Series 63 Mastery Exam

All of the following are included in the definition of person under the Uniform Securities Act EXCEPT a deceased individual an unincorporated association a political subdivision the custodian for a minor

a deceased individual A minor, but not the custodian, a deceased individual, and an individual whom the court has deemed incompetent are not persons under the USA. Natural persons and legal entities are persons under the USA. 1.1

Unlike broker-dealers, investment advisers have a legal obligation to place their client's interests ahead of their own. This is due to -the fiduciary relationship existing between the investment adviser and client -the charging of fees rather than commissions -the fact that most investment advisers manage larger accounts than broker-dealers -the requirements of the Dodd-Frank Act of 2010

-the fiduciary relationship existing between the investment adviser and client Investment advisers are considered fiduciaries; broker-dealers and their agents are not. Fiduciaries are legally required to place their client's interests ahead of their own while broker-dealers and their agents are only required to meet a suitability standard. 4.1

Which of the following persons, natural or corporate, fall under the definition of a broker-dealer under the Uniform Securities Act? -A corporation that sells interests in various oil and gas limited partnerships to qualified investors -A properly registered agent who regularly sells securities in his own account and for the account of his employer -An industrial corporation registered with the SEC that proposes to issue shares to the public -A credit union that offers shares to its public customers

A corporation that sells interests in various oil and gas limited partnerships to qualified investors The USA's definition of broker-dealer includes any company that offers securities (oil and gas limited partnership interests are securities) to the public in a state. Issuers, credit unions, and agents are all excluded from the definition of broker-dealer. 1.2

Which of the following is an issuer transaction? -Adam inherited securities of the XYZ Corporation from his uncle who, as a founder of the company, had received the shares directly from the company. -Adam sold the securities he had inherited from his uncle to his neighbor at the market price. No commissions were charged. -Adam's uncle, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation 10 years after its founding. -Adam purchased shares in XYZ Corporation in an over-the-counter transaction.

Adam's uncle, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation 10 years after its founding. Purchasing shares directly from the corporation that issued them is an issuer transaction. 2.1

An agent is registered with XYZ Discount Brokers, a wholly owned subsidiary of the XYZ Bank Holding Company. The holding company also owns XYZ Capital Markets, a full service broker-dealer. This agent would NOT be permitted to split commissions with which of the following? -An agent registered with XYZ Capital Markets -An agent registered with Big Capital, an independent broker-dealer in the state -Another agent registered with XYZ Discount Brokers -Her principal at XYZ Discount Brokers .

An agent registered with Big Capital, an independent broker-dealer in the state The USA permits the splitting of commissions among agents of the same broker-dealer or with an agent employed by an affiliate company controlled by the same parent company, such as XYZ Bank Holding Company. Her principal is also registered as an agent

Which of the following falls under the Uniform Securities Act's definition of "agent"? -An analyst for a broker-dealer who maintains a limited retail customer base to devote most of her time to research -An individual employed by an issuer -A sales assistant of an agent who is responsible for mailing trade confirmations to the agent's clients -A broker-dealer selling nonexempt securities to its customers

An analyst for a broker-dealer who maintains a limited retail customer base to devote most of her time to research Regardless of the primary function of a broker-dealer employee, if the employee engages in sales activity, that employee must be registered as an agent. 1.3

Which of the following transactions would NOT be exempt from the sales literature and advertising filing requirements of the Uniform Securities Act? -A broker-dealer sells bonds to an investment company. -On an unsolicited basis, a client calls his agent to purchase municipal bonds. -A broker-dealer conducts a seminar at which sales are made of fixed annuities. -An individual employed by a broker-dealer calls a client to encourage her to purchase U.S. Treasury bonds.

An individual employed by a broker-dealer calls a client to encourage her to purchase U.S. Treasury bonds. When an individual calls noninstitutional clients to purchase shares in publicly traded securities, the transaction does not qualify as exempt under the USA, even if the securities themselves are exempt. Sales to investment companies and unsolicited orders are exempt transactions, while fixed annuities are not securities. 2.3

If an individual files his first application for registration as an agent in the state in late October, the agent's license will likely expire -December 31 of the following year -on every anniversary date of the initial registration -automatically within 30 days after the withdrawal of registration if the state securities Administrator has initiated proceedings against the registrant -December 31 of the same year

December 31 of the same year An agent registration will expire on December 31 each year unless renewed. There is no exception for initial registrations. 1.3

An Administrator may issue a stop order suspending the effectiveness of a registration statement if it is in the public interest and which of the following occurs? I. It is determined that the Administrator of another state has issued a stop order relating to this issue. II. The issuer has accidentally neglected to pay the appropriate fees. III. The issuer reports a loss for the previous quarter.

