at some point during the year, then the State does not require a new filing fee to be paid. The fee is paid at the initial registration and for every annual (on December 31st) renewal registration thereafter. When the successor firm files its year-end registration renewal, the full fee for the next year must be paid.

Under NASAA recordkeeping rules for investment advisers, any advertisement, circular or other communication must be retained: I if it is circulated to 2 or more persons II if it is circulated to 10 or more persons III for a minimum of 3 years IV for a minimum of 5 years A-I and III B-I and IV Incorrect answer C. You chose this answer. C-II and III D-II and IV

INCORRECT The best answer is B. 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.

All of the following persons are defined as federal covered advisers EXCEPT: Incorrect answer A. You chose this answer. A advisers with $100,000,000 or more of assets under management Incorrect answer B. You did not choose this answer. B advisers to investment companies Correct answer C. You did not choose this answer. C advisers to sophisticated investors Incorrect answer D. You did not choose this answer. D advisers not subject to State regulation

INCORRECT The best answer is C. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These are so-called federal covered advisers; and they cannot be required to register with the State. The smaller advisers are only required to be registered at the State level. If an adviser has under $100,000,000 of assets, it must register in the State. Also note that if an adviser is NOT subject to State registration requirements, then to make sure that the IA is registered with SOMEONE, it would be defined as a "federal covered adviser." This used to be the case with New York and Wyoming, but now they both require IAs to register in the State, so this really is a moot point (but it still must be known for the exam.)

A client of a RIA dies. His attorney calls the RIA and instructs him to sell 500 shares of ABC at the market and deposit the proceeds to the client's checking account. The RIA should: Incorrect answer A. You did not choose this answer. A accept the trade verbally and follow the attorney's instructions Incorrect answer B. You chose this answer. B get a copy of a power of attorney that authorizes the attorney to act on behalf of the client Correct answer C. You did not choose this answer. C get a copy of the client's will to see what is allowed and what is not allowed Incorrect answer D. You did not choose this answer. D require the attorney to send the instructions in writing either by e-mail or fax

INCORRECT The best answer is C. An attorney for a client does not have trading authorization over that client's account, unless the client gave the attorney trading authorization in a written power of attorney. Regardless, any power of attorney dies with the client and is void. The assets in the deceased client's account must be transferred to an account for the estate before anything can be done in the account - so get a copy of the will and see if the attorney is appointed the executor over the estate. As executor, the attorney would then be permitted to effect transactions in the account.

A Registered Investment Adviser with 25 clients in State A is expanding its operations to States B, C, and D. It currently has 6 clients in State B, but has not opened an office in that State. It currently has 3 clients in State C, where a small office has been opened. It has 5 clients in State D, and is considering opening an office there. In which States is the RIA required to register? A-State A only B-States B and C only C-States A, B, and C Incorrect answer D. You chose this answer. D-States A, B, C and D

INCORRECT The best answer is C. Because the RIA has offices in States A and C, it must register in those States. The "de minimis" exemption from registration only applies to advisers with no office in the State that have 5 or fewer clients in that State. Since the adviser has 6 clients in State B, it must register in State B. The fact that it has no office there has no bearing on this. On the other hand, the "de minimis" exemption applies to State D, since the adviser has no office there and has the maximum permitted number of clients (5) before registration is required.

Which statements are TRUE regarding investment advisory contracts under the Uniform Securities Act? I Assignment of the contract is not permitted unless the customer consentsII If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignmentIII If the investment adviser is a partnership, the death or withdrawal of a minority of the partners constitutes an assignmentIV 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 Incorrect answer A. You did not choose this answer. A I only Incorrect answer B. You did not choose this answer. B II and IV only Correct answer C. You did not choose this answer. C I, II, and IV Incorrect answer D. You chose this answer. D I, II, III, IV

INCORRECT The best answer is C. 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 securities is/are EXEMPT under the Uniform Securities Act? I Savings and loan association stock II Municipal industrial revenue bonds III Bonds issued by a company listed on the Midwest (Chicago) Stock Exchange A-I and II B-I and III Incorrect answer C. You chose this answer. C-II only D-I, II, III

INCORRECT The best answer is D. Exempt securities under the Act include securities issued by Savings and Loans; municipal bonds, including industrial revenue bonds; and the securities of companies listed on stock exchanges (a "blue chip" exemption). Also note that the securities of issuers listed on the major exchanges (NYSE, AMEX (NYSE American) and NASDAQ) are now federal covered securities and cannot be required to be registered in the State.

Regarding the Administrator's ability to inspect the books and records of a broker-dealer doing business in its State, which statement is TRUE? Incorrect answer A. You did not choose this answer. A The Administrator can only inspect the books and records of a broker-dealer on a surprise basis with 1 day written notice to the broker-dealer Incorrect answer B. You did not choose this answer. B The Administrator can only inspect the books and records of a broker-dealer on a surprise basis with a court order Incorrect answer C. You chose this answer. C The Administrator can only inspect the books and records of an out-of-State broker dealer if it is concurrently inspecting the books and records of that broker-dealer in its State Correct answer D. You did not choose this answer. D The Administrator can conduct an inspection of a broker-dealer's books and records in any State and at any time

INCORRECT The best answer is D. The Administrator is empowered to inspect the books and records of an investment adviser or broker-dealer that is doing business in that State in any location (either inside or outside that State) and without giving prior notice. There is no requirement for a court order to do so.

