Series 63 Missed Final Questions

An agent receives physical certificates from a customer that the customer wishes to deposit to his brokerage account. Which statement is TRUE? A. The agent must forward the certificates to the broker-dealer immediately B. The agent must enter the certificates into street name and destroy the old certificates immediately C. The agent can accept the securities for safekeeping for no longer than 3 months D. Under no circumstances can a broker-dealer take physical custody of securities unless approval of the Administrator is obtained

The best answer is A. Broker-dealers take custody of clients funds and securities as part of the business and must maintain minimum net capital in order to do so. (In contrast, investment advisers do not "routinely" take custody and must notify the Administrator if they intend to do so and must follow NASAA's custody rules for IAs.) If an agent receives securities from a client to be placed in custody of the broker-dealer, the certificates must be forwarded to the broker-dealer immediately.

To ensure the integrity of electronically stored data, the record must be: A. non-rewritable B. non-duplicable C. non-transferable D. non-negotiable

The best answer is A. In order to ensure the integrity of electronically stored data, the storage medium must be non-rewritable and non-erasable. A separate duplicate copy must be retained in another location, making choice B incorrect. Choices C and D are terms that apply to securities - not to digitally stored data.

Which statement is TRUE about registration of directors as agents of a broker-dealer? A. When a broker-dealer registers in a State, automatic registration as an agent occurs for any director B. When a broker-dealer registers in a State, each director must apply separately for registration as an agent C. The broker-dealer must apply for registration of each director as an agent D. The broker-dealer must only apply for registration of a director if so directed by the Administrator

The best answer is A. Included in a State registration application are the names, addresses and background of the officers of the broker-dealer, and these individuals become automatically registered as agents when the broker-dealer entity becomes registered in the State. This is part of State law because the qualifications and business history of the officers and directors is disclosed in the application for the BD registration, so there is no need to have the same information filed twice with a separate registration for these persons to be agents of the BD. The way that most States handle this is when the registration application for the BD is processed, the officers are automatically registered as agents at the same time in CRD (Central Registration Depository); the fees for registration as an agent in the State are automatically deducted; and a window is opened for them to take the appropriate exams as needed (e.g., #63 or #66). Thus, the State gets its money up front! If the officer or director will not be acting as an agent of the BD (e.g., that person has no sales responsibility), he or she can "opt out" of automatic registration (which happens after the fact) and the BD will be refunded the fee.

When can an Investment Adviser borrow from a client? A. If the client is a broker-dealer B. If the client is an accredited investor C. If the client is the sister-in-law of the President of the Investment Advisory firm D. Under no circumstances

The best answer is A. NASAA does not allow IAs to borrow from their clients, unless the client is a broker-dealer (which would be in the business of giving margin loans), a bank that is in the business of loaning funds, or an affiliate of the investment adviser. This rule contrasts starkly with the FINRA rule for borrowing by broker-dealers. Broker-dealers, under the FINRA rule, cannot borrow from clients unless the client is an immediate family member; a "significant other" like a live-in boyfriend or girlfriend; a bank; or a business associate.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that: A. is based on the investment adviser's business model including the size of the firm, types of services provided, and number of business locations B. ensures that key management personnel have been familiarized with the policies and procedures to be followed in the event of a significant business interruption C. designates the investment adviser's independent outside accountant as the person to take responsibility in the event of a significant business interruption D. announces to the public in local newspapers and on the internet the fact that a significant business interruption has occurred

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

A Registered Investment Adviser is a director of a private corporation. The corporation goes public, and the adviser wants to recommend the purchase of the stock to his clients. All of the following statements regarding this action are true EXCEPT this action is: A. permitted without restriction since the company is trading publicly B. permitted as long as the existence of the control relationship is disclosed in writing in the RIA's disclosure document C. a potential violation of the insider trading rules D. a potential violation of the conflict of interest rules

The best answer is A. Since the RIA is a director of this publicly-held company, he or she is an insider; and he or she has a control relationship with the company. While it is not prohibited for the RIA to recommend to purchase of the company's stock to his or her customers, the RIA would be obligated to disclose the existence of the control relationship to customers that were recommended the company's securities by the RIA; and the RIA would have to ensure that insider trading rules were not being violated by making such recommendations (e.g., the basis for the recommendation must come from publicly available information). In the real world, this is such a compliance nightmare that the simple solution for the RIA would be to just not recommend that company's stock. However, the RIA can do so with the appropriate disclosures.

A BD application is received by the State Administrator for a new broker-dealer subsidiary of a Swiss securities firm. The application includes the disclosure that the parent firm was suspended from membership on the Deutsche Bourse 6 years ago because of unauthorized trading by its Hong Kong branch. The State Administrator: A. cannot deny registration based on the suspension that was imposed by a foreign regulator B. can deny registration based on the suspension by the foreign regulator C. must grant registration because the U.S. subsidiary is a legally separate entity from the parent company that is based in Switzerland D. can deny registration only if the actions of the parent company were a criminal offense

The best answer is A. The Uniform Securities Act sets a 10 year statute of limitations for securities related violations as a cause for denial of registration. This is based on violations of U.S. law. It also includes a provision regarding violations of the law of a foreign jurisdiction. In this case, it sets a 5 year statute of limitations. (Why? - Who knows!) In this case, the suspension by the foreign regulator happened 6 years ago, so the State Administrator cannot deny registration based on the action taken by the foreign regulator. The wording includes willfully violating the law of a foreign jurisdiction governing any aspect of the securities or banking business within the past 5 years; or being the subject of an action by a foreign regulator in the past 5 years denying, revoking or suspending the right to engage in the securities business as a broker-dealer, investment adviser or agent.

An issuer hires an agent and registers that individual to distribute an offering of its securities. Which statement is TRUE under NASAA rules? A. If the agent solicits transactions in a State where the agent is not registered, the issuer can be held liable B. If the agent finishes distributing this securities offering and there is time left until the agent's registration lapses at year end, he or she can work for another issuer distributing that issuer's securities C. The agent is only permitted to sell the issuer's securities to employees of that issuer D. The agent must also affiliate with a registered broker-dealer in order to distribute the offering of securities

The best answer is A. The definition of an "agent" under State law is an individual who represents a broker-dealer or issuer effecting, or attempting to effect, purchases or sales of securities. Thus, Choice D is incorrect. An example of an agent of an issuer would be a general partner of a limited partnership who hires a "wholesaler" to market partnership units to investors. This individual is an agent of the issuer, marketing securities to the public and the agent must be registered in the State where the agent resides to do so. The agent must also be registered in each State where he or she solicits individuals to buy partnership units. Choice B is false because if this person goes to work for another issuer, that issuer must register this person as an agent of that issuer. Choice C gets at an exclusion from the definition of an "agent" which is given to an employee of an issuer who only sells that issuer's securities to issuer employees without being compensated for those sales. This exclusion from registration is designed for issuer employees who place employee funds in stock purchases of that employer through stock option or retirement plans. It has no bearing on this question.

An agent is soliciting customer orders for a new non-exempt issue that has been registered. The top officers of this company were previously associated with XYZ Company, a highly successful firm in the same industry. That firm's success was attributed to these individuals. Under the Uniform Securities Act, which statements by the agent are permitted? I "The top officers of this new firm were previously at XYZ Company" II "These top officers were responsible for the rapid growth of XYZ Company over the past 3 years" III "The top officers are experts in the field who made XYZ Company, their previous firm, into a gold mine" A. I and II B. II and III C. I, II, III D. None of the above

The best answer is A. The use of flamboyant or exaggerated language to induce a sale is prohibited. It is perfectly acceptable to state that the officers were associated with the other company and were responsible for its growth, as long as the statements are true.

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

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

Under the Uniform Securities Act, an investment adviser is any person who is compensated for rendering advice about which of the following? A. Investment contracts B. Endowment policies C. Annuity contracts that periodically pay a fixed amount D. Bank issued certificates of deposit

The best answer is A. To be an investment adviser, advice must be given about securities - and an investment contract is a security (e.g., a contractual monthly investment plan that requires a fixed payment amount monthly for a minimum time period to buy a designated mutual fund). Endowment policies and fixed annuities are insurance products, not securities. A bank issued certificate of deposit is a bank product and is not a security.

A Canadian broker-dealer has a client who comes to the United States for 4 months as a contract employee for an American company. Which statement is TRUE about the Canadian broker-dealer doing securities business with the client in the United States? A. The Canadian broker-dealer can continue to do business with the client in the United States without taking any further action B. The Canadian broker-dealer can rely on the "vacationing" client exemption and does not have to register in the State C. The Canadian broker-dealer must register in the State D. The Canadian broker-dealer need only register in the State if the client is not a dual citizen

The best answer is A. A NASAA interpretation that only applies to Canadian broker-dealers says that Canadian BDs can contact existing customers who are temporarily residing in the United States without having to register in a State, as long as the client is in the U.S. for less than ½ year and intends to return to Canada. Since this Canadian client will only be in the U.S for 4 months, the Canadian BD can continue to do business with the client while he or she is in the U.S. without having to register in the State where the client is working. Note that the Canadian BD cannot contact prospective clients in the U.S - only existing clients can be contacted. And also note that this rule does NOT apply to a U.S. BD registered in one State that contacts an existing client who is temporarily in another State. In this case, if the client spends more than 30 days in the other State, that BD must be registered in the other State.