I and II Failure to pay fees or subject to a stop order from another regulatory agency would constitute reason for an Administrator to suspend

The powers granted to the Administrator under the Uniform Securities Act permit the Administrator to vacate or modify a securities registration stop order I. if it appears that the public interest is such that the issue will be completely sold II. when the conditions that created the issuance of the order have changed III. if it is in the public interest IV. when registration has been granted by the SEC

II and III A stop order is used by the Administrator to halt a securities registration. If the conditions that led him to issue the stop no longer exist and, as always, the decision is in the public interest, the stop order can be vacated (legalese for removed) or modified. 3.2

Under the Uniform Securities Act, the definition of sale includes I. bona fide gifts of securities II. giving a security as a bonus with any purchase III. exercising a right to convert 1 security into another IV. preliminary agreements between issuers and underwriters

II and III Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale. 3.1

Registered agents employed with a broker-dealer registered in State A regularly mail sales material to 4 clients in State B. The State A broker-dealer I. need not register in State B until it has 5 or more clients in State B II. must be registered in State A III. must be registered in State B IV. must register in all states in which it receives any mail from clients

II and III The firm would be required to be registered in both State A and State B and is required to be registered only in the state to which it directs mail and not states from which mail is received. No de minimis exemption similar to the one for investment advisers is available for broker-dealers. 1.2

Company A, a blue chip with a AAA rating, has a wholly owned subsidiary, Company B. Because Company B is a relatively new operation, it has not yet developed a strong credit history. Needing to borrow additional funds for long-term capital investment, but wanting to keep interest costs to a minimum, what steps might Company B take? Borrow from the bank that Company A uses. Issue common stock Invest in U.S. Treasury bills Issue a bond guaranteed by Company A

Issue a bond guaranteed by Company A This would be an example of a guaranteed security. That is, the payment of principal and interest is guaranteed by an entity other than the issuer. Because the question says the need is long-term, issuing a bond is preferable to borrowing from a bank and nothing in the question or answer choice says anything about Company A co-signing on the loan. Because the question refers to borrowing, the only correct answer would be something involving a debt and common stock is equity, not debt. 4.3

First Securities of New Jersey, Inc., is a broker-dealer that has its only offices in New Jersey, where most of its clients reside. First Securities also has more than 30 customers living in New York State. Many of its New York State customers vacation for 3 or 4 months during the winter in Florida. First Securities is a broker-dealer required to be registered in New York and New Jersey New York New Jersey and Florida New York, New Jersey, and Florida

New York and New Jersey Because First Securities of New Jersey's clients only vacation or maintain a temporary presence in Florida, the firm is excluded from the definition of a broker-dealer and not required to register in Florida. 1.2

Which of the following statements regarding withdrawal of registration by broker-dealers is NOT true? -Once a broker-dealer withdraws its registration, it may not re-register in the future. -Broker-dealers may not withdraw their registrations if the state securities Administrator has a revocation proceeding in process. -Withdrawals of registration must be in writing. -Withdrawal of registration is generally effective 30 days after written notification.

Once a broker-dealer withdraws its registration, it may not re-register in the future A broker-dealer may not withdraw its registration if it is in a registration revocation process. Broker-dealers must give a withdrawal notice in writing, which becomes effective within 30 days. A broker-dealer in good standing is not prohibited from re-registering with a state at any point in the future if all the appropriate requirements are met, including the payment of a registration fee. 1.2

Your client has been saving for the purchase of a home. He calls to tell you that his bank CD matured. The client plans to purchase the home within the next 9-12 months but may need extra money for the down payment. Which of the following would be the most suitable recommendation? Large-cap stock Growth stock Public utility stock paying liberal dividends Treasury bills

Treasury bills When a customer needs access to funds within a short period of time, his primary consideration is liquidity. The most suitable investment recommendation for this client is U.S. Treasury bills: they are highly liquid and safe. In addition, recommending investments in stocks that carry considerable risk to a client who traditionally purchases bank CDs may not meet the client's nonfinancial considerations. 5.2