Which order is NOT required to be retained as a record by a broker-dealer? Correct answer A. You chose this answer A Subscription order pursuant to a rights offering Incorrect answer B. You did not choose this answer. B Market-not held order Incorrect answer C. You did not choose this answer. C Unexecuted order that is subsequently canceled Incorrect answer D. You did not choose this answer. D Market order that is immediately filled

The best answer is A. A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

The Administrator can be under the obligation to file a U-6 Form if a(n): Correct answer A. You chose this answer A written complaint about an investment adviser representative is received from a customer that alleges a felony Incorrect answer B. You did not choose this answer. B oral complaint about an investment adviser representative is received from a customer that alleges a suitability violation Incorrect answer C. You did not choose this answer. C written complaint is received about an investment adviser representative from a whistleblower Incorrect answer D. You did not choose this answer. D oral complaint is received about an investment adviser representative from the representative's spouse

The best answer is A. The U-6 Form is filed by regulators when they take disciplinary or legal action against a broker-dealer, agent, investment adviser or investment adviser representative. This information goes into the CRD (Central Registration Depository) or IARD (Investment Adviser Registration Depository) and is available for viewing by the general public and customers on BrokerCheck. One of the required U-6 reports is for written (not oral) customer complaints that allege a felony like theft or embezzlement. This goes into the BrokerCheck file and is made public, with a notation that this is an allegation and is not yet proven. If it is proven, then the resulting disciplinary action is reported on the U-6 and shown in BrokerCheck; if it is dismissed, then this is reported as well so that the allegation is removed from the agent's or IAR's BrokerCheck report.

Broker-dealers may charge: A-commissions on recommended transactions B-advisory fees on recommended transactions C-both commissions and advisory fees on recommended transactions D-commissions, advisory fees and performance fees on recommended transactions

The best answer is A. 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.

Investment advisers, when opening an account for a new client are: A-required to have procedures in place to detect and reportsuspected money laundering B-not required to have procedures in place to detect and report suspected money laundering because they are not subject to bank regulation C-not required to have procedures in place to detect and report suspected money laundering because they are not subject to broker-dealer regulation D-only subject to the anti-money laundering rules if they are Federal Covered Advisers

The best answer is A. Federal anti-money laundering rules apply to all broker-dealers and investment advisers. If an adviser is only state-registered, these rules still apply.

Under the Uniform Securities Act, which of the following securities is (are) considered to have an issuer? I Collateral trust certificate II Equipment trust certificates III Fractional interests in oil and gas programs IV Certificates of interest in a gravel mining program A- I and II only B- III only C- III and IV only D- I, II, III, IV

The best answer is A. For collateral trust certificates, the "issuer" is defined as the person performing the functions of manager or depositor under the Trust agreement. For equipment trust certificates, the issuer is the person to whom the equipment is to be leased. For fractional interests in oil and gas programs; or mining titles or leases, there is not considered to be an "issuer." (Note: States have been concerned for many years about sales of highly risky oil and gas exploration deals to unsophisticated investors. The legal wording of "no issuer" is a "technicality" that makes a person offering oil and gas units to investors register in the State under the toughest method - Registration by Qualification. The easier methods cannot be used.)

Under the Uniform Securities Act, in a civil suit brought by a purchaser against a seller that is alleged to have violated the Uniform Securities Act, the burden of proof rests with the: A-Defendant B-Plaintiff C-State securities administrator D-Judge presiding over the state court hearing the case

The best answer is B. The burden of proof in any lawsuit is placed on the plaintiff - not the defendant. The buyer of the securities is the plaintiff in the suit and must prove to the satisfaction of the court, that the seller (the defendant) violated the Uniform Securities Act.

Which of the following statements are TRUE about an offer of rescission? I The offer can only be made prior to the institution of a lawsuit alleging a securities violation II The offer can only be made after the institution of a lawsuit alleging a securities violation III An offer must be made to buy back the security at the original purchase price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security IV An offer must be made to buy back the security at the current market price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security A-I and III B-I and IV C-II and III D-II and IV

The best answer is A. If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to buy back the security at the original purchase price, plus the customer must be paid interest at the legal rate in the State (6%), less any dividend or interest income received from that security. Any offer of rescission must be accepted within 30 days of the offer.

An agent of a broker-dealer publishes a web page that offers a free suitability determination to each customer that fills out a form electronically. Furthermore, if the customer agrees to open an account, the site states that: "The first 10 trades will be free." Which statements are TRUE regarding this communication? I To publish this web page, the broker-dealer must be registered in each State where a customer completes the suitability determination II To publish this web page, the broker-dealer is not required to be registered in each State where a customer completes the suitability determination III To publish this web page, the agent must be registered in each State where a customer completes the suitability determination IV To publish this web page, the agent is not required to be registered in each State where a customer completes the suitability determination A-I and III B-I and IV C-II and III D-II and IV

The best answer is A. Because this is not a "general" Internet Communication and the communication is being followed-up with specific client interaction, this is considered to be an offer of brokerage services in each State where a customer completes and submits the electronic suitability form. As such, the maker of the offer (the broker-dealer) and its agents must be registered in each State where this occurs. The fact that the first 10 trades will be free has no bearing. The broker-dealer will charge for its trades thereafter.

To get a customer to open an account, an agent tells a client that he will personally visit the client each month to explain that month's investment results. The agent fails to tell the customer that he expects to be transferred to another state in 3 months. Which statement is TRUE? A-This is a prohibited business practice B-This statement is allowed if the agent will arrange for another individual to take over the account when he is transferred C-This statement is acceptable D-This statement must be given to the customer in writing to be acceptable

The best answer is A. It is a prohibited practice to make promises to customers that the agent cannot reasonably expect to honor. In this case, the agent has promised to personally visit the customer each month to go over investment results, even though the agent is being transferred to another state in 3 months. This is a promise that cannot be kept.