An agent of a broker-dealer puts up a website that promotes the benefits of dollar cost averaging, including the caveat that it is suitable for investors only if they can maintain their periodic payments regardless of economic conditions and that it requires a long-term investment time horizon. If the website is viewed by an individual in another State where both the broker-dealer and agent are not registered, which of the following disclosures are required on the site in order not to be in violation of the Uniform Securities Act in that State?I "The broker-dealer or agent may only transact business in the State if registered in the State or if exempted or excluded from registration"II "Follow ups or individualized responses to persons in the State that involve either effecting or attempting to effect transactions in securities will not be made absent compliance with State registration requirements or an applicable exemption or exclusion"III "The services being offered do not represent an offer to sell securities or a solicitation of an offer to buy the securities in the State unless the subject securities are registered or are subject to an applicable exclusion"IV "The Securities and Exchange Commission has not approved, nor has it disapproved of offering made in this advertisement" A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A. Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site:"The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and"Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). There is no requirement to give a disclaimer regarding whether securities being offered are registered or exempt in the State; and the SEC has nothing to do with State law, so Choice IV does not apply (it does apply to prospectus disclosure on new issues of non-exempt securities registered under the 1933 Act, however).

A person who renders investment advice relating solely to municipal securities is: A. exempted from the definition of an investment adviser, and is not required to register under the Act B. defined as an investment adviser and must register under the Act C. defined as a broker-dealer and must register under the Act D. defined as an agent and is required to register under the Act

The best answer is B. A person who gives investment advice relating solely to municipal securities is not exempted from registering as an investment adviser under State law. (Please note, however, that a person who gives advice solely about U.S. Government guaranteed securities is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. This is another type of federal covered adviser, for which there is no state registration.)

An application to register securities may be filed by all of the following EXCEPT a(n): A. Broker-Dealer B. Investment Adviser C. Issuer D. Officer of the company who is selling shares that are personally owned

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).

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

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

Which person would be required to register as a broker-dealer in a State? A. A person with no place of business in the State who conducts securities transactions with the issuer of non-exempt securities B. A person with no place of business in the State who represents an issuer in the sale of exempt securities to non-institutional customers for compensation C. A person with no place of business in the State who represents an issuer in the sale of non-exempt securities to the issuer's employees without receiving compensation D. A person with no place of business in a State who conducts securities transactions with financial institutions in the State for compensation

The best answer is B. Choice A is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with issuers - it is not dealing with the general public. Choice B is defined as a broker-dealer because the firm is selling securities to retail customers in the State for compensation. It makes no difference whether the securities involved are exempt or non-exempt. Choice C is excluded from the definition because this is an employee of an issuer that represents the issuer, selling its securities to the issuer's employees (for example, selling that issuer's securities to the employees that choose that investment option in the company's 401(k) plan). Choice D is excluded from registration as a broker-dealer because it has no office in the State and is only dealing with financial institutions - it is not dealing with the general public.

A Federal Covered Adviser discovers a material error in its Form ADV. When must Form ADV be amended with the State to correct the error? A. There is no requirement to amend the filing in the State because the investment adviser is Federal covered B. Within 30 days C. Within 60 days D. Within 90 days

The best answer is B. Form ADV is filed through the IARD Investment Adviser Registration Depository) system run by FINRA - this is used by both Federal Covered and State-registered advisers. In IARD, the adviser details whether this is a Federal or State registration and IARD reports to the correct regulator. In addition, for Federal Covered Advisers, the adviser details which States get "notice" filings. When a Form ADV is filed or updated by a Federal covered adviser, this is reported to the SEC, and at the same time, this is also reported to the designated States that get notice filings.The annual updating amendment to Form ADV must be filed within 90 calendar days of the adviser's fiscal year end - note that this is the same rule for both NASAA (State registered advisers) and the SEC (Federal Covered Advisers). For material changes that occur during the year, an "other than annual amendment" must be filed via IARD. Here, the SEC states that it must be filed "promptly" for Federal Covered Advisers, while NASAA requires that it be filed within 30 days of the change for State registered advisers and for notice filings made by Federal Covered Advisers. (Yes, it would be nice if NASAA and the SEC "got together" on their rule writing, but they don't!)

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

The best answer is B. Investment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this conflict of interest is disclosed to the client when the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.

Investment advisers may be compensated: A. based on a percentage of capital gains or losses in the account B. based on a percentage of the value of all assets under management C. based on the level of trading activity in the account D. based on any of the above choices

The best answer is B. Investment advisers cannot be compensated based solely on capital gains achieved. The fee arrangement can be based on a percentage of all assets under management.

An Investment Adviser has adopted an external Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director

The best answer is B. NASAA has a model rule on "Business Continuity and Succession Planning" for Investment Advisors. The rule requires IAs to draft a plan for the actions to be taken in the event of an unexpected major negative event occurring at the IA firm. One of the issues that must be addressed in the plan is the death or disability of key personnel. To continue servicing client accounts in such an instance, the IA can adopt either an "internal" or "external" Succession Plan. In an "internal plan," the Adviser transfers the advisory responsibilities to another IAR currently in the firm. With an "external" Succession Plan, the Adviser transfers client management to another firm.

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of Form ADV Parts 2A and 2B? A. They must be delivered only if the individual becomes a client of the investment adviser B. They must be delivered regardless of whether the individual becomes a client of the investment adviser C. They must be delivered only upon written request of the individual that is considering becoming a client D. They must be delivered only upon receiving a check for the initial investment amount from the client

The best answer is B. NASAA requires that the investment adviser furnish the Brochure (Form ADV Part 2A) and the Brochure Supplement (Form ADV Part 2B) to an advisory client or a prospective advisory client. The Brochure and Supplement must be furnished:not less than 48 hours prior to entering into any advisory contract with such client or prospective client; orat the time of entering into the contract, the advisory client has the right to terminate the contract without penalty within 5 business days.

Under NASAA rules, if a customer wishes to trade a margin account prior to returning the signed margin agreement, such an action is: A. prohibited B. permitted only if the customer returns the signed margin agreement promptly C. permitted only if the customer returns the signed margin agreement within 1 day of the first transaction in the account D. permitted only if the customer returns the signed margin agreement within 3 days of the first transaction in the account

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

An investment adviser has a soft dollar arrangement with DEF Brokerage Company. An investment adviser representative brings a big new account to the RIA and the account owner tells the IAR to direct 50% of his trades to XYZ Brokerage Company. If execution is not an issue, then the IAR should: A. send 50% of the customer's trades to the DEF Brokerage Company B. send 50% of the customer's trades to the XYZ Brokerage Company C. send 25% of the customer's trades to the DEF Brokerage Company and 25% of the customer's trades to the XYZ Brokerage Company D. close the customer's account because of the conflict of interest between the DEF Brokerage Company and the XYZ Brokerage Company

The best answer is B. Since "execution" is not an issue, we must presume that the quality of trade execution and cost of trade execution at XYZ Brokers is as good as that received from DEF Brokers. Since the customer wants 50% of his trades directed to XYZ Brokers instead of to DEF Brokers (which has the "soft dollar" arrangement with the adviser), follow the customer's instructions!

A broker-dealer's agent that is registered in State A, wishes to sell a security in State B. Which of the following may be sold in State B without the agent being registered in State B? I U.S. Government Agency Issues II Commodity Futures III Fixed Annuities IV Limited Partnership interests investing solely in securities of U.S. Government Agencies A. I only B. II and III only C. I and IV only D. I, II, III, IV

The best answer is B. Since commodity futures and fixed annuities are not defined as securities, they are not regulated by the Uniform Securities Act. If an agent registered in State A, wishes to sell securities in State B, the agent must be registered in State B unless an exemption is available. Individuals (agents) who represent broker-dealers selling either exempt or non-exempt securities must be registered in that State. Thus, the agent selling U.S. Governments (an exempt security) in State B must be registered in State B. The individual selling limited partnership units (a non-exempt security) in State B must be registered in State B. Do not confuse these with the following exemptions: Individuals who represent issuers (not broker-dealers) selling exempt securities are not required to be registered; or Investment advisers who only give advice on U.S. Government securities are not required to be registered.

Under the provisions of the Prudent Investor Act, all of the following statements are true regarding the management of trust accounts with multiple beneficiaries EXCEPT the fiduciary: A. must manage the trust impartially, taking into account the differing needs of the trust beneficiaries B. must manage the trust to meet the needs of older beneficiaries before considering the needs of the younger beneficiaries C. should seek to maximize portfolio performance and can assume extra risk consistent with the beneficiaries' investment objectives and needs D. is permitted to delegate investment decisions to qualified agents without needing consent of the beneficiaries

The best answer is B. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. In any trust with multiple beneficiaries, the fiduciary must act impartially and must consider the needs of each beneficiary. Therefore, when there are multiple beneficiaries, the trustee cannot favor any one of them.

Under NASAA rules, the "Brochure" must be: I provided to clients at least 48 hours prior to entering into a written advisory contract II provided to clients at least 48 hours prior to entering into an oral advisory contract III filed with NASAA at least 48 hours prior to entering into a written or oral advisory contract A. I only B. I and II C. II and III D. I, II, III

The best answer is B. The Brochure Rule under NASAA rules requires that the brochure be given to customers 48 hours prior to entering into a written or verbal contract to provide advisory services. Alternatively, the customer can sign a contract without being given the "Brochure" as long as the customer can cancel without penalty within 5 business days of signing. There is no requirement to file the "Brochure" with NASAA 48 hours in advance. As a matter of fact, they already have a copy, since they have the Form ADV Parts 2A and 2B on file - that is the "Brochure" and "Brochure Supplement." Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!