For purposes of state regulation, broker-dealers are defined in the Uniform Securities Act to include -an agent conducting principal-only transactions with major financial institutions -a trust company servicing accounts in a fiduciary capacity -an agent of an issuer who receives commissions for the sale of the issuer's securities -a person in the business of conducting securities transactions for its own account or for the account of others

a person in the business of conducting securities transactions for its own account or for the account of others The USA excludes an agent from the definition of a broker-dealer. Financial institutions, like trust companies, are not included in the definition of a broker-dealer. Only persons who are in the business of conducting securities transactions for the accounts of others or the firm are defined as broker-dealers and required to register. 1.2

Protecting the interest of your client is of primary concern to the regulators. Therefore, industry rules required agents to disclose to their clients the highest education level reached their grade on any securities licensing exams taken their home address any potential conflicts of interest

any potential conflicts of interest Potential conflicts of interest must always be disclosed. An agent could share the other information with clients, but is under no obligation to do so. 4.1

A person applying for an initial registration as an agent might be asked to provide all of the following EXCEPT fingerprints a consent to service of process citizenship information proposed method of doing business

fingerprints Unlike FINRA rules, the USA does not require fingerprints for new registrants. 1.2

The filing of a Currency Transaction Report (CTR) would be required when an individual -hands over $10,500 in cash and has the bank wire the money to an account in another bank -deposits a personal check in the amount of $11,000 -purchases more than $10,000 of securities and makes payment with a personal check -rolls over the proceeds of a maturing CD of $15,000

hands over $10,500 in cash and has the bank wire the money to an account in another bank A CTR must be filed whenever there is a cash transaction of more than $10,000. 5.7

In order to be in compliance with the Uniform Securities Act, an investment advisory contract must comply with all of the following EXCEPT be in writing specify the method of fee computation provide for annual renewal describe what, if any, are the provisions for a refund in the event of early contract termination

provide for annual renewal There is no specified term for advisory contracts in the USA. 4.3

Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? -Rent-free use of unused space in the broker-dealer's office -Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements -Clearance and settlement services provided by the broker-dealer -Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers

-Clearance and settlement services provided by the broker-dealer Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service. 5.5

Which two of the following statements regarding customer accounts are correct? I. Margin account agreements must be signed before the first trade in the account. II. Margin account agreements must be signed promptly after the first trade in the account. III. The option account agreement must be returned by the client before the first trade in the account. IV. The option account agreement must be returned by the client within 15 days of the account being approved.

II and IV Don't ask why, but in both cases, trading can commence before the agreements are signed and returned. In the case of the margin account, promptly after is the time and for the options account, within 15 days. 4.4

The term "person", as defined in the Uniform Securities Act, would exclude all of the following EXCEPT a minor a guardian for an individual declared mentally incompetent an individual declared mentally incompetent a deceased individual

a guardian for an individual declared mentally incompetent There are three non-persons in the act: minors, deceased individuals and those who have declared legally incompetent. 1.1

In which of the following situations is an agent most likely to be in violation of the Uniform Securities Act? -An agent, acting on behalf of his clients, purchases shares in an oversubscribed initial public offering -A customer instructs an agent to purchase shares in ABC Company, a company the agent knows is experiencing financial difficulty. The agent purchases XYZ stock, a financially sound company, instead. -The agent registers in several states in which he has no clients -An agent suggests that a client with a short-term financial need borrows from his margin account held at the brokerdealer

-A customer instructs an agent to purchase shares in ABC Company, a company the agent knows is experiencing financial difficulty. The agent purchases XYZ stock, a financially sound company, instead. Failure to follow a customer's instructions, even if it is in the client's best interest, is a violation of USA. 5.2

Which of the following activities regarding the use of material facts is prohibited? -A full discussion of a material fact may be omitted in a sales discussion if the agent clearly references a discussion of the fact in the prospectus. -A material fact is deliberately omitted in a sales presentation because it was publicly disclosed 4 years ago. -In the absence of specific guidance from her supervisor, an agent is responsible for determining what is and what is not a material fact. -An agent declines to reveal material, nonpublic information provided to him in confidence by a senior officer of the firm.