A Registered Investment Adviser that is headquartered in State A has offices in States A, B and C. The IARs in each State only solicit clients in that State. The RIA must comply with the recordkeeping rules of: Correct answer A. You chose this answer A State A only Incorrect answer B. You did not choose this answer. B States A, B and C respectively covering the transactions occurring in each State Incorrect answer C. You did not choose this answer. C the most restrictive State only Incorrect answer D. You did not choose this answer. D the Securities and Exchange Commission

The best answer is A. The Uniform Securities Act provides that State-registered advisers with offices in many States only have to comply with the recordkeeping rules set forth by the Administrator of the State in which the Adviser is headquartered.

Under the Prudent Investor Rule, investment decisions must be made based primarily on: A-an overall investment strategy that balances risk and return objectives B-maximization of investment return to provide for the future needs of the beneficiary C-avoidance of losses, even at the expense of a lowered investment return D-those securities stipulated by the State's Legal List

The best answer is A. This one is common sense - the prudent investor rule states that investment decisions should be based on an overall investment strategy that seeks to balance risk and return.

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 Incorrect answer D. You chose this answer. D-The agent's actions are acceptable if the agent buys the shares back from the customer at an agreed upon price

The best answer is A. Giving fictitious quotes and then trading based on erroneous information is considered a manipulative practice subjecting the agent to civil action.

When a broker-dealer application becomes effective in a State, who is NOT required to separately register? Correct answer A. You chose this answer A Directors of the broker-dealer Incorrect answer B. You did not choose this answer. B Salespersons of the broker-dealer Incorrect answer C. You did not choose this answer. C Supervisors of salespersons of the broker-dealer Incorrect answer D. You did not choose this answer. D Managing directors that oversee marketing of broker-dealer services

The best answer is A. The officers of a broker-dealer are listed in the BD registration application and are automatically registered as "agents" in the State when the BD application becomes effective. If any one of these officers is not involved in marketing or sales, the BD may withdraw that person's registration as an agent (because only individuals involved in selling or marketing securities are required to be registered as agents in the State). Note that a "managing director" is not an officer of a broker-dealer. It is simply a name used in the brokerage industry for a high-level manager.

Unintentional violations of the Uniform Securities Act are considered to be a: Correct answer A. You chose this answer A misdemeanor subjecting that person to civil liability only Incorrect answer B. You did not choose this answer. B misdemeanor subjecting that person to civil liability and civil penalties Incorrect answer C. You did not choose this answer. C felony subjecting that person to criminal liability only Incorrect answer D. You did not choose this answer. D felony subjecting that person to criminal liability and criminal penalties

The best answer is A. Unintentional violations when offering or selling a security result in Civil Liability under the Act. There are no Civil Penalties. Willful violations of the Uniform Securities Act can be a felony and can result in Criminal Liability and Criminal Penalties.

Who would NOT have to file a U-4 registration application as an Investment Adviser Representative with the State? Correct answer A. You did not choose this answer. A A director of the investment advisory firm who does not have any sales responsibility Incorrect answer B. You chose this answer. B An outside contractor who is retained by the investment advisory firm to find new clients Incorrect answer C. You did not choose this answer. C An employee of the investment advisory firm who solely solicits potential clients in the State where the advisory firm has its principal office Incorrect answer D. You did not choose this answer. D An employee of the investment advisory firm who solely solicits potential clients in States other than the State where the advisory firm has its principal office

The best answer is A. When a broker-dealer or investment advisory firm application is filed in a State, the officers of the firm are named in the application and are automatically registered at the same time. Thus, all officers are automatically registered with the BD or IA registration. If the officer has no sales responsibility, the firm can "turn off" that registration and avoid paying annual State registration fees for that individual. Note that anyone who is hired by the IA to sell advisory services must be registered as an IAR of that firm. It makes no difference if this person is classified as an independent contractor or an IAR.

A broker-dealer is a syndicate member in a negotiated underwriting of revenue bonds issued by the City of Jacksonville, Florida Industrial Development Authority. If the issue is oversubscribed, under NASAA rules, it would be unethical for the bonds to be sold to: A-residents of Florida B-employees of the broker-dealer that are Florida residents C-institutional investors in Florida D-investors that are non-residents of Florida Explanation

The best answer is B. When a broker-dealer does a new issue offering, it must make a "bona-fide" sale to the investing public and cannot retain part of the issue for itself or for its employees. If this were permitted, the broker-dealer would have the incentive to "underprice" the issue and then buy it for itself; intending to turn around and resell it for a profit. This would be in addition to any underwriting fees earned by the broker-dealer. The issue can be sold to both Florida and non-Florida residents, as long as it is suitable. While it is typically the case that only State-residents will get the highest tax benefit if they buy an issue of that State, it is not always true. There are situations where out-of-state residents can benefit by buying bonds (for example, by buying taxable bonds of a State, and these are taxable bonds).

