Unit 1 - Regulation of Investment Advisers

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? I. Agents II. Broker-dealers III. Investment Advisers. A) II and III B) I and III C) I and II D) I, II and III.

Answer: A) II and III Only broker-dealers and investment advisers are required to maintain financial records. Agents must maintain sales records, but there are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers.

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) if accompanied by an unmarked prospectus B) under no circumstances C) without restriction D) if approved by a principal

Answer: B) under no circumstances The prospectus is a legal document and may not be altered.

An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the "pay-to-play" prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than A) $500 per election cycle for a candidate that IAR was eligible to vote for B) $250 per election cycle for a candidate that IAR was ineligible to vote for C) $350 per election cycle for a candidate that IAR was eligible to vote for D) $350 per election cycle for a candidate that IAR was ineligible to vote for

Answer: C) $350 per election cycle for a candidate that IAR was eligible to vote for There is a de minimis level that is considered an exception from the pay-to-play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle.

John Johnson was convicted five years ago of failure to pay child support, a misdemeanor in his home state. Mr. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will A) consider granting registration to Mr. Johnson, but only if he receives heightened supervision. B) determine Mr. Johnson's status based upon the extent to which his child support payments are being paid. C) disregard that conviction when determining Mr. Johnson's qualifications for registration. D) consider Mr. Johnson to be statutorily disqualified since in this state his crime is a felony.

Answer: C) disregard that conviction when determining Mr. Johnson's qualifications for registration. The conviction on Mr. Johnson's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to Mr. Johnson's application for registration in that state.

An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working one day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Complying with the notice filing requirements of the state B) Passing an oral or written examination C) Becoming licensed as a broker-dealer D) Register as an investment adviser representative in State B

Answer: D) Register as an investment adviser representative in State B Individuals managing client assets while employed by federal covered investment advisers, must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT A) a mutual fund may not use the term no-load if its 12b-1 fee exceeds .25% B) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company C) an investment company must have more than $100,000 capitalization to be offered to the public D) an investment company's board of directors may be composed of up to 70% of the company's interested persons

Answer: D) an investment company's board of directors may be composed of up to 70% of the company's interested persons At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company.

Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for A) 3 years after the dissolution B) 5 years from the date of organization C) the lifetime of the firm D) 5 years after the dissolution

Answer: A) 3 years after the dissolution Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than 3 years after dissolution.

According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level? A) 5% B) 2% C) 12% D) 10%.

Answer: A) 5%. An interested person is any person (including two or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer. Such persons are required to file reports of beneficial ownership on Schedule 13D with the issuer, the exchanges (if a listed security), and the SEC within ten days of exceeding the 5% level.

Which of the following statements relating to penalties under the USA is CORRECT? A) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. B) Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act. C) A seller who notices that a sale was made in violation of the act may offer a right of rescission to the purchaser that must be accepted either 2 years after notice of the violation or 3 years after the sale, whichever comes sooner. D) Any person aggrieved by an order of the Administrator may request an appeal of the order within 15 days which, in effect, functions as a stay of the order during the appeal period.

Answer: A) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. To be subject to time in prison, a sales agent must knowingly have violated the USA. A client who purchased a security in violation of the USA may recover the original purchase price plus costs involved in filing a lawsuit. In addition, the purchaser is entitled to interest at a rate stated by the Administrator, less any earnings already received on the investment. The right of rescission must be accepted or rejected within 30 days of receipt of the letter of rescission; it is the statute of limitations for claims that runs the 2- or 3-year period. An appeal will only stay an order when so directed by a court of competent jurisdiction.

Under current law, who of the following would be required to register as an investment adviser in a state? I. A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein II. A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state III. A person whose home office is in the state and who manages less than $90 million in assets IV. A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state A) I, II and III B) I, II and IV C) II and III D) III and IV

Answer: A) I, II and III Persons having no place of business in a state are generally limited to directing fewer than 6 offers to retail (individual) residents of that state within any 12 month period before being required to register. Unless an exception applies, investment advisers who have less than $100 million in AUM must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level. The exemption from registration for those who have no office in the state and only deal with issuers applies to broker-dealers, not to investment advisers.