-A material fact is deliberately omitted in a sales presentation because it was publicly disclosed 4 years ago. The fact that material information was publicly disclosed in the past does not release the agent from ensuring that it is disclosed to the client. The ultimate responsibility of disclosure belongs to the agent making a recommendation. She must make a determination regarding what information is material in order for an investor to make an informed decision. An agent may not reveal material, nonpublic information provided to him in confidence. 5.1

Flashpoint Securities, Inc., (FSI) is a registered broker-dealer with the state. If a violation of the Uniform Securities Act occurred, FSI would most likely NOT be held liable for failure to supervise which of the following? -An agent registered with FSI -A financial planner, registered with the state as an investment adviser, who receives commissions on transactions of advisory clients that are directed to FSI -A senior office of FSI whose brother-in-law was just convicted of securities fraud -A clerk in FSI's back office who was recently caught stealing customer's stock certificates by a staff member of the Administrator

-A senior office of FSI whose brother-in-law was just convicted of securities fraud Broker-dealers are responsible for supervising the activities of all personnel, both registered and non-registered. In order for the financial planner to receive commissions on those securities trades, registration as an agent with FSI would be required. However, FSI cannot be held liable for the actions of a family member of one of its employees unless we are told that the employee was somehow involved. 1.2

Which of the following statements regarding an investment adviser is NOT correct? -An investment adviser whose only clients in this state are insurance companies located in the same city as her office is not an investment adviser under the Uniform Securities Act. -An investment adviser with $70 million in assets under management who would be required to register in 17 states has the option of registering with the SEC. -If, during a 12-month period, an investment adviser directed communications to no more than 5 individuals in this state and did not maintain an office in this state, no registration is required. -The Administrator of this state can require a federal covered adviser doing business in this state to file a copy of all of the documents submitted to the SEC.

-An investment adviser whose only clients in this state are insurance companies located in the same city as her office is not an investment adviser under the Uniform Securities Act. The exemption for institutional clients exists only when the adviser does not have an office in the state. Once an investment adviser would be required to register in 15 or more states, the prohibition against registering with the SEC with less than $100 million in AUM is removed. An investment adviser with no office in the state who limits communications to five or fewer investors would fall under the de minimis exception and is not required to register. Federal covered advisers doing business in a state can be compelled to file copies of anything submitted to the SEC. 1.5

Kapco Advisers is a federal covered investment advisers with its principal office in New York City and several offices in New Jersey. Joe Segal, who lives in Manhattan, is an IAR with the firm and has the responsibility for serving those clients of Kapco who winter in Florida. In order to do so, Joe takes a hotel suite in Miami Beach for one week in December, in Boca Raton for one week in January, and in West Palm Beach for one week in February. While Mr. Segal is using these facilities to meet with existing clients, he does let them know that if they have any friends who might be interested in the firm's advisory services, they are welcome to make an appointment with him. Which of the following statements is correct regarding Mr. Segal's registration status under the Uniform Securities Act? -Because Joe is meeting with existing clients who are not permanent Florida residents, he does not have to register as an IAR in the state of Florida. -Because Joe is employed by a covered adviser, no registration is necessary in the state of Florida. -Because Joe is employed by a covered adviser, he is only required to register with the SEC. -Because Joe may be meeting with individuals who are not existing clients and may be Florida residents, he must be registered in the state of Florida as an IAR.

-Because Joe may be meeting with individuals who are not existing clients and may be Florida residents, he must be registered in the state of Florida as an IAR. Once an IAR is using a temporary facility to meet with prospective clients, it is considered that there is a place of business in the state. Therefore, IAR must be registered. The de minimis rule does not apply here because he is holding himself out as offering advisory services in the State and the hotel room becomes a place of business. Because KAPCO is a federal covered IA, they don't register in the state although notice filing may be required. 1.6

Recent regulatory efforts have been focused on cybersecurity and data protection. Which of the following statements is NOT correct? -The concern is protection of covered accounts. -Investment advisers who have the ability to direct the transfer of funds from advisory accounts are susceptible to the same risks as broker-dealers. -A cybersecurity program must include reasonable policies and procedures to identify relevant red flags for covered accounts. -Covered accounts include those carried in the name of a business.