Collecting and verifying information provided by a customer at account opening is part of the company's policies and procedures covering: A-Privacy of Customer Information B-Anti-Money Laundering C-Cybersecurity D-Business Continuity

The best answer is B. When a customer account is opened, the customer must provide identifying information that must be verified promptly after account opening. The 4 critical pieces of information that must be verified are: Name, Street Address, Date of Birth and Social Security number. This is part of the "Know Your Customer" requirement. This is done to stop "bad actors" such as terrorists from opening accounts from which they can wire money to co-conspirators either within or outside the United States. Privacy of customer information is covered under Regulation SP. Customer account information is considered to be "private" and cannot be divulged to others unless the customer consents. A copy of the firm's privacy policy must be given to the customer at account opening and annually thereafter. Cybersecurity covers policies and procedures to stop the theft of customer account information. This includes protecting against unauthorized access and requiring strong customer password protection. Business continuity covers the procedures that the firm would follow to maintain customer access to accounts if there is a significant business disruption or if key personnel were compromised.

An application to register securities may be filed by all of the following EXCEPT a(n): Incorrect answer A. You did not choose this answer. A Broker-Dealer Correct answer B. You chose this answer B Investment Adviser Incorrect answer C. You did not choose this answer. C Issuer Incorrect answer D. You did not choose this answer. D Person on whose behalf the offering is to be made

The best answer is B. Applications to register a security in a State cannot be filed by agents; nor can they be filed by investment advisers. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).

The Administrator will deny an agent's registration application if the applicant was: Incorrect answer A. You did not choose this answer. A convicted of a driving misdemeanor 5 years ago Correct answer B. You chose this answer B convicted of a drug felony 10 years ago Incorrect answer C. You did not choose this answer. C arrested for an insider trading violation for which a trial date has been set Incorrect answer D. You did not choose this answer. D sued under the Federal Securities Acts for manipulation of Pink Sheet stocks

The best answer is B. The only misdemeanors that will cause the Administrator to deny an agent's registration are convictions involving any aspect of the securities business occurring in the past 10 years. On the other hand, any felony conviction occurring in the past 10 years will cause the Administrator to deny registration. Being arrested or sued is not a reason for denial of registration. The person who was arrested or sued must be convicted in a court of law; and the conviction must meet the tests mentioned above, in order for the Administrator to deny registration.

Registration by Coordination permits: A-simultaneous registration in different states B-simultaneous Federal and State registration C-registration for intrastate issues D-registration for issues of small dollar size

The best answer is B. Registration by Coordination permits the same information that is filed with the SEC to register a new issue under Federal law, to be filed with the State for simultaneous State registration.

A CPA who acts as a solicitor for an investment adviser, referring clients to that adviser for a fee: Incorrect answer A. You did not choose this answer. A must be registered with the SEC Correct answer B. You chose this answer B must be registered in the State Incorrect answer C. You did not choose this answer. C must be registered with both the SEC and the State Incorrect answer D. You did not choose this answer. D is not required to be registered with either the SEC or the State

The best answer is B. Investment adviser solicitors are not registered with the SEC - the SEC only requires registration of Federal Covered advisers. However, these solicitors are contacting potential customers in a given State. The State requires that the solicitor be registered to do so. The solicitor can either register as an investment adviser or can affiliate with an advisory firm and register through that firm as an investment adviser representative.

Which of the following is defined as advertising? Incorrect answer A. You did not choose this answer. A Prospectus Correct answer B. You chose this answer B Website Incorrect answer C. You did not choose this answer. C Letter to a Client Incorrect answer D. You did not choose this answer. D Internet Chat Room

The best answer is B. Non-password protected websites can be seen by the general public, so they are defined as advertising. In contrast, a password-protected website is defined as sales literature, because it is seen by a specific audience. A Letter to a client is correspondence. A Prospectus is neither advertising nor sales literature, because it is a lawyer-prepared disclosure document.

A registration statement which has been filed for a security is effective for: Incorrect answer A. You did not choose this answer. A 6 months Correct answer B. You chose this answer B 1 year Incorrect answer C. You did not choose this answer. C 2 years Incorrect answer D. You did not choose this answer. D 5 years

The best answer is B. Registration statements for securities are effective for 1 year. However, they remain in effect for as long as the security is actively offered - so if the offering takes longer, the registration is still good. If a stop order is entered, the registration ceases to be effective and sale of the issue must stop.

If a broker-dealer is registered in a State, the State Administrator would NOT be permitted to: Incorrect answer A. You did not choose this answer. A require the broker-dealer to post a surety bond with the State Correct answer B. You chose this answer B require the broker-dealer to maintain a greater net capital amount than required under Federal law Incorrect answer C. You did not choose this answer. C require the broker-dealer to file advertising with the State Administrator Incorrect answer D. You did not choose this answer. D require the officers of the broker-dealer to pass a licensing exam, even if they do not deal with customers

The best answer is B. Remember that when there is both a Federal and State law covering the same thing, the Federal law has "supremacy." Thus, the Administrator cannot compel a broker-dealer to maintain a higher level of net capital than that required under Federal law (the Securities Exchange Act of 1934 covers net capital for broker-dealers). As a condition of registration in a State, the Administrator can require the posting of a surety bond; can require the filing of advertising; and can require the officers of the broker-dealer to pass a licensing exam.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is (are) prohibited business practices? I Sharing commissions between a registered broker-dealer and an agent II Sharing gains in an account between an agent and a customer III Sharing inside information between an agent and a customer A-I only B-II and III C-I and III D-I, II, III

The best answer is B. Sharing gains in a customer account is prohibited unless very specific tests are met. To do this, a written agreement must be executed between the customer and the agent, and this must be approved by the broker-dealer. In addition, any sharing must be proportionate to the capital contributed. Sharing "inside information" is prohibited under Federal law. Sharing of commissions between a broker-dealer and an agent registered with that broker-dealer is the normal business practice in the industry, and is not prohibited.