An investment adviser agrees to direct its portfolio trades to a specific broker-dealer at full commission rates in return for the broker-dealer providing the adviser with a leased new car paid by the broker-dealer. This is: I a soft dollar arrangement II a quid pro quo arrangement III permitted under the Uniform Securities Act IV prohibited under the Uniform Securities Act A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. The SEC and State Administrators permit so called "soft dollar" arrangements. An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients. The problem here is that the "give back" does not benefit the adviser's clients - rather, it benefits the adviser personally at the expense of his or her clients (since the lease is really being paid by the higher commission charges that are being imposed on all of the adviser's trades for his or her clients).

The gift of an assessable security is defined under the Uniform Securities Act as a(n): A. exempt transaction B. sale of a security C. unsolicited transaction D. issuer transaction

The best answer is B. The gift of an assessable security is not a gift - the issuer has the right to assess the holder for more monies, if they are needed to run the business. This gift relieves the giver of a liability to pay; which is the same thing as the recipient of the "gift" - the buyer - actually paying for the security. Thus, a buyer paying for a security; or relieving the seller of a liability; is a "sale" of that security.

Which of the following persons is defined as an adviser in the State that is EXEMPT from registration in the State? A. Federal covered adviser B. Adviser with no place of business in the State that deals solely with insurance companies C. Adviser that publishes a general circulation newsletter about investing D. Professional who only gives incidental advice about securities

The best answer is B. This is a very picky question that sees if you know the difference between an exclusion and an exemption. Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers.Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are other advisers; federal covered advisers; broker-dealers; deposit taking institutions; insurance companies; investment companies; employee benefit plans with assets of at least $1,000,000; and governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months.

To protect against identity theft and theft of funds, client instructions received electronically must be: A. encrypted B. authenticated C. monitored D. refused

The best answer is B. To protect against identity theft and theft of funds, customer instructions received electronically must be authenticated, to make sure that the instruction actually came from that client.

Under the Uniform Securities Act, all of the following transactions are exempt EXCEPT an offer of securities made to a(n): A. insurance company B. individual with a $1,000,000 net worth C. broker-dealer D. savings institution

The best answer is B. Transactions with financial or institutional investors are exempt under the Uniform Securities Act. This would include insurance companies, broker-dealers, banks, and savings and loans. There is no provision in the Act for an exemption for a sale to an individual with a high net worth, so Choice B is incorrect. Also remember that this exemption only applies to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.

A State-Registered Investment Adviser finds that it has fallen below the minimum net worth requirements established by that State. A report must be made to the State Administrator that the RIA is not in compliance with the State's minimum net worth standards: A. the same day B. the next business day C. within 10 business days D. within 30 business days

The best answer is B. Under NASAA Model Rule 202(d)-1 "Every investment adviser registered or required to be registered under the Act shall by the close of business on 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 the following:A trial balance of all ledger accounts;A statement of all client funds or securities which are not segregated;A computation of the aggregate amount of client ledger debit balances; andA statement as to the number of client accounts.

Which of the following is a federal covered adviser? A. An investment adviser with $10,000,000 of assets B. An investment adviser with $50,000,000 or less of assets C. An investment adviser with $100,000,000 of international assets D. An investment adviser to individuals that are accredited investors under Regulation D

The best answer is C. A "Federal covered investment adviser" is one that must register with the SEC only; and that is not required to register with the State (though the State can still require a notice filing). These are the larger investment advisers and include any adviser to an investment company; and any adviser with $100,000,000 or more of assets under management. In this question, the best choice offered is the adviser with $100,000,000 of assets under management must register with the SEC. It makes no difference if the assets are international securities - if the adviser is based in the U.S., which we must assume, and meets the minimum asset test, then it must register with the SEC.

Which of the following can be filed electronically? I Registration application information II Signature requirement III Payment of fees IV Answer to a subpoena A. I and III B. III and IV C. I, II, III D. I, II, III, IV

The best answer is C. A subpoena must be answered by a personal appearance in court. All State registration information, including signature and fee payment, can be done electronically.

Which individual would most likely be required to be registered as a representative of a broker-dealer? A. An administrative staff person involved in back-office support work B. A secretary taking messages to buy and sell securities C. A sales assistant taking an order for a limited partnership unit D. A staff person who reports completed trades to customers

The best answer is C. Administrative personnel are not registered making Choices A and D incorrect. In Choice B, the secretary is taking a "message" while in Choice C, the sales assistant is taking an "order." Taking an order to buy or sell a security requires that individual to be registered. An argument could be made that in Choice B, since the "message" was about buying or selling a security, these also are orders. However, Choice C is clearly the better answer.

An investment adviser that claims that it is a "fee only" adviser could be compensated based on: I a percentage of assets under management II a flat annual or hourly fee for all work performed for wealthy investors III 12b-1 fees paid by mutual funds IV a performance based fee for wealthy investors A. I, II, III B. III and IV C. I, II, IV D. I, II, III, IV

The best answer is C. Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,100,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it sells. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.

Which of the following statements is (are) TRUE about the commingling of customer funds and securities with those of the broker-dealer and its agents? A. Broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities B. Agents are prohibited from commingling customer funds and securities with their own funds and securities C. Both of the above D. None of the above

The best answer is C. Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take customer cash or securities into his possession - this is a violation. He or she can have the customer send cash directly to the broker-dealer for credit to the customer's account, however.

Misstatements of material fact in a securities registration are violations of the Act for which of the following persons? I Issuer II Directors of the issuer III Underwriter IV Agents of the underwriter A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. Agents are not involved in the filing of registration statements for securities; therefore, they are not responsible for the contents of the registration statement. However, issuers, directors of issuers, and underwriters are all involved in preparing a securities registration statement and have liability for material omissions under the Act.

Which statement is TRUE about a state-registered investment adviser's recordkeeping obligations? A. Only advisers that maintain custody of client funds are required to retain books and records that can be inspected by the Administrator B. An investment adviser that has offices in multiple States must keep records in accordance with the requirements set by the Administrator of each State where an office is located C. Advisers are required to retain records for at least 5 years from the end of the fiscal year during which the last entry of record was made D. Electronic records are permitted as long as hard copies are kept in a separate secure location

The best answer is C. All advisers must retain the records set by the Administrator - not only advisers that take custody. An investment adviser with offices in multiple states only has to keep records in accordance with the State where the main office is located. Electronic records are permitted as long as they cannot be altered, are kept securely, and a duplicate copy (not necessarily a hard paper copy) is kept in a secure location. Advisers must retain records for 5 years under NASAA rules (note that this differs from SEC rules for broker-dealer records, most of which must be retained for 3 years).

A customer wishes to make an investment in growth mutual funds for an Individual Retirement Account. All of the following statements by an agent are prohibited EXCEPT: A. "The fund has averaged a 20% annual growth rate in the past and is guaranteed to produce the same growth rate in the future" B. "Last year, the fund paid out dividends of $1.00 per share and capital gains of $.50 per share, for a total income yield of $1.50" C. "The fund yielded 20% last year and is expected to yield the same this year, though the actual yield may be more or less" D. "The fund is registered with the SEC, which has approved of the fund's shares"

The best answer is C. An agent cannot guarantee a return to a customer (Choice A), nor can an agent state that income from a fund consists of both dividends and capital gains (the income portion consists solely of dividends), nor can the agent state that the SEC approves of the fund. It is perfectly acceptable to state the historical yield for the fund, and then to state that similar results are expected in the future, although the actual result may be more or less.

Exempt securities are NOT subject to which provisions of the Uniform Securities Act? I Advertising filing requirements II Registration requirements III Anti-Fraud requirements A. I only B. II only C. I and II only D. I, II, III

The best answer is C. Both exempt and non-exempt securities; and exempt and non-exempt transactions are subject to the anti-fraud provisions of the Uniform Securities Act. Exempt securities are not subject to the Act's securities registration and filing of advertising requirements.

Filing of advertising with the Administrator is NOT required for: I U.S. Government securities II Municipal securities III Investment company securities IV Options Clearing Corporation securities A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities. Options are non-exempt securities and are not federal covered, so the Administrator can require filing of advertising for these.

If any information filed with the State Administrator is discovered to be incomplete or inaccurate in any material respect, the registrant MUST: A. withdraw from registration and re-file with the State Administrator B. cease business operations until an amended registration has been filed with the State Administrator C. file a correcting amendment promptly with the State Administrator D. file an updating amendment with the State Administrator no later than 30 days from discovery

The best answer is C. If a filing with the Administrator is found to have material misstatements or omissions, a correcting amendment must be filed promptly.

An Investment Adviser Representative writes a blog published on the Internet about how to achieve the best returns for clients, while minimizing risk. Which statement is TRUE about this? A. This can only be done if the Investment Advisory firm that employs the IAR approves of the content B. This can only be done if the Investment Advisory firm that employs the IAR authorizes the distribution of the communication C. This can only be done if the Investment Advisory firm that employs the IAR both approves the content and authorizes the distribution of the communication D. This action is prohibited

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

Under the Uniform Securities Act, an investment adviser may be formed as which of the following? I Corporation II Partnership III Association IV Broker-dealer A. I and II B. III and IV C. I, II, III D. I, II, III, IV

The best answer is C. Investment advisers (and broker-dealers) can be formed as any legal operating entity, such as a corporation, partnership, sole proprietorship, association, etc. Investment advisers cannot be formed as broker-dealers; nor can broker-dealers be formed as investment advisers. Each is a legally separate entity, and each is regulated separately.