-Covered accounts include those carried in the name of a business. Business accounts are not considered covered accounts. All of the other statements are true. 5.8

Which of the following activities could result in an Administrator taking action against a broker-dealer registered in her state? -Executing transactions in a customer's margin account before receiving the written margin account agreement -Hypothecating a customer's securities in a margin account without written consent from the customer promptly after the initial transaction -Charging reasonable fees or commissions for brokerage execution services -Maintaining custody of customer's funds and securities without notifying the Administrator

-Hypothecating a customer's securities in a margin account without written consent from the customer promptly after the initial transaction The signed hypothecation agreement must be received by the broker-dealer promptly after the initial transaction in a margin account. Since the requirement is after, transactions can be made without having the margin agreements in hand. Charging reasonable fees is proper and, unlike investment advisers, broker-dealers do not have to notify the Administrator of their plan to maintain custody of customer assets. 4.4

Which of the following practices are prohibited by NASAA's Statement of Policy on Dishonest or Unethical Business Practices by Broker-Dealers and Agents? -Frequent trading in an account consistent with the client's objectives and investment experience -Describing a mutual fund as "no load" when it has a 12b-1 charge not in excess of .25% -Entering into a transaction with a customer at a price that is reasonably related to the current market price of the security -Indicating that your graduation from an elite business school will result in better investment performance than that of agents who graduated from nonelite schools

-Indicating that your graduation from an elite business school will result in better investment performance than that of agents who graduated from nonelite schools An agent is prohibited from representing that his education, registration, or experience in any way guarantees better investment results. Providing a customer a reasonable price but not the best price is not prohibited. Trading frequently to meet a customer's objective is an allowable practice and does not necessarily indicate churning; look for the word excessive to indicate churning. As long as the 12b-1 charge is no higher than .25%, the fund can be called no load. 5.2

Under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following would NOT be an unethical or prohibited action by an investment adviser? -Implying to clients that federal covered securities are exempt from state registration because of SEC approval -Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets -Failing to obtain a client's written verification of an advisory contract renewal -Charging a fee that is unreasonable

-Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets Bonding is generally required only when an investment adviser has discretion over client accounts or maintains custody of customer funds or securities. 5.3

Which of the following statements does NOT describe registration requirements under the Uniform Securities Act? -If an agent resigns from his employing broker-dealer and affiliates with another broker-dealer, both firms and the agent must notify the state Administrator of the change in employment. -The revocation of a broker-dealer's registration in a state has no effect on the registration of agents employed by that broker-dealer. -An agent may lawfully sell securities that have been registered in a state or that are exempt from registration in the state. -An agent that does not live in the state can solicit business in that state if the agent and the broker-dealer are registered in that state.

-The revocation of a broker-dealer's registration in a state has no effect on the registration of agents employed by that broker-dealer. The USA registration of an agent is contingent on his affiliation with a registered broker-dealer. Therefore, the revocation of a brokerdealer's license will also suspend an agent's registration until the agent re-affiliates with a different registered broker-dealer. 1.3

State securities Administrators can require -both broker-dealers and agents to post bonds and maintain minimum capital and net worth requirements -broker-dealers that have had regulatory problems to post bonds in amounts greater than those required by the Securities and Exchange Commission -agents to post a surety bond if they have discretion over client funds and securities -agents to maintain minimum net worth requirements based upon the number of clients they serve

-agents to post a surety bond if they have discretion over client funds and securities The state securities legislation cannot require surety bonds that exceed the amounts required under federal law. In addition, agents are not subject to minimum net worth or capital requirements. Broker-dealers are subject to net capital requirements. An agent may be required to maintain bonding coverage if he has discretionary authority over client assets. 1.3

All of the following actions are dishonest or unethical business practices under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) statements of policy EXCEPT -an agent offering an unregistered exempt security for sale -implying to a prospect that the Administrator has approved of an agent's qualifications -buying a stock in one market and selling it in another to create the appearance of increasing market interest -an agent suggesting to clients that they purchase a stock after learning from his father, the company's CEO, that the next earnings report would show a dramatic increase

-an agent offering an unregistered exempt security for sale The solicitation of unregistered exempt securities (e.g., municipal bonds) is a common and permissible practice. An agent who implies that he has received approval from the Administrator, or any other SRO, executes trades to create fictitious volume, or recommends trades based on nonpublic inside information would be in violation of the USA and other securities regulations. 4.1

All of the following actions are unethical or prohibited business practices under the Uniform Securities Act EXCEPT -an agent offering an unregistered exempt security for sale -implying to a prospect that the Administrator has approved of an agent's qualifications -buying a stock in 1 market and selling it in another to create the appearance of increasing market interest -an agent suggesting to clients that they purchase a stock after learning from his father, the company's CEO, that the next earnings report would show a dramatic increase