Suits alleging criminal violations of the Uniform Securities Act must be brought within: Incorrect answer A. You did not choose this answer. A 3 years Correct answer B. You chose this answer B 5 years Incorrect answer C. You did not choose this answer. C 10 years Incorrect answer D. You did not choose this answer. D 15 years

The best answer is B. Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.

Which of the following persons would be defined as an "agent" under the Uniform Securities Act? A- April Showers, an administrative assistant in the Treasurer's Department at Rainwear Industries, who sells Rainwear common stock to Rainwear employees under Rainwear's ESOP B- John Q. Public, a municipal employee that accepts tender offers from the public for new issues of general obligation bonds being sold by New York City Correct answer C. You chose this answer C- Marvin Monet, the President of Capital Industries, who sells Capital Industries common stock to the public D- Fred Farmer, the Controller of PorkPie Products, who negotiates and sells a private placement of PorkPie stock to institutional investors

The best answer is C. An "agent" is an individual who represents a broker-dealer or issuer in effecting securities transactions. Under this definition, the President of Capital Industries offering common stock to the public is defined as an agent. The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified exempt securities. Thus, the employee of New York City offering its bonds is excluded from the definition. Also, the Act excludes from the definition of an "agent," any individual who represents an issuer offering securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans (ESOPs).

Which of the following are defined as securities under the Uniform Securities Act? I Stock options II Commodity options III Stocks IV Commodities Incorrect answer A. You did not choose this answer. A I and II only Incorrect answer B. You did not choose this answer. B III and IV only Correct answer C. You chose this answer C I, II, III Incorrect answer D. You did not choose this answer. D I, II, III, IV

The best answer is C. Stocks, stock options, and commodity options contracts are all defined as securities. Please note that physical commodities (e.g., gold, wheat, etc.), and futures contracts that trade on these commodities in such markets as the Chicago Board of Trade, are not considered to be securities.

An investment adviser representative lives in State W and works for a federal covered adviser that is headquartered in State W. The investment adviser also has customers in States X, Y and Z. The investment adviser representative has customers in States W, X and Y, but not in State Z. The investment adviser representative is required to register in: A-None of the States because the adviser is federal covered B-State W only C-States W, X, and Y only D-States W, X, Y and Z

The best answer is C. This Federal covered adviser is doing business in States W, X, Y and Z and would be required to file notice in each State where it deals with clients (there is no State registration because the IA is SEC-registered). The only exemption here is if the federal covered adviser has no office in the State and only deals with institutional customers or deals with 5 or fewer retail clients in a year. Regarding registration of the IAR in the State, because he is physically located in State W, he must register there (remember, there is state registration of IARs employed by Federal covered advisers). Because he is dealing with clients in States X and Y, he must be registered there as well. Even though the adviser has clients in State Z and would have filed notice there, this IAR does not have clients there and does not register there.

Which of the following is NOT a federal covered security? Incorrect answer A. You did not choose this answer. A An offering made over-the-counter of $250,000,000 of 10% convertible debentures of ACME Corporation, a company whose common stock is listed on the American Stock Exchange (NYSE American) Incorrect answer B. You chose this answer. B A private placement of $250,000,000 of debt backed by automobile finance company receivables sold to investment managers that are qualified purchasers Correct answer C. You did not choose this answer. C An offering of $250,000,000 of General Obligation bonds by the City of New Orleans to the residents of Louisiana Incorrect answer D. You did not choose this answer. D An offering of $250,000,000 of common shares of a mutual fund that will be offered to the general public

The best answer is C. If a security is defined as "exempt" under the Uniform Securities Act, then it is not required to be registered in each State where offered. If a security is a "federal covered security," then it cannot be required to be registered in each State where offered (though the State can require a notice filing and payment of a filing fee). Municipal bonds (Choice C) are an exempt security. The other 3 choices are federal covered securities. A federal covered security is defined as one that is: NYSE, AMEX (now renamed NYSE American) or NASDAQ listed or is a senior security of such an issuer; issued by a registered investment company; sold only to qualified investors - that is, investment managers with at least $25,000,000 under management - essentially these are federal covered advisers; or sold in exempt transactions specified under the Securities Act of 1933 such as Regulation D private placements. Note that for all 4 choices, there would be no registration required in the State. The question is looking for the distinction between an exempt security and one that is a "federal covered security."

An elderly client is visiting an Investment Adviser Representative (IAR) in the IA's office. He tells the IAR that he is going to have major surgery and is concerned about the safety of his stock certificates that he keeps at home in a small fireproof box. The Investment Adviser Representative wishes to help the client out. Which of the following should the IAR NOT do? A-Drive the client to his house to retrieve the stock certificates and then take him to the bank used by the Investment Adviser where the client rents a safe deposit box in the client's name and deposits the securities B-Ask the client for the name of his attorney and then call him to ask for his opinion of what should be done in this situation C-Drive the client to his house to retrieve the stock certificates and then take him to the Investment Adviser's bank and place the certificates in the Investment Adviser's safety deposit box, making sure to write down all of the certificate numbers and other pertinent information D- Drive the client to his house to retrieve the stock certificates and then take him to his bank where the client rents an existing safe deposit box and deposit the securities

The best answer is C. If the investment adviser were to put the certificates in its own safe deposit box, it would be taking custody, and all securities kept in custody must be kept by a qualified custodian - not by the IA. Taking the client to his bank, where he deposits the securities to his existing safe deposit box is OK. (Choice D). The client can rent his own safe deposit box at any bank - even the one used by the IA - so Choice A is OK. Calling the client's attorney for advice (Choice B) is fine as well.