When must a Registered Investment Adviser (RIA) send a notice of change in ownership? A. To each client, when the RIA changes its business form from a sole proprietorship to a partnership B. To the State Administrator, when the RIA changes its business form from a sole proprietorship to a partnership C. To each client, when the RIA changes its business form from a partnership to a sole proprietorship D. To the State Administrator, when the RIA changes its business form from a partnership to a sole proprietorship

The best answer is C. Isn't this one special!! The rule on notifying clients of a change of ownership of an investment adviser only applies to investment advisers organized as partnerships. If there is a change in the majority of the partners (as would be collapsing a partnership into a sole proprietorship), then each client who has signed an advisory contract must be notified of the change. This is a requirement of NASAA Rule 502(c) for State-registered advisers and also is a requirement of the Investment Advisers Act of 1940 (for Federal covered advisers).

An Investment Adviser prepares a 4-color glossy brochure to be given to potential customers instead of the Form ADV Form Part 2A. The brochure includes all of the information found in the ADV Part 2A, but is much livelier in its presentation. An Investment Adviser Representative uses the brochure to solicit a new client, who signs a contract with the firm that includes a clause giving the customer 2 business days to back out of the contract without incurring any penalty. Which statement is TRUE under NASAA rules? A. This procedure complies with NASAA rules regarding the use and delivery of investment adviser brochures B. This procedure violates NASAA rules because only the Form ADV Part 2A can be delivered to customers C. This procedure violates NASAA rules because the customer must be given 5 business days to back out of the contract without penalty D. This procedure violates NASAA rules because a written receipt must be obtained from the customer indicating that the brochure was delivered

The best answer is C. NASAA requires that new customers be delivered the investment adviser brochure. It is OK to prepare a customer brochure that includes all of the ADV Part 2A information. The rule on delivery of the brochure is that either:the brochure must be delivered 48 hours prior to entering into either a verbal or written contract with the customer to provide advisory services; orif the brochure is delivered at the time that the contract is signed, the customer has 5 business days to terminate the agreement without penalty. In this case, the customer signs a contract that gives him 2 business days to rescind the deal. The rule requires that the customer be given 5 business days to rescind the deal when the customer is receiving the brochure at the time that the contract is signed. (Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract)

A person makes an initial application for State registration on March 31st. Which statement is TRUE regarding the filing fee? A. The fee will be pro-rated and only 3/12ths of the annual fee must be paid B. The fee will be pro-rated and only 9/12ths of the annual fee must be paid C. The annual fee is not pro-rated and the full year filing fee must be paid D. No filing fee is due until the annual December 31st renewal

The best answer is C. Registration applications for broker-dealers, investment advisers, and agents expire on December 31st of each year, unless the Administrator changes that date. If a new application is filed at any point during the year, there is no pro-rating of the annual filing fee amount.

The Administrator, by order, can deny any exemption from registration for which of the following? I A municipal bond issued by another state, sold in the Administrator's state II An isolated non-issuer transaction III A sale of securities to a bank trust department IV A private placement A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. The Administrator is permitted to modify the Uniform Securities Act in his or her State, and thus, can change any "exempt" transaction. However, the Administrator cannot change the exemption from registration given to the securities specified as exempt under the Act, such as U.S. Government or municipal bonds.

A new customer wants to open a discretionary account by initially depositing $20,000 in cash. He signs the authorization form and indicates to an agent that his investment objective is long-term growth. He wishes that the agent immediately invest his money to take advantage of market timing. Which statement is TRUE? A. As long as the customer is an American Citizen born in the United States and this is verified, the agent may invest the money in a manner consistent with the customer's objective B. Once the new account form is approved by the State Administrator, the agent can start investing as long as the investment is consistent with the customer's objective C. The agent should contact her branch manager as cash deposits or withdrawals exceeding $10,000 must be reported to the Department of Treasury D. The agent should contact her State Administrator as amounts exceeding $10,000 must be reported to the Secretary of the State

The best answer is C. The Department of Treasury requires that any deposits of cash made by a customer; or withdrawals of cash made by a customer; in the amount of more than $10,000, must be reported to FinCEN (Financial Crimes Enforcement Network).

The NASAA Statement of Policy regarding investment advisers that wish to exercise discretion in a customer account: A. requires that written power of attorney be obtained prior to the agent exercising discretion B. permits the agent to exercise discretion for up to 5 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period C. permits the agent to exercise discretion for up to 10 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period D. permits the agent to exercise discretion for up to 30 days upon the verbal authorization of the customer, as long as a written power of attorney is obtained by the end of that time period

The best answer is C. The NASAA Statement of Policy permits oral discretion to be exercised by an investment adviser for up to 10 business days; as long as a written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. (Please note that if the investment adviser is also a registered broker-dealer, the rules of FINRA would not permit this - FINRA requires written power of attorney from the customer prior to exercising discretion in the customer's account).

Under NASAA rules, advertisements by investment advisers: I can contain testimonials II cannot contain testimonials III can unconditionally make an offer of free services IV cannot unconditionally make an offer of free services A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. The NASAA rule on IA advertising parallels the SEC rule included under the Investment Advisers Act of 1940. The NASAA rules states that any advertisement from an investment adviser:cannot contain a testimonial (broker-dealer advertising may, however);cannot state that any report or research will be provided for free unless this is offered without condition;cannot contain false, untrue or misleading statements;can include a list of recommendations made with their performance as long as all recommendations over that period (a minimum of 1 year) 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. 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.

Which person is EXCLUDED from the definition of a broker-dealer under the Uniform Securities Act? A. A person with no place of business in the State who solely effects exempt transactions for customers that reside in the State B. A person with no place of business in the State who solely effects transactions in federal covered securities in the State C. A person with no place of business in the State that effects underwriting transactions with other broker-dealers in the State D. A person with no place of business in the State who only effects securities transactions with accredited investors in the State

The best answer is C. The Uniform Securities Act excludes from the definition of a broker-dealer, any person who has no place of business in the State and who transacts business exclusively with:issuers of securities involved in the transaction; or other broker-dealers; or banks, savings institutions, trust companies, insurance companies, investment companies, or pension plans.Basically, this provision states that an "out-of-state" broker-dealer that is not dealing with the public, will not have to register in the State. Choices A and B are broker-dealers that are dealing in either exempt transactions or federal covered securities. These are not excluded from the definition, since they can be dealing with the general public. Choice D is a broker-dealer that is only dealing with accredited investors (an individual with either $200,000 annual income or $1,000,000 net worth under Federal law). These persons are also considered to be the "public" - since these dollar limits are not that high. The broker-dealer with no place of business in the State that only deals with other broker-dealers in the State clearly meets the exclusion.

Customer privacy rules allow the disclosure of a specific customer's account information: A. under no circumstances B. to any third party that makes the request in writing C. to a third party as necessary to complete a transaction requested by that customer D. to any government agency that makes a request for information

The best answer is C. The customer privacy rules do not permit firms to disclose specific customer account information to third parties - unless the customer authorizes this. Note that "aggregated" information does not fall under this policy, such as a firm disclosing average customer account balances. Information that must be disclosed by the firm to a third party in order to effect a transaction ordered by the customer, or to maintain or service a customer account, does not fall under the policy. Also, any request for information made by a court of law does not fall under the policy; nor do information requests made by regulators such as the SEC or FINRA. Choice D is incorrect because "any government agency" cannot request customer account information.

The Administrator may deny or revoke an agent's license for which of the following reasons? I The agent has filed an application that is materially incomplete II The agent has made material misrepresentations to the Administrator III The agent has failed to post a surety bond IV The agent has failed to maintain minimum net capital A. I and II only B. III and IV only C. I, II, III D. I, II, IV

The best answer is C. There is no minimum net capital standard for agents - only for broker-dealers and investment advisers. The Administrator can deny or revoke an agent's license if the registration application is materially incomplete or if it contains material misrepresentations. The Administrator can also require the posting of a surety bond and the passing of an examination.

The amount of commission charged to a customer to effect a securities transaction: A. is not required to be disclosed B. must be disclosed prior to executing the transaction C. must be disclosed on the trade confirmation D. must be disclosed on the account statement

The best answer is C. There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is(are) considered to be a manipulative and prohibited practice(s)? I Arbitrage II Churning III Painting the tape IV Wash trades A. I only B. II only C. II, III, IV D. I, II, III, IV

The best answer is C. Trading a customer account for the purpose of generating commissions to the agent is commonly known as "churning" and is a prohibited practice. Buying a security on one exchange and simultaneously selling it to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading" (also known as "painting the tape"). Buying a security on one exchange and simultaneously selling it on another exchange for profit is a common trading technique known as "arbitrage" and is perfectly legal.

An Investment Adviser Representative is terminated. Under the Uniform Securities Act, which statement is TRUE about the records that must be retained by the Investment Adviser relating to this? A. The copy of the original U-4 signed by the registrant must be filed with the State Administrator B. The copy of the original U-4 signed by the registrant must be destroyed C. The copy of the original U-4 signed by the registrant must be retained for a period of time specified by the State D. The copy of the original U-4 signed by the registrant must be given to the terminated representative

The best answer is C. Under the NASAA Model Rule on Recordkeeping for Investment Advisers, one of the records that must be kept is: "Copies, with original signatures of the investment adviser's appropriate signatory and the investment adviser representative, of each initial Form U-4 and each amendment to Disclosure Reporting Pages (DRPs U-4) must be retained by the investment adviser (filing on behalf of the investment adviser representative) and must be made available for inspection upon regulatory request." These must be retained for the period of time that the employee stays with the IA firm, and then for an additional 5 years after termination.

Which of the following are violations of the Uniform Securities Act? I Recommending the purchase of a security from a listing provided by a broker-dealer's research department II Recommending the purchase of a security based on material inside information III Recommending the purchase of a security based on overheard rumors IV Recommending the purchase of a security without fully describing the material facts about the transaction A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Using material inside information; inducing purchases based on rumor; and not fully describing the material facts of a transaction are all prohibited practices. Recommending a security from a listing provided by a broker-dealer is normal industry practice and is allowed.

Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II Whether a payment for order flow was made III The customer name and account number IV The price of execution A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

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

A Registered Investment Adviser is one that is registered with (the): A. FINRA B. NASAA C. SEC D. MSRB

The best answer is C. An investment adviser must either register with the SEC as a Federal Covered Adviser (one with at least $100 million of AUM); or if it has less than $100 million of AUM, it registers with the State. There is no investment adviser registration with FINRA - only broker-dealers register with, and are regulated by FINRA. NASAA (North American Securities Administrators Association) is the regulator torturing you with this test, but it has no registration or enforcement capacity

All of the following orders must be retained as a record by broker-dealers EXCEPT: A. executed orders B. unexecuted orders C. canceled orders D. subscription orders

The best answer is D. 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).

An agent's license remains in effect: A. for 30 days B. for 2 years unless terminated earlier C. until canceled by the agent or revoked by the administrator D. for a period of time that may vary from State to State

The best answer is D. Agent, broker-dealer, investment adviser, and investment adviser representative registrations are good for time periods that vary from State to State, though most States have a 1 year renewal period. Registrations expire on December 31st of each year, unless the Administrator designates another date.

Under the Uniform Securities Act, a representative's registration in a State: A. means that the State Administrator approves of the individual B. also registers that individual with the Securities and Exchange Commission C. also registers that individual in each State that has adopted the Uniform Securities Act D. is effective only as long as the investment adviser is registered in that State

The best answer is D. An investment adviser representative's registration stays in effect as long as the firm remains registered. If the investment adviser has its registration suspended or revoked in the State, then all of its representative's licenses are suspended or revoked as well. If these persons associate with another registered investment adviser in that State, then they can become "representatives" again.

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

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

A representative is making a presentation to a married couple, ages 75 and 77, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statement made by the representative would NOT be misleading and fraudulent? A. "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" B. "EIAs can be redeemed at any time without penalty if you have an emergency cash need" C. "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" D. "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company"

The best answer is D. Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice A is a misleading statement. If the contract is redeemed early, there are steep surrender charges, making Choice B misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice C a misleading statement. Choice D is true - the contracts have a minimum guaranteed rate of return (like around 3%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.

Which issue would be subject to registration under the Uniform Securities Act? A. Harris Bank, selling an additional common stock offering B. Travelers Insurance Company, selling a debenture offering C. San Francisco, California, selling a general obligation bond offering D. Nanotech Corporation, (OTCBB listed), selling an additional common stock issue

The best answer is D. Exempt securities under the Uniform Securities Act include bank issues, insurance company issues and municipal issues. The corporate issues that are exempt under State law must be either exchange or NASDAQ listed. Note that the OTCBB (Over-The-Counter Bulletin Board) consists of stocks that do not meet NASDAQ listing standards - basically penny stocks - and these are non-exempt under State law.

Under the Uniform Securities Act, which of the following are allowed forms of investment adviser compensation? I Charging a flat fee only if the portfolio increases in value II Charging an hourly rate which includes the time it takes to get to the client's office and back III Charging a fee based upon a fixed percentage of assets under management IV Charging a flat fee per year regardless of the portfolio size A. I only B. III only C. II and IV D. II, III, IV

The best answer is D. Fees based upon a percentage of assets under management and flat fees (including hourly and annual fees) are permitted as long as the details are fully disclosed to customers. Performance fees are prohibited.

Filing of advertising with the Administrator is NOT required for: I U.S. Government securities II Municipal securities III Investment company securities IV NYSE-listed securities A. IV only B. I and II only C. III and IV only D. I, II, III, IV

The best answer is D. Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities.

If an investment adviser buys out another investment advisory firm, which statement is TRUE about filing fees paid to the State? A. Two additional separate filing fees must be paid for each of the advisory firms B. A new filing fee covering the entire year must be paid for the combined advisory firm C. An additional pro-rata filing fee covering the balance of the year for the combined advisory firm must be paid D. No additional filing fee is required

The best answer is D. If an investment adviser "buys out" another advisory firm, then the firm that is "bought out" ceases to exist; and the accounts of the firm that is "bought out" become part of the existing acquiring advisory firm. No additional filing fee must be paid by the acquiring advisory firm, since a new firm is not being created. As an additional note, if a new "successor" firm were created from the merger of 2 firms, the State Administrator will allow the successor firm to complete the predecessor firm's filing year, so no additional fee would be required either.

Which statement is TRUE about the delivery of a final prospectus to the purchaser of a non-exempt new issue security? A. No final prospectus delivery is required if the investor is a substantial investment adviser B. No final prospectus delivery is required if the customer received the preliminary prospectus and is provided with the final pricing amendment C. A final prospectus must be delivered, at, or prior to, confirmation of sale, to any person that gave an indication of interest D. A final prospectus must be delivered, at, or prior to, confirmation of sale, to any person who purchases the issue

The best answer is D. In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions!

Which of the following with a place of business in the State are required to register in a State? I Investment adviser representative II Federal covered adviser representative III Broker-dealer representative A. III only B. I and III only C. II and III only D. I, II, III

The best answer is D. Investment adviser representatives with a place of business in the state must register in the State; as must their investment adviser firms. Federal covered adviser representatives with a place of business in the State must also register in their State; however their federal covered investment adviser firms are not required to register in the State - they need only register with the SEC. However, the federal covered adviser firm is still required to file notice in the State. Broker-dealer representatives with a place of business in the State must register in the State; as must their broker-dealer firms.

Under the Uniform Securities Act, an investment adviser may be formed as any of the following EXCEPT a(n): A. corporation B. partnership C. association D. broker-dealer

The best answer is D. Investment advisers (and broker-dealers) can be formed as any legal operating entity, such as a corporation, partnership, sole proprietorship, association, etc. Investment advisers cannot be formed as broker-dealers; nor can broker-dealers be formed as investment advisers. Each is a legally separate entity, and each is regulated separately.

Which of the following statements is TRUE regarding paying a referral fee for investment advisory business to an unlicensed individual? A. A referral fee based on a percentage of assets invested is permitted if there is a prior written agreement between the unlicensed individual and the investment adviser B. A referral fee may be paid to an unlicensed individual only if a securities transaction results from the referral and there is a prior written agreement between the unlicensed individual and the investment adviser C. A fixed fee may be paid to an unlicensed individual for any referral D. The payment of referral fees to unlicensed individuals is prohibited

The best answer is D. Investment advisers do not earn commissions, and the prohibition on sharing commissions with unlicensed persons is not applicable. Investment advisers are permitted to pay referral fees to individuals who solicit business for the adviser, however the State defines the solicitor as an investment adviser representative that must be registered (licensed) with the State. So a referral fee can only be paid to a licensed solicitor; not to an unlicensed solicitor.

An investment adviser wishes to offer all of the medical professionals at a local hospital a reduced advisory fee in the hopes of attracting new assets to manage. Which statement is TRUE about an adviser offering discounted rates? A. The investment adviser is permitted to offer a discount to any potential customer in order to attract new business B. The investment adviser is not permitted to offer the discount unless the Administrator is notified that a discount may be offered C. The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable D. The investment adviser can offer the discount as long as the fact that non-medical professionals that are unaffiliated with the hospital pay a higher fee is disclosed in the Form ADV Part 2A

The best answer is D. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue group business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount (in this case, they must be medical professionals at the hospital); and the adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the brochure") that is given to clients.

Which of the following does NOT qualify as an exempt transaction under the Uniform Securities Act? A. A sale of common stock to an insurance company B. A sale of preferred stock by an executor of an estate C. A sale of an outstanding security that is listed on the New York Stock Exchange D. An isolated sale of corporate bonds on behalf of an issuer

The best answer is D. Isolated "non-issuer" transactions are exempt - meaning that the securities involved are not required to be registered in the State. These are transactions that take place in the secondary (trading) market. An isolated "issuer" transaction is not exempt. In this case, a corporate issuer is selling bonds, which is a security that must be registered under the Act. The sale of common stock to an insurance company is an exempt transaction, since sales to financial institutions are exempt. The sale of preferred stock by an executor of an estate is an exempt transaction, since sales by fiduciaries are exempt. Any security of an issuer which is listed on a recognized stock exchange such as the New York Stock Exchange is also exempt under the so-called "blue chip" exemption. Since these companies are also registered with the SEC under the Securities Exchange Act of 1934, secondary market trading of these securities falls under the exemption given to "non-issuer transactions in outstanding securities of companies registered under the 1934 Act." Also remember that these exemptions only apply to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.

NASAA has the power to set record retention rules for a Federal Covered Adviser that cover which of the following records? I Communications to 2 or more persons II E-mails to clients III Trial balances IV General ledger A. I and II only B. III and IV only C. I and IV only D. None of the above

The best answer is D. NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).

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

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

To protect against cyber theft, employees of broker-dealers and investment advisers must do all of the following EXCEPT: A. complete training on cyber security risks and defensive strategies B. use strong passwords in order to gain entry into customer files C. periodically change passwords used for access to customer files D. keep a written record of passwords used in a physical location apart from the employee's assigned desk or office

The best answer is D. Passwords are supposed to be kept secret and not accessible to others. Keeping a written copy in a separate location, where someone else could easily pick up the written list, is definitely a no-go!

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

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

Registration of securities in a State by Coordination becomes effective: A. when the filing with the State is completed B. 2 business days after the filing with the State is completed C. 5 business days after the filing with the State is completed D. when the Federal registration becomes effective

The best answer is D. Registration of securities in a State by coordination becomes effective at the same time that the Federal registration becomes effective. However, the Administrator requires that the registration information be on file with the State for at least 10 business days prior to the State registration becoming effective.