-an agent offering an unregistered exempt security for sale The solicitation of unregistered exempt securities (e.g., municipal bonds) is a common and permissible practice. An agent who implies that he has received approval from the Administrator, or any other SRO, executes trades to create fictitious volume, or recommends trades based on nonpublic inside information would be in violation of the USA and other securities regulations. 5.2

A broker-dealer has flexibility in terms of the capacity in which it can act in a securities transaction. When buying a security from a client, the trade confirmation would -include the amount of the commission charged -disclose that the firm acted as the client's agent in the transaction -disclose that the firm acted as a principal in the transaction -indicate the amount of markup charged

-disclose that the firm acted as a principal in the transaction Broker-dealers can act as brokers (agency capacity) or as dealers (principal capacity). When buying for (or selling from) the firm's inventory, the BD is acting in a principal capacity and that must be disclosed on the trade confirmation. Only when acting in an agency capacity is commission shown on the confirmation. There are situations where the markup would be shown, but not here because when the dealer buys from the client, a markdown is charged, not a markup. 4.1

Among the benefits of using electronic communications with clients are all of the following EXCEPT -the speed of delivery when compared to traditional mail -there is lower delivery cost when compared to traditional mail -electronic communications do not have the same recordkeeping requirements as traditional methods of communicating with clients -the ability to reach clients wherever they are

-electronic communications do not have the same recordkeeping requirements as traditional methods of communicating with clients Regardless of the method used, the recordkeeping requirements for communications with clients are basically the same. 4.5

It would be considered an unethical business practice for a broker-dealer to -accept unsolicited orders from individual clients for unregistered nonexempt securities -fail to disclose the amount of commission that was charged on an exempt transaction involving an exempt security -offer registered nonexempt securities to clients -sell unregistered exempt securities to unsophisticated retail clients

-fail to disclose the amount of commission that was charged on an exempt transaction involving an exempt security Any trade involving a commission, regardless of the type of security, must have that commission disclosed. What would be wrong with selling U.S. Treasury securities to unsophisticated clients? 5.2

A registration statement for new issues of securities under the Uniform Securities Act is effective for more than 1 year after its effective date -if the SEC delays the Administrator's acceptance of the registration -if the issuer or broker-dealer offering the securities has an unsold allotment -if an offering subscription is oversubscribed, thereby requiring registration of additional shares -under no circumstances because the Uniform Securities Act provides that registration statements are effective for up to 1 year from the effective date

-if the issuer or broker-dealer offering the securities has an unsold allotment A new issue's registration statement may remain valid for more than 1 year beyond its effective date if there are unsold securities remaining in the issue that must be sold with a prospectus. 2.2

After careful analysis of a client's needs and objectives, an agent has determined that the KAPCO Growth Fund is a suitable investment. However, the fund's prospectus is extremely long and has many complicated details contained explaining the investment style used by the portfolio manager. In an effort to help the client better understand the nature of this investment, the agent highlights the most important items in the document and suggests to the client that reading those is all that is necessary. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this action would be -prohibited because no marks may be placed on a prospectus -prohibited because an agent may never omit material information -permitted because the entire prospectus has been delivered -permitted because this will help make the client better informed about the investment decision

-prohibited because no marks may be placed on a prospectus Making marks in a prospectus, even if the goal is a noble one, is always prohibited. 4.5

According to the NASAA Statement of Policy on Dishonest or Unethical Practices of Broker-Dealers and Agents, agents may -select the specific security to be purchased in a discretionary account without contacting the client in advance -split commissions from the purchase or sale of securities with any other agent who is registered with any brokerdealer registered in the state -share in the profits and losses of an account without written consent of the client and authorization from the employing broker-dealer -imply that a conservative investment strategy will guarantee a specific investment result will be achieved

-select the specific security to be purchased in a discretionary account without contacting the client in advance That is what a discretionary account does. It gives the authorization for the agent to determine the asset (the specific security), the action (buy or sell), and the amount without the need to have prior contact with the client. Agents may only share commissions with other agents registered with the same broker-dealer or one under common control. Agents are prohibited from sharing in an account without written consent. Agents are also prohibited from implying any type of guarantee with an investment recommendation, no matter how conservative. 5.2

Under the Uniform Securities Act, an individual is NOT an agent if he is employed by a broker-dealer and only -trades for the firm's market-making account -accepts unsolicited orders -serves as a partner, officer, or director of the firm with exclusive responsibility for information technology -represents the broker-dealer in effecting transactions between the issuer and underwriter