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

The best answer is C. 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.

Which of the following statements are TRUE? I Password-protected websites are defined as Advertising II Password-protected websites are defined as Sales Literature III Password protected websites can be required to be filed with the Administrator IV Password protected websites cannot be required to be filed with the Administrator A-I and III B-I and IV C-II and III D-II and IV

The best answer is C. 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.

All of the following are "critical" pieces of information that must be collected from a customer to open a new account EXCEPT: A-Name B-Date of Birth C-Telephone Number D-Social Security Number

The best answer is C. There are 4 critical pieces of information that must be collected to open a new account: Customer Name Address Date of Birth Social Security Number These 4 pieces of information must be used to independently verify the customer's identity (a requirement put in place after September 11th, 2001). There is no requirement for a customer phone number, though, honestly, how would an account be opened without a way to reach the customer? Actually, there might be a situation where a phone number is not needed - for example, an account opened for a military serviceman who is stationed overseas.

A customer calls an agent to complain about the agent's handling of her account. The customer is not satisfied with the agent's response and calls the branch manager to complain. Under NASAA rules, this is: Incorrect answer A. You did not choose this answer. A defined as a complaint that must be recorded and a resolution attempted because it was directed to a manager Incorrect answer B. You did not choose this answer. B defined as a complaint that must be recorded and a resolution attempted because it was made verbally Correct answer C. You chose this answer C not defined as a complaint that must be recorded and a resolution attempted because it was made verbally Incorrect answer D. You did not choose this answer. D not defined as a complaint that must be recorded and a resolution attempted because it was not filed with the State Administrator

The best answer is C. A complaint that must be recorded and resolved is defined as one received by the broker-dealer in writing (e-mail counts here as well), A verbal complaint does not count.

A customer has previously signed a durable power of attorney giving his spouse power of attorney over his individual brokerage account. Which statements are TRUE? I The power of attorney continues upon the customer's death II The power of attorney ceases upon the customer's death III The power of attorney continues upon the customer's incapacitation IV The power of attorney ceases upon the customer's incapacitation Incorrect answer A. You did not choose this answer. A I and III Incorrect answer B. You did not choose this answer. B I and IV Correct answer C. You chose this answer C II and III Incorrect answer D. You did not choose this answer. D II and IV

The best answer is C. A durable power of attorney continues in effect if the grantor is incapacitated. A non-durable power of attorney ceases if the grantor becomes incapacitated. Note, however, that any power of attorney ceases if the grantor dies (the power of attorney dies with the customer!)

Under the Uniform Securities Act, an agent may engage in which of the following transactions? Incorrect answer A. You did not choose this answer. A Effecting transactions in a State where he is not registered, but where thebroker-dealeris registered Incorrect answer B. You did not choose this answer. B Effecting transactions in a State where the broker-dealer is not registered, but where he is registered Correct answer C. You chose this answer C Performing investment advisory services for customers as long as they are solely incidental to his work as a broker and no fees are charged Incorrect answer D. You did not choose this answer. D Soliciting orders fornon-exemptunregistered securities if he is registered in the State

The best answer is C. An agent can perform advisory services for clients as long as they are incidental to his work and no compensation is taken for the advisory work. Agents cannot effect trades in a State where they are not registered; or where their broker-dealer is not registered. Agents cannot solicit orders for unregistered non-exempt securities (but they can solicit orders for unregistered exempt securities such as U.S. Governments or Municipals).

Frederick Kruger, an investment adviser representative, has decided to leave his current firm and accept a position with another investment adviser. Freddy makes an agreement with an investment adviser representative at his old firm to handle his accounts after he leaves. The IAR at the old firm will set aside and pay 50% of any fees that he receives to Frederick for the next 3 years. Which statement is TRUE? This arrangement is: Incorrect answer A. You did not choose this answer. A acceptable because the commissions are being shared between 2 registered individuals Incorrect answer B. You did not choose this answer. B acceptable because an oral contract is binding on both parties under the Uniform Securities Act Correct answer C. You chose this answer C prohibited because commissions cannot be shared by individuals that are registered at different advisory firms Incorrect answer D. You did not choose this answer. D prohibited because sharing in commissions is not allowed under any circumstances

The best answer is C. It is an unethical practice to share commissions under NASAA rules, unless they are shared with another registered individual at the same broker-dealer; or a broker-dealer that is under common control.

If the Administrator summarily suspends a registration of an agent, which of the following statements are TRUE? I The Administrator must notify the agent promptly that the order has been enteredII The Administrator must obtain a court order prior to issuing its own orderIII An opportunity for a hearing must be given within 15 days of written requestIV The individual is prohibited from acting as an agent in that State Incorrect answer A. You did not choose this answer. A I and II only Incorrect answer B. You did not choose this answer. B III and IV only Correct answer C. You chose this answer C I, III and IV Incorrect answer D. You did not choose this answer. D I, II, III, IV

The best answer is C. The Administrator is permitted to summarily suspend a registration, which means that he or she can take this action without obtaining a court order. If the administrator does this, the agent must be notified promptly of the action and the reasons for the action; and the agent must be given the opportunity for a hearing within 15 days of the agent making a written request.