An investment adviser representative of a Federal Covered adviser with no office in the state only has insurance companies as clients. Where must the adviser representative register? A. SEC B. State C. Both the SEC and the State D. Neither the SEC nor the State

The best answer is D. Since the adviser is federal covered, that firm is only required to register with the SEC. It must give a notice filing to any State where it has a physical presence or where it offers advisory services. As far as the investment adviser representative is concerned, there is no registration of IARs with the SEC. They are only registered in the State where they are physically located and in each State where they solicit advisory business. For the IAR to be able to register in the State, the IA must have completed a notice filing in the State. The facts that the IAR has no office in the State and only has insurance company clients are critical in this case because an exemption from State registration is given to investment advisers and their representatives who have no office in the State and whose only clients are institutional investors. Since the IAR has no office in the State and his or her only clients are institutions such as insurance companies, the general public is not being solicited and the IAR is exempt from registration.

Which of the following securities qualify for a Blue Chip exemption under the Uniform Securities Act? I Common stock listed on the American Stock Exchange (NYSE American) II Common stock listed on the NASDAQ III Limited partnership offering where the general partner is a company listed on the American Stock Exchange (NYSE American) IV Unlisted mortgage bonds of a company whose common stock is listed on the American Stock Exchange (NYSE American) A. I only B. I and II only C. III and IV only D. I, II, and IV

The best answer is D. The "Blue Chip Exemption," exempts from State registration, issues listed on recognized stock exchanges, such as the New York Stock Exchange, American Stock Exchange (now renamed the NYSE American), or NASDAQ Stock Market, etc., as well as any senior securities of those issuers (bonds and preferred stock) and any warrants and rights of those issuers. Also note that under the National Securities Markets Improvement Act of 1996, these are now defined as federal covered securities, which are only registered with the SEC; the States cannot require registration for these issues. However, a limited partnership security where an exchange listed company acts as general partner is technically a different issuer (it is an issue of the partnership; not of the corporate general partner that is listed on the exchange). As such, it is non-exempt.

Which of the following individuals is NOT EXCLUDED from the definition of a "sales representative" under the Uniform Securities Act? A. An individual who represents an issuer in isolated non-issuer transactions B. An individual who represents an issuer in transactions with underwriters C. An individual who represents an issuer in transactions with financial institutions D. An individual who represents an issuer in transactions with investors

The best answer is D. The Act defines individuals who represent issuers effecting securities transactions with the public as "agents" who must be registered. Thus, Choice D meets this definition. The Act exempts from licensing as an "agent," those individuals representing issuers who do not deal with the public. Thus, individuals representing issuers (not broker-dealers) who deal solely with underwriters or financial institutions are not defined as "agents" who must be registered. Also, if that individual representing an issuer only performs an exempt transaction, such as an occasional trade ("an isolated non-issuer transaction"), he or she is excluded from being licensed as an "agent."

The Administrator CANNOT require which of the following regarding federal covered securities offered in a State? A. Filing of documents relating to the issue in the State B. Notice filing for the issue in the State C. Payment of a filing fee in the State D. Registration of the issue in the State

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

The Administrator will summarily cancel a broker-dealer's registration for all of the following reasons EXCEPT the licensee: A. is no longer in existence B. has ceased to do business as a broker-dealer C. has been adjudicated as mentally incompetent D. is the subject of a complaint alleging an unethical business practice

The best answer is D. The Administrator will cancel a broker-dealer's or investment adviser's registration if the firm is no longer in existence; has ceased doing business; or if the owner of the firm has become incompetent (as determined by a court of law). In Choice D, an allegation of engaging in an unethical business practice has been made, but this has not yet been determined to be the case. Furthermore, an unethical business practice might involve something that is not a very serious offense, such as failing to properly maintain records. For such a violation, the Administrator might fine the firm and make them take corrective action, but their registration would not be canceled.

The Prudent Investor rule prohibits investments in: I Futures II Options III Speculative Stocks A. I only B. I and II C. II and III D. None of the above

The best answer is D. The Prudent Investor Rule does not detail the types of investments to be made, nor does it specify that only securities are permitted investments. When investing under the rule, investments must be managed in the way that a prudent investor would.

If the Administrator designates an officer to conduct a hearing, the officer may: I administer oaths to witnesses and take evidence II subpoena witnesses and compel their attendance III require the production of books and records A. I and II only B. II and III only C. III only D. I, II, III

The best answer is D. The State Administrator is empowered, at a hearing, to administer oaths to witnesses ("Do you promise to speak the truth, so help you God" etc.); can subpoena witnesses to attend hearings; and can require the production of books and records at such hearings.

Under NASAA rules, all of the following records must be retained for at least 5 years by a Registered Investment Adviser EXCEPT: A. Cash receipts and disbursements B. Order tickets C. Written communications D. Articles of incorporation

The best answer is D. The basic rule for investment adviser records is that they must be retained for 5 years under the Uniform Securities Act. However, certain "permanent" records must be kept for the life of the firm - these include the partnership agreement if the RIA is a partnership; articles of incorporation if the RIA is a corporation; and any minutes to partnership or Board of Directors meetings. These must be kept for the life of the firm, plus an additional 3 years after the firm ceases operations.

Which statements are TRUE about State registration of solicitors for investment advisers? I Officers of investment advisers that solicit advisory business in the State must be registered in the State II Employees of investment advisers that solicit advisory business in the State must be registered in the State III Independent contractors that solicit advisory business in the State must be registered in the State IV Non-affiliated persons that solicit advisory business in the State must be registered in the State A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. The bottom line is that anyone who solicits potential clients for an investment adviser in a State must either be registered as an investment adviser or an investment adviser representative in that State. Remember that there are exemptions and exclusions from registration, but these are not addressed in this question.

Under NASAA rules, which of the following records MUST be retained by Investment Advisers? I Record of each written communication received by the investment adviser relating to any recommendation or advice II Record of each written communication sent by the investment adviser relating to any recommendation or advice III Copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication (including electronic communications) sent to 2 or more persons. IV Record of each securities transaction except for transaction not directed or controlled by the adviser and transactions in U.S. Government securities. A. I and III only B. II and IV only C. I, II, III only D. I, II, III, IV

The best answer is D. The list of required records is extensive and includes:Journals of original entry, such as cash receipts and disbursements;General ledger and trial balances;Order ticket copies (order memoranda); Copies of canceled checks, bank statements and bank reconciliations; Originals of all written communications received and sent by the investment adviser relating to any recommendation or advice about securities;List of discretionary accounts; Copy of each power of attorney granted to the adviser; Copy of each advisory agreement entered into with a client; Copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication (including electronic communications) sent to 2 or more persons; Record of each securities transaction except for transactions not directed or controlled by the adviser and transactions in U.S. Government securities; U-4 Form for each Investment Adviser Representative and subsequent amendments. There is no rule requiring advisers to obtain copies of customer tax returns!

Under the Uniform Securities Act, posting of cash in lieu of meeting the surety bond requirement is permitted for all of the following EXCEPT: A. Agent registration B. Broker-dealer registration C. Investment adviser registration D. Security registration

The best answer is D. The posting of a surety bond can only be required by the Administrator for registration as a broker-dealer, investment adviser, or agent. When such a bond is posted, the State, in effect, has money on deposit from the registrant that the Administrator can take to satisfy any claims resulting from a violation of the Act. There is no requirement for the posting of a surety bond for a securities registration.

XYZ Advisers is a federal covered adviser with an office in State A. It has 400 clients in State A; 6 clients in State B; and 3 clients in State C. A customer in State C files a complaint with that State's Administrator alleging that XYZ adviser made misleading statements. Which State Administrator(s) has the authority to revoke XYZ Adviser's registration? A. State A only B. States A and B only C. States A, B and C D. None of the above

The best answer is D. The wording here is tricky! This is a federal covered adviser, so it is not registered with any State; rather, it is registered with the SEC and only the SEC can revoke its registration. Regarding each State, the adviser must notify the State if it is doing business in the State. If a complaint is filed with the Administrator of a State for a federal covered adviser, the State can still investigate and issue an order against the adviser; but it has no registration that it can revoke! One must read these questions careful

The term "issuer" applies to a: A. person who proposes to sell a security B. director of a company that is selling new shares to the public C. trader executing trades off an exchange floor D. market maker in a security traded over-the-counter

The best answer is A. An "issuer" is defined as any person who issues, or proposes to issue, a security. Directors of companies that are selling new issues are not issuers. However they can be defined as "agents" of the issuer. Traders execute trades in the secondary market and have nothing to do with issuers. Market makers also trade stocks for their own accounts in the secondary market and have nothing to do with issuers.

An investment adviser that takes custody MUST send quarterly account statements to which of the following? A. Customer mailing address B. Qualified custodian mailing address C. Investment adviser mailing address D. All of the above

The best answer is A. An investment adviser that takes custody, under NASAA rules, must send quarterly account statements to customers, at the mailing address specified by the customer (an e-mail address is acceptable, as long as the adviser has proof of delivery of the e-mail).

A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of: A. being solicited to purchase the new issue B. entering into the contract to purchase the new issue C. completion of the purchase of the new issue D. settlement of the purchase of the new issue

The best answer is B. The rule for prospectuses is that they must be delivered at, or prior to, confirmation of sale. The generation of the confirm is the time that the customer is legally entering into the "contract" to buy the security, so this is the best answer. Settlement is the date (typically 3 business days after the confirm is generated) when the customer actually makes the payment for the purchase. This is when the transaction is legally "complete."