-serves as a partner, officer, or director of the firm with exclusive responsibility for information technology The definition of an agent under the USA excludes any employee, partner, officer, or director of a broker-dealer who is not involved directly in the trade or sale of securities. All the others function as agents representing the broker-dealer. 1.3

The Uniform Securities Act permits the Administrator to do all of the following EXCEPT -suspend an agent's registration without an opportunity for a hearing -conduct investigations involving dealers doing business in his state but domiciled in another state -have subpoenas to individuals outside the state -conduct an investigation until proof of wrongdoing is established

-suspend an agent's registration without an opportunity for a hearing The Administrator has the power to conduct investigations and have subpoenas issued in other states. The Administrator cannot suspend or revoke an agent's registration without providing the agent with an opportunity for a hearing. 3.2

The Uniform Securities Act prohibits the state securities Administrators from -conducting investigations outside of their state of jurisdiction -publishing information obtained in private investigations about individuals who have violated the Uniform Securities Act -using for personal benefit any information that is filed with the Administrator and that has not been made public -subpoenaing witnesses in order to compel the production of books, papers, correspondence, or other material relevant to an investigation

-using for personal benefit any information that is filed with the Administrator and that has not been made public The state securities Administrator may conduct investigations for the public's protection. The Administrator may not misuse any information for personal gain by virtue of its position. 3.2

Long Range Planning (LRP) is a federal covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: I. 16 clients in State A II. 12 clients in State B III. 6 clients in State C IV. 4 clients in State D Fred would have to register as an IAR in: States A, B and C. States B and C. States A and C. States A and D.

States A and D. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a federal covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state covered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there). 1.6

An agent representing a broker-dealer in State P has a retail customer who moves to State S from State P. The agent and the brokerdealer now have one customer in State S. To continue to do business with this customer, which of the following is TRUE? -Only the agent must register in State S. -Neither the broker-dealer nor the agent needs to register in State S. -The agent and broker-dealer must register in State S. -Only the broker-dealer must register in State S.

The agent and broker-dealer must register in State S. The agent and broker-dealer must register in State S. Unlike investment advisers, there is no de minimis exemption for brokerdealers. 1.3

Which of the following criteria would most likely be used to determine if an agent is engaged in churning or excessive trading in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices by Broker-Dealers and Agents? -The agent received commissions on each transaction conducted on behalf of clients. -The customer has not provided the agent written trading authority. -The agent's firm acted in a principal capacity in the transaction. -Transactions in a customer's account were excessive in frequency based on the customer's objectives.

Transactions in a customer's account were excessive in frequency based on the customer's objectives. An agent may be suspected of churning an account if the account's transactions would be considered at an abnormal level on the basis of the client's financial resources and objectives and the character of the account. 5.2

A broker-dealer is a member of the underwriting syndicate for a new issue of common stock. From all indications, it appears that the offering will be oversubscribed. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices by BrokerDealers and Agents, the broker-dealer should -allocate the shares fairly among the firm's largest clients -allocate the shares of the issue to clients in a manner that is based on their indications of willingness to purchase the shares -allocate the shares in such manner that both employees and clients have a reasonable division of the issue -withhold shares for the firm's own account rather than make the distribution available to the public

allocate the shares of the issue to clients in a manner that is based on their indications of willingness to purchase the shares In any new issue, particularly one that might be "hot", the obligation of the member of the underwriting group is to make a bona fide public distribution. This can be done based on the indications of interest received prior to the effective date of the offering. 5.2

In conducting an investigation, the Administrator has the power to do all of the following EXCEPT -make a public announcement about the pending investigation without the consent of the accused -arrest suspected violators of the Uniform Securities Act -subpoena witness and compel them to provide testimony relevant to the investigation -require the production of any records relevant to the investigation at hand

arrest suspected violators of the Uniform Securities Act One power the Administrator does not have is the ability to arrest. 3.2

An investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms. When advertising this system, the IA must -show performance for at least the past 12 months -indicate the length of time the system has been in play -provide customer testimonials evidencing their satisfaction with the system -indicate that there are limitations and difficulties to using the system

indicate that there are limitations and difficulties to using the system When advertising any type of charting or formula system, the ad must always mention the limitations and difficulties of using the system. 4.4