Registration of a security in a State is required if the: Incorrect answer A. You did not choose this answer. A security isexempt Incorrect answer B. You chose this answer. B security is offered in anexempt transaction Correct answer C. You did not choose this answer. C security has been registered with theSecurities and Exchange Commissionunder the1933 Act Incorrect answer D. You did not choose this answer. D offering does not fall under the definition of a security

The best answer is C. The Uniform Securities Act states that registration of a security is not required if: the issue is exempt; or the issue is non-exempt but is offered in an exempt transaction; or the issue does not fall under the definition of a security; or the issue is a federal covered security. Whether an issue has been registered with the Securities and Exchange Commission (under the Securities Act of 1933 - Federal law) has no bearing on State registration requirements. For example, if a new stock issue is registered with the SEC and quoted on the OTC Pink Open Market, then it is not a Federal covered security. It still must be registered in the State before it can be sold.

An agent of a broker-dealer is told, in confidence, by the President of a publicly held corporation, that this quarter's sales have fallen drastically. Which action should the agent take? Incorrect answer A. You did not choose this answer. A The agent should immediately disclose this information to the financial news media Incorrect answer B. You did not choose this answer. B The agent should immediately disclose this information to the firm's proprietary trading desk Correct answer C. You chose this answer C The agent should consider the information to be "confidential" and not disclose it to anyone Incorrect answer D. You did not choose this answer. D The agent should execute solicited customer orders to sell based on the information disclosed

The best answer is C. The agent has received "inside information" and cannot tell it to anyone until the news is publicly released by the issuer. If the agent or the firm traded on this information, or tells customers to trade based on this information, the insider trading rules are violated.

A broker-dealer is registered in New York and Florida. A client that lives in New York is going to retire to Florida. Her agent, who is located and registered in New York, wishes to keep servicing her account. In order to do so, the agent: Incorrect answer A. You did not choose this answer. A is not required to be registered in Florida because he is already registered in New York Incorrect answer B. You did not choose this answer. B is required to move to Florida and register there Correct answer C. You chose this answer C must register in Florida Incorrect answer D. You did not choose this answer. D must have the customer notify the Florida State Administrator

The best answer is C. When a customer moves to a new State, given that the broker-dealer is already registered in the State, then the agent who services that customer, must also be registered in the State to which the customer has moved.

A broker-dealer is attempting to increase its commission brokerage business by offering "free office space" in its Park Avenue office building to hedge funds in return for the hedge fund sending its trades through that broker-dealer. Which statement is TRUE? Incorrect answer A. You did not choose this answer. A This is an unethical practice because broker-dealers cannot offer "free services" Incorrect answer B. You did not choose this answer. B This is an unethical practice because investment advisers are not permitted to accept "free" services Incorrect answer C. You did not choose this answer. C This is a legal usage of soft dollar compensation Correct answer D. You chose this answer D This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator

The best answer is D. This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized or "free" rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

A broker-dealer is attempting to increase its commission brokerage business by offering "free office space" in its Park Avenue office building to hedge funds in return for the hedge fund sending its trades through that broker-dealer. Which statement is TRUE? Incorrect answer A. You did not choose this answer. A This is an unethical practice because broker-dealers cannot offer "free services" Incorrect answer B. You did not choose this answer. B This is an unethical practice because investment advisers are not permitted to accept "free" services Incorrect answer C. You did not choose this answer. C This is a legal usage of soft dollar compensation Correct answer D. You chose this answer D This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator

The best answer is D. This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized or "free" rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

A customer calls his agent on Friday after the markets have closed and tells him to sell his position in XYZ stock when the market opens on Monday. The customer is holding the XYZ shares at his home, but is leaving tomorrow on a 2 week vacation. The customer asks the broker to come over to his house tonight to pick up the securities. Under the Uniform Securities Act, the agent should: A-have the customer execute a stock power before taking custody B-put the stock in his personal safe deposit box over the weekend C-tell the customer to wait until he returns from the vacation to execute the trade D-not take custody of the securities but should have the customer send the securities directly to the brokerage firm by registered mail or delivery service

The best answer is D. 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.

An agent can promise a customer that he will resell a security at a price higher than that paid by the customer: A-only if agreed to in writing B-only if approved by a manager C-only if this is an isolated non-issuer transaction D-under no circumstances

The best answer is D. No guarantees can be made to customers. To do so is a prohibited practice.

If a customer of a broker-dealer fails to pay for a securities purchase by the 4th business day from trade date, the customer's account must be: I restricted II frozen III for 30 days IV for 90 days A-I and III B-I and IV C-II and III D-II and IV

The best answer is D. The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 4th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.

An application made with the Administrator for initial or renewal registration is considered to be "complete" when required: I fees are sent to the Administrator II fees are received by the Administrator III documents are sent to the Administrator IV documents are received by the Administrator A-I and III B-I and IV C-II and III D-II and IV

The best answer is D. The State will define a registration application as "complete" when the proper documents and payment are received (not sent). Remember, they want their money!!!

An agent receives confidential information of a material nature about a registered corporation. Which statements are TRUE? I The information cannot be transmitted to someone who might trade that company's stock based on that information II The information cannot be used as the basis for making trades in that company's stock III The information cannot be used to make recommendations to buy that company's stock IV The information cannot be used to make recommendations to sell that company's stock A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. If an agent receives "inside information," the information cannot be used as the basis for the agent to make trades in that stock; cannot be used to make recommendations to buy that stock; cannot be used to make recommendations to sell that stock; and cannot be transmitted to someone who is likely to trade on the information. Only when such information is made "public" may such actions occur.

An associated person is an agent of a broker-dealer registered in State A. The agent quits and goes to work for a broker-dealer located in State B. Which is NOT responsible for notifying the appropriate State Administrator? A-The broker-dealer in State A B-The agent C-The broker-dealer in State B D-The administrator of State B

The best answer is D. The broker-dealer and agent are both required to notify the Administrator of State A that the agent is no longer associated with that broker-dealer. Since the agent is associating with a broker-dealer located in State B, that broker-dealer must notify the State Administrator of State B of the agent's hiring.