Which of the following are accredited investors? I. An individual whose net worth, excluding the value of her principal residence, is greater than $1 million. II. An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. III. Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. IV. A newly registered open-end investment company with net assets of $600,000. A) I, II, III and IV B) I and II C) I, II and III D) III and IV.

Answer: A) I, II, III and IV. An accredited investor can take different forms; an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.

Under the Securities Exchange Act of 1934, the authority of the SEC to investigate violations of rules extends over: I. the state securities statutes. II. the federal securities acts and rules of the SEC. III. the SROs. A) II and III. B) I and III. C) I and II. D) I, II and III.

Answer: A) II and III The SEC may investigate any situation it believes may have violated federal securities laws, its own rules, and rules of the SROs (i.e., exchanges, FINRA, MSRB). The SEC does not enforce state securities statutes or state or federal banking laws.

The Investment Company Act of 1940 does which of the following? A) Prescribes procedures for the establishment of investment companies. B) Sets rules for the registration of investment advisers. C)Governs the issuance of new issues. D) Regulates the secondary market.

Answer: A) Prescribes procedures for the establishment of investment companies. The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure investors are fully informed and fairly treated by the management of investment companies.

You are an IAR. One of your clients is a C level officer with a publicly traded corporation. When needing to relieve yourself, you are shown to the executive washroom. While cleaning up, you notice a report, stamped "Confidential" and a quick peek reveals that it is highly favorable to the company. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, you: A) cannot buy any of the stock for personal or client accounts B) can accept unsolicited orders from clients and buy for your personal account only C) should tell your client what you saw and ask permission to act on this information D) contact the Administrator immediately.

Answer: A) cannot buy any of the stock for personal or client accounts. This is a case of "accidentally" acquiring material, inside, nonpublic information. Under no circumstance are you permitted to make any use of this until the report is made public. Trick - you may accept unsolicited customer orders (unless they were in the washroom with you), but you can't do anything for yourself.

An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case A) the IAR may exercise his discretion as authorized and sell the CANCO B) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork C) the IAR must wait for the signed paperwork to be received D) the investment adviser firm should apply to the Administrator for an extension of time

Answer: A) the IAR may exercise his discretion as authorized and sell the CANCO Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used for the initial transactions in a customer's account for the first 10 business days after the date of the first transaction.

Under the Uniform Securities Act, an agent's request for withdrawal of registration takes effect: A) 30 days after receipt of an application to withdraw. B) 30 days after receipt of an application to withdraw or within such a shorter period of time as the Administrator may determine. C) 45 days after receipt of an application to withdraw. D) 60 days after receipt of an application to withdraw.

Answer: B) 30 days after receipt of an application to withdraw or within such a shorter period of time as the Administrator may determine. The Administrator has the power to shorten the time period for both withdrawal and initial registration. Always choose the answer that is the most correct.

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Securities issued by which of the following qualify for an exemption from registration under the Act? I. Life insurance companies authorized to conduct insurance sales in that state. II. Railroads whose rates are subject to regulation by a state or federal agency. III. Commercial paper with no more than 9 months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $25,000. IV. Bonds that are obligations of the People's Republic of North Korea. A) II and III B) I and II C) I, II, III and IV D) I, II and III

Answer: B) I and II Any life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads are under the jurisdiction of other state or federal regulators and their equipment trust certificates carry an exemption from state securities registration. The commercial paper would qualify if the denomination was $50,000 instead of $25,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations; at the time of this writing, North Korea does not qualify.

Section 15 of The Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: I. no contract may be terminated with more than 60 days notice in writing. II. the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis. III. unless a specific exemption applies, the fund may not engage in margin trading . IV. the contract must be in writing. A) I and III B) I and IV C) II and III D) II and IV.

Answer: B) I and IV Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.