Capital Asset Planning (CAP) is an investment adviser registered in states A, B, and C. CAP has no place of business in state D. The registration provisions of the Uniform Securities Act would not apply to CAP in state D if it confined their advisory business in state D to all of these EXCEPT other investment advisers broker-dealers individuals qualifying as accredited investors savings and loan associations

individuals qualifying as accredited investors Investment advisers without a place of business in the state are not required to register in the state if their only clients are other investment advisers, broker-dealers, and institutional clients. Although it is true that the term accredited investor includes institutions where the exemption would apply, unless the choice limited itself to those, it also includes retail (individual) investors meeting certain financial standards. As the case of this question, the exemption does not apply. 1.5

Under the Uniform Securities Act, a person who owns a business providing advice on commodity futures contracts as well as limiting its securities advice to those issued or guaranteed by the U.S. government is not required to register as an investment adviser in the state required to be a registered investment adviser in the state required to be a registered investment adviser representative in the state required to be a registered agent in the state

not required to register as an investment adviser in the state This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser. 1.5

When a broker-dealer operates on the premises of a financial institution, certain disclosures must be prominently made in communications with the public. As long as omission of the disclosures would not cause the message to be misleading, these disclosures need not be made as part of TV broadcasts of 30 seconds or less TV broadcasts of 60 seconds or less radio broadcasts of 60 seconds or less radio broadcasts of 30 seconds or less

radio broadcasts of 30 seconds or less The NASAA Model Rule for sales of securities at financial institutions states that radio broadcasts of 30 seconds or less do not have to include the special disclosures ordinarily required. 5.6

As a client's agent, you can help prevent loss due to online scams. One of the ways to do so is to be aware of red flags indicating the potential that a con artist is trying to separate your clients from their money. Among those red flags would be -the use of social media to provide the company's annual report -rewards for recruiting friends to join in the investment -that payment for purchases may only be made using a personal check -a well-designed website with complete information about the offering, including financial statements and biographical details of the principal officers

rewards for recruiting friends to join in the investment A frequent tool used by con artists is offering rewards to those who recruit friends into the deal. 4.5

NASAA has created a model template to be used by broker-dealers to disclose the cost of services offered by them. Among the disclosures that broker-dealers must make to their customers are all of the following EXCEPT any potential conflicts of interest the fees and charges for account maintenance the locations of the firm's' branch offices the charge for issuing a stock certificate

the locations of the firm's' branch offices Although it certainly makes sense to let your clients know where your offices are, that doesn't involve any kind of expense to the client, so it is not part of the fee disclosure. Conflicts of interest must always be disclosed. A listing of the firm's fees and charges generally accompanies the new account forms, but may be disclosed separately if desired. Among those charges can be an account maintenance fee and a charge for having a stock certificate issued. 4.1

A broker-dealer has its principal office in State A and branches in States B, C and D. State A requires all broker-dealers registered in that state to maintain records for two years while states B and C have a three year retention requirement and State D's is four years. If the SEC requires that records be kept for three years, this broker-dealer maintain records for two years four years two years in State A, three years in States B and C and four years in State D three years

three years A broker-dealer registered in several states must also be registered with the SEC. Under the NSMIA of 1996, the federal laws take precedence over those of any state. However, if the broker-dealer were only registered on the state level, then the obligation, just as it is for state registered advisers, is met by complying with the requirements of the state in which the principal office is located. 1.2

The Uniform Securities Act imposes certain recordkeeping requirements upon registered broker-dealers. Among the records that must be retained are all of these EXCEPT order tickets unsolicited testimonials from customers emails sent to customers blotters

unsolicited testimonials from customers A client who sends in a testimonial praising the firm on his own has not created a record that is necessary for the firm to maintain, unless the firm decides to use that letter. 1.2

An individual meets the Uniform Securities Act's definition of an agent in all of the following cases EXCEPT -when acting for a broker-dealer on behalf of a large institutional customer to find a buyer for a large block of stock to be sold on the NYSE -when buying shares of a security listed on the Nasdaq Stock Market system for the portfolio of a client of the brokerdealer -when receiving commissions for selling shares of his employer's stock to employees' retirement funds -when acting on behalf of an issuer of a security in transactions with an underwriter

when acting on behalf of an issuer of a security in transactions with an underwriter Any transaction between the issuer, or other person on whose behalf the offering is made, and an underwriter is included in the definition of exempt transaction. The Uniform Securities Act specifically states that an individual representing the issuer in an exempt transaction is excluded from the definition of an agent 1.3