A registered securities agent has been contacted by an independent venture capitalist to obtain customers for a private placement that he is forming. Which statement is TRUE? A. The agent is prohibited from directing customers to the venture capitalist B. The agent is permitted to direct customers to the venture capitalist without restriction C. The agent is permitted to direct customers to the venture capitalist with the permission of the Administrator D. The agent is permitted to direct customers to the venture capitalist if the agent has posted a surety bond

The best answer is A. If this agent were to direct his customers to the venture capitalist, he would be "selling away" from his firm - that is, putting his customers into a security that his firm doesn't know about in a transaction that the firm is not supervising. Such private securities transactions are a prohibited business practice under the Act. All trades effected by an agent must be recorded on the books of the broker-dealer and supervised by the broker-dealer.

"Painting the tape" is the: A. illegal practice of effecting wash trades in thinly traded issues in a common trading pool B. illegal practice of matching buyers and sellers who want immediate trade executions C. legal practice of effecting both long sales and short sales subject to the "uptick" rule D. legal practice of taking both a stock and option position on the same "side of the market"

The best answer is A. In the "old" days, stock trade reporting was done mechanically through the "ticker tape." The "ticker" was a machine similar to a telegraph that received reported trades and printed them on a paper tape. A manipulative practice was "painting the tape" - that is, effecting a series of buy and sell trades in a stock at successively higher prices, but where there is no change of ownership (so-called "wash" trades) just to show trading activity coming across the tape. This was done by a group of individuals who owned the stock and who would trade with each other at successively higher prices, to create the appearance of activity and upward price movement in the stock. The individuals in the trading pool would rebate the gain or loss among themselves during the time period that they were doing the wash trades. The increased trading activity would attract other traders to buy the stock (since they would think that "something was going on with the stock"), and the price would rise - at which point, the manipulators would unload their stock position.

Limited partnership shares are sold to a bank. Under the provisions of the Uniform Securities Act of 1956, as amended, this transaction is subject to: I advertising filing requirements with the Administrator II anti-fraud provisions as promulgated in the Act III payment of filing fees with the State A. I and III only B. II only C. II and III only D. I, II, III

The best answer is B. The sale of securities to a financial institution is an "exempt transaction" under the Uniform Securities Act - because the general public is not involved. As an exempt transaction, the securities involved are not required to be registered in the State (however the person selling them must still be registered in the State). Both exempt securities and exempt transactions are specifically excluded from the Act's advertising filing requirements. Finally, filing fees are only required for securities registrations in the State (primary market); not for secondary market transactions that occur in the State.

An Investment Adviser has adopted an internal Business Succession Plan. Who is responsible for servicing the IA's client accounts if the managing director of the Investment Adviser suddenly dies? A. Another Investment Adviser Representative currently in the firm B. Another Investment Advisory Firm to which investment management has been transferred C. The custodian bank that holds client funds and securities positions D. An immediate family member of the deceased managing director

The best answer is A. NASAA has a model rule on "Business Continuity and Succession Planning" for Investment Advisors. The rule requires IAs to draft a plan for the actions to be taken in the event of an unexpected major negative event occurring at the IA firm. One of the issues that must be addressed in the plan is the death or disability of key personnel. To continue servicing client accounts in such an instance, the IA can adopt either an "internal" or "external" Succession Plan. In an "internal plan," the Adviser transfers the advisory responsibilities to another IAR currently in the firm. With an "external" Succession Plan, the Adviser transfers client management to another firm.

Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following information EXCEPT: A. time of execution of the order B. person who placed the order C. name of account for which order was entered D. name of broker-dealer to which the order was sent

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

Two companies, Company A and Company B, are involved in a securities offering. Company B is selling its stock. Company A's employees help sell the shares. Company A receives commissions from Company B and pays the commissions to its staff. Therefore, the employees of Company A are: A. agents of a broker-dealer B. their own broker-dealer C. independent contractors D. agents of an issuer

The best answer is A. Since Company A's employees are being compensated for selling the shares of Company B, Company A is defined as a "broker-dealer" and Company A's employees are agents of the broker-dealer. Both Company A and its employees would be required to register in the State. Also note that Company B would be defined as an "issuer" in this transaction, but this is not part of the question.

Which statements are TRUE about required notice to the Administrator? I When an agent begins or terminates a connection with a broker-dealer, the agent and broker-dealer must notify the Administrator promptly II When an agent begins or terminates those activities which make him or her an agent, the agent and broker-dealer must notify the Administrator promptly III When an agent begins or terminates a connection with a broker-dealer, the agent and broker-dealer must notify the Administrator within 30 days IV When an agent begins or terminates those activities which make him or her an agent, the agent and broker-dealer must notify the Administrator within 30 days A. I and II B. III and IV C. I and IV D. II and III

The best answer is A. The Uniform Securities Act requires that if an agent associates or disassociates with a broker-dealer, prompt notice must be given to the State Administrator by BOTH the broker-dealer and agent.

Which statements are TRUE regarding joint accounts? I An order to buy or sell may be accepted from any single account owner II An order to buy or sell can only be accepted from all account owners jointly III An order to draw a check on the account can be made by any single account owner IV An order to draw a check from the account must be made by all of the account owners jointly A. I and III B. I and IV C. II and III D. II and IV

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

A federally registered investment adviser makes a subsequent material change to its manner of business operations. This event: A. is not required to be reported to the Administrator of each State where the adviser does business B. must be reported promptly to the Administrator of each State where the adviser does business C. must be reported within 30 days to the Administrator each State in which the adviser does business D. must be reported to the Administrator when the adviser files its annual ADV Part 2 update with the State

The best answer is B. Federal covered advisers are required to register with the SEC, but they are still required to make notice filings in each State in which they do business. If there is a subsequent material event, the notice filing in each State must be updated "promptly."

A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action is: I allowed II not allowed III considered to be "soft dollar" compensation IV not considered to be "soft dollar" compensation A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question. Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.

Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II The exchange where the transaction was effected III The customer name and account number IV The price of execution A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

The best answer is B. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.

Under the provisions of the Uniform Securities Act, which statements are TRUE? I An investment adviser with a place of business in the State, need not register in that State if it is only dealing with insurance companies II A broker-dealer with no place of business in the State, need not register in that State if it is only dealing with insurance companies III If a broker-dealer is registered with the Financial Industry Regulatory Authority, then it is also registered in that State IV If a broker-dealer has its registration revoked, then the registration of its agents will also be revoked A. I and III B. II and IV C. I, II, IV D. I, II, III, IV

The best answer is B. If an investment adviser has no place of business in a State, and only deals with "professional investors" in that State, then it would be exempt from registration in that State. However, in Choice I, the adviser has a place of business in the State, and hence, must register. Once the adviser has an office in the State, it makes no difference who the adviser deals with - the adviser must register. Broker-dealer registration requirements are similar to the rules outlined above. If a broker-dealer has no place of business in a State, and transacts only with other broker-dealers and institutional investors, it is exempt (making choice II correct). Once a broker-dealer has an office in the State, it must register - it makes no difference who the firm's customers are. If a broker-dealer is registered with FINRA, this does not mean that the firm is registered in the State. FINRA member firms are required to register under Federal Law (Securities Exchange Act of 1934). Federal registration requirements have no bearing on State registration requirements for broker-dealers (though this is not the case with federal covered advisers!). Thus Choice III is incorrect. Finally, Choice IV is true. If a broker-dealer has its registration revoked, then its agents' registrations are also revoked (since an agent can only register through a registered broker-dealer). Note, conversely, that if an agent's registration is revoked, this has no bearing on the status of the broker-dealer's registration.

The provisions of the Uniform Securities Act apply to solicitation of the public to buy or sell securities or advisory services that are made: A. by mail or telephone in that State and received in that State B. by mail or telephone outside that State and received in that State C. by mail or telephone either inside or outside that State and received in that State D. by mail or telephone either inside or outside that State and are received either inside or outside that State

The best answer is C. Each State Administrator only has jurisdiction over solicitations or transactions involving securities or advisory services that are received in that Administrator's State. It makes no difference where the solicitation came from - it might have come from within that State or from outside that State.

All of the following are federal covered securities EXCEPT: A. NYSE listed issues B. NASDAQ listed issues C. SEC registered issues D. Registered investment company issues

The best answer is C. Federal covered securities that cannot be required to be registered in each State include NYSE listed issues, NASDAQ listed issues and registered investment company issues. SEC registered issues are not necessarily "federal covered" securities. For example, issues listed in the OTCBB or Pink Sheets are SEC registered, but they are not "federal covered" securities. These issues represent the speculative (risky) side of the marketplace, and it is specifically these issues that are in the state regulators' crosshairs. These issues are SEC registered, but they also are required to be registered in each State where offered.

All of the following securities are exempt from registration under the Uniform Securities Act EXCEPT: A. Railroad common stock B. Municipal bonds C. Canadian common stocks D. Foreign government bonds

The best answer is C. Foreign government securities (that means debt, since governments don't issue stock) are exempt. Foreign stocks, however, are non-exempt, and must be registered with the State. Railroad common stock is exempt, since common carriers regulated by the Interstate Commerce Commission (ICC) are exempt; so are municipal bonds and foreign government bonds.