Among the powers granted to the Administrator under the Uniform Securities Act (USA) is the power to I) audit the books of a federal covered adviser​ with clients in his state​ if he suspects fraudulent business behavior II) permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000 III) require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes IV) require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the ​investment ​adviser has a place of business in the state A) III and IV B) I, II and III C) I, II, III and IV D) I and III

Answer: B) I, II and III Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. IARs associated with federal covered advisers are only required to register in a state in which they (the IAR)​ have a place of business.

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are: I. mutual funds are only allowed to maintain TIC accounts with other funds that are members of the same family of funds. II. no public offering may commence unless the fund has at least $100,000 in net assets. III. no registered investment company may own more than 3% of the voting shares of another registered investment company. IV. shares of the fund will not have any margin loan value until the 30th day after purchase. A) II and IV B) II and III C) I and II D) I and IV

Answer: B) II & III The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Since the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.

Mark is a client of Gibraltar Investment Advisers. Gibraltar sells its investment advisory business to Alpha advisers. Which of the following best describes Mark's relationship to Alpha? A) Mark may not become a client of Alpha. B) Mark may become a client of Alpha if he chooses to do so. C) Mark is automatically a client of Alpha. D) The investment advisory contract Mark made with Gibraltar continues with Alpha.

Answer: B) Mark may become a client of Alpha if he chooses to do so. An investment advisory relationship may not be assigned without the consent of the client. The client may choose to enter into a contract with the new firm. The contract with the old firm becomes void when it sells its business.

XYZ Corporation has been in business for more than 20 years. They need additional capital for expansion, and they determine that an initial a public offering in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering? A) Registering by qualification. B) Registering by coordination. C) Providing notice filing to those states in which shares are to be issued. D) Registering by notification.

Answer: B) Registering by coordination. Because this offering is being made in more than one state, SEC registration is necessary. The state registration method would be coordination, which is the simultaneous registration of a security with both the SEC and the states.

Under the Uniform Securities Act, an investment adviser would be permitted to maintain custody of customer cash and/or securities if: A) the IA maintained net worth or a surety bond of at least $10,000. B) notification was given to the Administrator and custody was not prohibited by that state's rules. C) permission was obtained from the Administrator and custody was not prohibited by that state's rules. D) customer permission was obtained prior to entering into the contract.

Answer: B) notification was given to the Administrator and custody was not prohibited by that state's rules. In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about bonding or net worth? Under the USA, in order to maintain custody, an IA must have net worth of no less than $35,000, or provide a suitable surety bond.

An individual, registered as an agent with ABC broker-dealer, has an independent financial planning practice. Hourly fees are charged for developing financial plans, and if the client wishes, he refers transactions to ABC broker-dealer and is paid commissions for products sold. The Investment Advisers Act of 1940 requires: A) that ABC register as an investment adviser but not the financial planner. B) that the financial planner register as an adviser but not the broker-dealer. C) neither the financial planner nor ABC is required to register as an investment adviser. D) that ABC register as an investment adviser because it sells securities.

Answer: B) that the financial planner register as an adviser but not the broker-dealer. The agent is receiving compensation for rendering advice. A broker-dealer is exempt from registering as an investment adviser unless it receives special compensation (typically a fee) for the advice.

An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state: A) with at least 1/3 of its circulation in the state. B) under no circumstances. C) with at least ½ of its circulation in the state. D) with at least 2/3 of its circulation in the state.

Answer: B) under no circumstances. An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than two-thirds of its circulation outside the state during the past twelve months

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Broker-dealers must maintain records of electronic communications for a minimum of three years. B) Broker-dealers must maintain records of trade blotters for a minimum of three years. C) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. D) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of five years.

Answer: C) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Emails are treated as any other communication: three years for broker-dealers and five years for investment advisers.

Which of the following statements are TRUE? I. When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. II. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. III. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. IV. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) II and IV B) III and IV C) I and II D) I and III.

Answer: C) I and II When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.