A broker-dealer is offering an IPO to the public. The broker-dealer is: Incorrect answer A. You did not choose this answer. A permitted to withhold shares from sale to the public for its unregistered employees Incorrect answer B. You chose this answer. B permitted to withhold shares from sale to the public for its registered employees Incorrect answer C. You did not choose this answer. C permitted to withhold shares from sale to the public for its proprietary trading account Correct answer D. You did not choose this answer. D not permitted to withhold shares from sale to the general public

The best answer is D. Broker-dealers and their employees (whether registered or unregistered) are prohibited from buying IPO shares at the offering price in the underwriting. They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding the issue from sale to the public" with the intention of taking a "free ride" on the likely upward price movement once the issue opens for trading in the market. This is a violation called "free riding and withholding."

If a broker-dealer with no office in a State with a de minimis exemption is not registered in a State, then it may effect: Incorrect answer A. You chose this answer. A trades in municipal bonds in that State with customers in that State Incorrect answer B. You did not choose this answer. B trades in corporate bonds in that State with customers in that State Incorrect answer C. You did not choose this answer. C a trade in a municipal bond in that State with a customer that has recently moved to that State Correct answer D. You did not choose this answer. D an isolated trade in a corporate bond in that State with a customer in that State

The best answer is D. If a broker-dealer with no office in a State is not registered in a State, then it cannot effect securities transactions in that State - it makes no difference if the securities involved are exempt (such as municipal bonds) or non-exempt (such as common stock). Thus, Choices A and B are incorrect. If the broker-dealer is contacting a customer who is temporarily vacationing in a State in which the broker-dealer is not registered, this is OK. The exclusion does not apply when an existing customer has moved to another State, only if they are vacationing there. Thus Choice C is incorrect. Choice D is only correct if that State has adopted a "de minimis" exemption for broker-dealers (some States have done this, others have not). Most States that have "de minimis" exemptions typically allow up to 3 clients in the State for a non-resident broker-dealer and that broker-dealer is not required to be registered in the State. Thus, Choice D is a true statement, since this State has a "de minimis" exemption.

Investment advisers may be formed as: I PartnershipsII CorporationsIII Associations Incorrect answer A. You did not choose this answer. A I only Incorrect answer B. You did not choose this answer. B II only Incorrect answer C. You did not choose this answer. C III only Correct answer D. You chose this answer D I, II, III

The best answer is D. Legally, an investment adviser is a "person," which is any legal operating entity. Advisers can be formed as corporations, partnerships, associations, etc., since these are all legal "persons" with authority to operate in a State. Reviewing All Questions

An investment adviser prepares an advertisement that will be used in newspapers in a large city. Under NASAA rules, the advertisement would be permitted to contain a(n) Incorrect answer A. You did not choose this answer. A testimonial from a famous client of the firm Incorrect answer B. You did not choose this answer. B offer of free research given to any customer that signs an investment contract Incorrect answer C. You did not choose this answer. C listing of the firm's "Top 10 Picks" showing performance over the past year Correct answer D. You chose this answer D a toll-free number to call for more information

The best answer is D. The NASAA rule on Investment Adviser advertising is similar to the SEC, with some key differences. IA Advertising: cannot contain false, untrue or misleading statements; cannot contain a testimonial (note, in contrast that under federal law, both broker-dealers and federal covered advisers can include testimonials in advertising as long as it is disclosed if it was paid); cannot state that any report or research will be provided for free unless this is offered without condition; can include a list of recommendations made with their performance as long as all recommendations over that period are included, along with the market price at the time of the recommendation and the current price of the security. This list cannot be deliberately selective. Note that there is no restriction on the offer of free services, as long as they are truly "free" and not conditioned on making a purchase or trade.

If a broker-dealer's net capital falls below the minimum requirement for registration in a State, the Administrator has the power to: Incorrect answer A. You did not choose this answer. A liquidate the assets of the firm and distribute the proceeds to the firm's customers Incorrect answer B. You did not choose this answer. B petition a court of law to appoint SIPC as the trustee managing the distribution of the firm's assets Incorrect answer C. You chose this answer. C freeze the assets of the firm Correct answer D. You did not choose this answer. D make a proper showing to a court of law to appoint a receiver over the firm's assets

The best answer is D. The Uniform Securities Act gives the Administrator the power to bring an action in a court of law to enforce compliance with the Act. A broker-dealer that does not maintain minimum net capital is not in compliance. The Administrator must make a showing to a court of law (that is, make the case in front of a judge) that the firm is in violation of State law and petition the court to appoint a receiver in the bankruptcy of the broker-dealer

Which of the following information MUST be included on an investment adviser's registration application under the Uniform Securities Act? I Administrative orders entered against persons associated with the investment adviserII Misdemeanor securities convictions of persons associated with the investment adviserIII Felony securities convictions of persons associated with the investment adviser Incorrect answer A. You did not choose this answer. A I only Incorrect answer B. You did not choose this answer. B III only Incorrect answer C. You did not choose this answer. C I and II only Correct answer D. You chose this answer D I, II, III

The best answer is D. Under the Uniform Securities Act, the registration applications of persons associated with the investment adviser must disclose any administrative orders entered against them by a State Administrator (e.g., suspension or revocation of a registration); and must disclose any prior misdemeanor convictions for securities or "money" related offenses; and any felony convictions.