Attaching any of the following to a prospectus delivered to a customer in connection with the purchase of a new non-exempt securities offering would be a violation of the Uniform Securities Act EXCEPT a(n): A. summary of the important points in the prospectus prepared by the broker-dealer offering the securities B. copy of the most recent advertisement published by the issuer in the mass media C. supplement that presents the issuer's most recent audited financial statements D. internal report prepared by the issuer that shows the next 12 months' sales projections

The best answer is C. Prospectuses cannot be altered or summarized by anyone - to do so would change the content and disclosures made to investors. Prospectuses are legal disclosure documents that are non-promotional, so copies of company advertisements cannot be attached. Similarly, reports showing the prospects of increasing sales for the company cannot be attached because they are promotional. A supplement attached to the prospectus of the company's most recent audited financial statements is non-promotional and can be attached. This is valuable unbiased investment information

Under the NASAA Statement of Policy, discretion may be exercised in a customer account without first receiving a written power of attorney from that customer: A. under no circumstances B. if it relates only to the size of the trade or the security to be traded C. if it relates only to the price of the trade or the time of the trade D. if the trade is for an institutional customer or another broker-dealer

The best answer is C. The definition of "discretion," where a written power of attorney is needed from the customer, is if the agent is selecting either the security to be traded or the size of the trade. No written power of attorney is needed for an agent to select either price of execution or time of execution in a transaction. For example, if a customer says "Buy me 100 shares of ABCD when you think the time is right," the agent can choose the price and time of that trade execution without needing a written power of attorney.

A customer has an individual account. Upon written request, the customer's account statements and confirmations may be sent to the: A. Agent B. Broker-dealer C. State Administrator D. None of the above

The best answer is D. Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office, because then the customer would not know what was going on in the account.

An agent representing a broker-dealer lives in one State and wishes to solicit business in a neighboring State. Which statement is TRUE? A. The agent does not have to register in the neighboring State if his or her transactions are limited to securities exempted under the Uniform Securities Act B. The agent does not have to register in the neighboring State if no commissions or remuneration is received on these trades C. The agent does not have to register if he or she solicits 10 or fewer customers in a 12 month period in the neighboring state D. The agent, and the employing broker-dealer, must be registered in the neighboring state

The best answer is D. Even if a transaction is exempt (which means that the securities that are the subject of the trade need not be registered), the agent handling the trade must be registered with the State. The fact that the agent will not earn any commissions for effecting trades in the neighboring State has no bearing on his requirement to be registered. The "de minimis" exemption for broker-dealers (and agents) is only available in a minority of states and, for those states that have it, generally limits a broker-dealer (or an agent) to no more than 3 clients in the State in a year. This agent is soliciting 10 clients in a neighboring State, so the "de minimis" exemption would not apply. The only reason for an agent not to register is if that individual does not fall under the definition of "agent," or if his broker-dealer is exempt from licensing in that State.

If an adviser is suspicious about a customer's account activity and believes that there may be illegal activity, then the adviser: I must file a CTR report with FinCEN II must file an SAR report with FinCEN III in 15 days IV in 30 days A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. If an adviser is suspicious about a customer opening an account, then a "Suspicious Activities Report" must be filed with FinCEN (Financial Crimes Enforcement Network - part of the Department of Treasury) within 30 days. The customer cannot be told that the report is being filed.

Under the Uniform Securities Act, an investment adviser may share in the profits of a client's account: A. if the agreement provides for this in writing B. if the Administrator approves C. if the adviser agrees to share equally in any losses in the account D. under no circumstances

The best answer is D. Investment advisers are prohibited from sharing in the gains of a client's account. Advisory fees are based on a percentage of assets under management.

Under the Uniform Securities Act, all of the following persons with no place of business in the State are EXEMPT from registration as an investment adviser EXCEPT advisers that: A. deal solely with insurance companies B. deal solely with investment companies C. deal solely with broker-dealers D. have more than 5 clients in the state in the preceding 12 months

The best answer is D. Investment advisers that are exempt from registration include advisers with no place of business in the State who deal solely with other advisers, broker-dealers, insurance companies, investment companies, financial and institutional investors, and government agencies. Also, advisers with no place of business in the State that have NO more than 5 clients in the State in the preceding 12 months are exempt. If an adviser with no place of business in the State has MORE than 5 clients in the State, then it must register.

Which statements are TRUE about registration of investment advisers? I An adviser with no place of business in the State that limits its clientele to insurance and investment companies is exempt from registration II Broker-dealers can act as investment advisers without registering as such if any advice given is solely incidental to the business of the broker-dealer III Investment Advisers must register with the State A. I only B. II and III C. I and III D. I, II, III

The best answer is D. Investment advisers with no place of business in a State that limit their clientele to insurance companies and investment companies are exempt from registration because they are dealing with professionals - not the general public. Note that if an adviser is physically located in a State, then it still must register. If a broker-dealer is registered as such with the state, then a second registration is not required for that firm to act in the capacity of an "investment adviser" - as long as such investment advice is solely incidental to the broker-dealer's business. This avoids the dual registration of these firms. Please note that if this firm were to actually sell investment advice, it would be required to register in the state as an investment adviser. Investment advisers must register in the state unless an exemption is available.

Which statements are TRUE about surety bond coverage required for a registration application under the Uniform Securities Act? I In lieu of posting a surety bond, the Administrator must accept a deposit of cash in the appropriate amount II In lieu of posting a surety bond, the Administrator must accept a deposit of securities in the appropriate amount III The Administrator is permitted to waive the surety bond requirement for registrants whose net capital or net worth exceeds a stated dollar amount IV If there is a surety bond requirement, the Administrator is not permitted to accept cash or securities as a substitute A. I only B. I and II only C. III and IV only D. I, II, III

The best answer is D. It is true that, in lieu of posting a surety bond, the Administrator must accept a deposit of cash in the appropriate amount, or a deposit of securities in the appropriate amount. The Administrator is permitted to waive the surety bond requirement for registrants whose net capital or net worth exceeds a stated dollar amount. It is untrue that if there is a surety bond requirement, the Administrator is not permitted to accept cash or securities as a substitute.

The Administrator is permitted to initiate a disciplinary proceeding against an agent for all of the following reasons EXCEPT if he or she: A. finds that the agent has engaged in dishonest practices 6 months after that individual's registration has been terminated B. finds that the agent has engaged in dishonest practices 6 months after that individual's registration has expired C. finds that the agent has failed to disclose a prior felony conviction D. knew of facts at the time that the agent was granted the license, but did not deny the license based upon those facts

The best answer is D. The Administrator is NOT permitted to suspend, or revoke a registration based upon facts known to the Administrator at the time that the registration was granted; where at that time the Administrator did not use those facts as a basis to deny registration. The Administrator can initiate a disciplinary proceeding against an agent for up to 1 year after the agent's license has been terminated. Thus, one cannot break the law, withdraw one's registration, and then claim that the Administrator has no jurisdiction. Thus, the Administrator can initiate a proceeding in Choices A and B. Of course, the Administrator can suspend or revoke a registration based upon the discovery of facts that were not disclosed on the initial registration (Choice C).

Under the Prudent Investor Act, a trustee's investment and management decisions should be evaluated: I based on each individual transaction II based on the context of the portfolio as a whole III as part of the investment strategy of each single trust beneficiary IV as part of the overall investment strategy for all beneficiaries of the trust A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. The Prudent Investor Act states that a fiduciary does not have to be "prudent" on each separate transaction - rather, the Act requires that the overall portfolio return is the proper assessment measure. If there are multiple beneficiaries whose assets are being managed in one account, the rule is not applied to each beneficiary, but overall to all of the beneficiaries in the trust.

A retired 81 year old customer has $36,000 of annual income from a pension and social security. She has no investments other than a fully-paid home worth $120,000. She has just inherited $75,000 that she would like to invest for supplemental monthly income with minimum default risk. The BEST recommendation is for the customer to purchase: A. AAA rated municipal bonds B. a variable annuity C. whole life insurance D. U.S. government bonds

The best answer is D. This customer is past her life expectancy, so she is not insurable, making Choices B and C incorrect. She only has $36,000 of annual income, so she is in a low tax bracket, making tax-free municipal bonds an inappropriate investment. U.S. Government bonds give a higher (taxable) yield than municipals, but since she is in a low tax bracket, she will keep more of the return "after-tax." And they are a top credit, so there is minimum default risk.

All of the following information must be recorded on an order ticket EXCEPT: A. time of order receipt B. customer account name/number C. name of person entering the order D. time and date of execution

The best answer is D. Time and date of execution is only recorded on an order ticket if it is executed - which may never happen! The name of the customer and account number must be recorded as well as an identifier of the person who prepared the order ticket. The order ticket must be stamped with time of order receipt; time of order execution (if it is executed) and time of order cancellation (if it is canceled.)

Which of the following information MUST be recorded on an executed order ticket? I Time of execution II Time of receipt III Account number IV Solicited or unsolicited A. I and II B. III and IV C. I, III, IV D. I, II, III, IV

The best answer is D. Time of order receipt is recorded on the order ticket, as is time of order execution, assuming that the order was filled (which is the case here). Both of these are required to permit regulators to be able to detect "front running" violations. They are also needed to resolve customer complaints about possible execution errors. The account name and/or number must be on the order ticket. Finally, it must be recorded whether the trade was solicited or unsolicited.

A State Administrator can require that a new investment adviser who files a registration application in the State file: I Proposed advertising II An announcement of the application in 1 or more newspapers III Standardized form letters to be used for prospecting A. I only B. I and II only C. II and III only D. I, II, III

The best answer is D. Under the Uniform Securities Act, the Administrator can require the filing of any prospectus, pamphlet, circular, form letter, advertisement or other sales literature or advertising communication addressed or intended for distribution to prospective investors. As part of the initial registration process, the Administrator can require that the applicant "publish an announcement of the application in one or more specified newspapers published in the state."