John, an investment adviser, employs an investment adviser representative who is found guilty of defrauding many of the firm's clients over a long period of time. Which of the following is (are) TRUE under the Uniform Securities Act? I) The investment adviser representative is subject to criminal penalties specified in the act and to civil liabilities resulting from clients who sue as a result. II) John may be subject to civil liabilities resulting from actions taken by the investment adviser representative. III) John is not subject to civil liabilities as a supervisor if he can prove that he had no knowledge of the actions of the representative and while exercising reasonable care, he could not have had knowledge of the violations. A) I and III. B) II and III. C) I, II and III. D)I and II.

Answer: C) I, II and III Persons convicted of willful violations are subject to the criminal penalties specified in the act (three years and/or $5,000 fine). Thus, the representative is subject to criminal penalties and civil liabilities resulting from clients who sue him for loss of money. The act subjects to civil liabilities any person supervising those who violate the law. However, a supervisor may not be held liable for the actions of those whom he supervises if it can be proved that the supervisor used reasonable care to discover and prevent the violations and has no knowledge of the violations.

An investment adviser would be exempt from registration under the Uniform Securities Act if it had no place of business in this state and its only clients were: I. banks II. insurance companies III. registered investment companies IV. other investment advisers A) III and IV B) I, II and III C) I, II, III and IV D) I and II.

Answer: C) I, II, III and IV As long as the investment adviser does not maintain a presence in this state and its only clients are broker-dealers, other investment advisers, or institutional clients, it is exempt from registration in this state.

Which of the following statements regarding financial requirements that may be imposed by the Administrator are TRUE? I. Agents may be required to be bonded. II. Investment adviser representatives may have to meet certain net worth standards. III. Broker-dealers may have to meet certain net capital levels. IV. Investment advisers may post a bond instead of meeting certain net worth levels. A) I, II and III B) III and IV C) I, III and IV D) I, II, III and IV

Answer: C) I, III and IV Individuals registered as agents may be required to be bonded, but these individuals, as well as those registered as investment adviser representatives, never have to meet net worth or net capital standards; those are for broker-dealers and investment advisers only. The USA does allow a broker-dealer or investment adviser to post a bond instead of demonstrating a certain net capital or net worth.

Under which of the following circumstances may an Administrator revoke a state registered investment adviser's registration? A) The adviser has been declared mentally incompetent by a court of jurisdiction. B) The adviser is no longer in business. C) The adviser has been convicted of a nonsecurities-related felony. D) The adviser cannot be located after a reasonable search by the Administrator.

Answer: C) The adviser has been convicted of a nonsecurities-related felony. If an adviser committed a felony or participated in unethical business practices, its registration will be revoked, not canceled. An adviser's registration may be canceled if the adviser is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing.

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT that they: A) must be in writing B) cannot be assigned without customer approval C) cannot allow for prepaid advisory fees D) can only allow fees to be performance related under certain limited circumstances.

Answer: C) cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2 million, where performance-based fees are permitted.

The National Securities Markets Improvement Act of 1996 (NSMIA) A) created the concept of fraud, as used in the Uniform Securities Act B) overcame the restrictions of selling securities in the interstate commerce C) defined the term "federal covered adviser" D) created a national market system

Answer: C) defined the term "federal covered adviser" The NSMIA defined the term "federal covered adviser" referring to advisers who must register with the SEC or who are excluded from the definition of "investment adviser" under the Investment Advisers Act of 1940. Fraud is a legal concept and is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent, provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted: A) improperly; the order cannot be placed without prior written authorization allowing discretion. B) properly because the agent saved the client money. C) improperly; the order should have been placed on Thursday. D) properly because the agent used discretion as to price and time.

Answer: C) improperly; the order should have been placed on Thursday. In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day - those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with clients who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is required to register as a broker-dealer B) engaged in an agency cross transaction C) is guilty of selling away D) performed a matched order

Answer: C) is guilty of selling away When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade was being executed by an officer or partner of the firm B) engaging in an agency cross transaction C) purchasing shares from an advisory client, originally acquired as a result of the adviser's previous "buy" recommendation D) directing a securities transaction to an affiliated broker-dealer

Answer: C) purchasing shares from an advisory client, originally acquired as a result of the adviser's previous "buy" recommendation There are two principals in every securities trade; the buyer and the seller. In this case, buying shares directly from the client who owns them, regardless of how they were originally acquired, places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent - that's the reason for the term.

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) there is a violation because the IAR failed to obtain the signed receipt. B) there is no violation as long as the customer signs a waiver agreeing to these terms. C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege D) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract.

Answer: C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege The problem here is that the client has five days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed.

Under the USA, an agent may file for a review of an Administrator's revocation order within how many days of revocation? A) 30 days B) 270 days C) 90 days D) 60 days.

Answer: D) 60 days. An agent may appeal a final order of the state Administrator but a written petition must be filed with the appropriate court within 60 days of the entry of the Administrator's order.

Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) The publisher of an investment advisory newsletter that plans issues based on market events. B) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities. C) A broker-dealer that managed clients' portfolios for a fee. D) A bank that charged a fee for providing investment advice.

Answer: D) A bank that charged a fee for providing investment advice. A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided.

Which of the following statements concerning an agency cross transaction for an advisory client is (are) TRUE? I. It is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. II. An advisory client must provide prior written consent for the adviser to be able to engage in agency cross transactions. III. An adviser must make prior written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. IV. An adviser may recommend the transaction to both parties to the transaction. A) I and IV B) I only C) I, II, III and IV D) I, II and III.

Answer: D) I, II and III. An agency cross transaction is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan. An adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. The adviser may not recommend the transaction to both parties.

Under the Securities Exchange Act of 1934, which of the following is a government security? I. Bonds issued by the state of Indiana II. Securities which are issued or guaranteed by the Tennessee Valley Authority III. Treasury bills A) III only B) I, II and III C) I and II D) II and III

Answer: D) II and III The Securities Exchange Act of 1934 defines government securities as those issued or guaranteed by the U.S. government or one of its agencies. Securities issued or guaranteed by a state, county, city, etc., or any agency of a nonfederal governmental unit are municipal securities.

During the application process for registration as an agent, the Administrator may request information about the applicant's: I. financial condition II. citizenship III. record involving a non-securities misdemeanor conviction 5 years ago IV. proposed method of doing business A) I and IV B) II and III C) I, II, III and IV D) II and IV.

Answer: D) II and IV The Administrator asks all registrants about their proposed method of doing business. Individual registrants may be asked about their citizenship. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers.

Federal covered securities, as defined under the Uniform Securities Act: I. must be registered with the SEC before they can be offered in the state II. must be registered in the state before they can be offered within the state III. include shares of an investment company registered with the SEC under the Investment Company Act of 1940 A) I only B) I and II C) I and III D) III only

Answer: D) III only It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are not required to be separately registered in each state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings.

Ditherton, Wiggleman and Jones, LLC, is an investment adviser with $2 billion in AUM. In appreciation for the large volume of brokerage transactions directed their way, Alexander Wimpton and Sons, Members of the NYSE, offer to send Mr. Ditherton on an all expense trip to Zurich to attend a seminar covering the latest developments in global investing. Under Section 28(e) of the Securities Exchange Act of 1934, A) Mr. Ditherton could attend because attendance at a business related seminar such as this falls under the safe harbor provisions of Section 28(e) B) Mr. Ditherton could attend, but only if he paid the direct costs of the seminar and let Wimpton and Sons take care of the transportation costs C) Mr. Ditherton could not attend because the safe harbor under Section 28(e) only applies to domestic events D) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar

Answer: D) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar Section 28(e) provides a safe harbor for soft dollar compensation from broker-dealers to investment advisers. Included is covering the registration fees of seminars related to the adviser's business. However, all transportation and personal expenses must be paid by the investment adviser.

Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT? A) SSI may remain SEC registered as long as AUM is at $90 million or more. B) SSI must become registered with SEC within 90 days of exceeding $110 million. C) SSI has the choice of remaining state-registered or registering with the SEC. D) SSI remains state-registered because its AUM is less than $100 million.

Answer: D) SSI remains state-registered because its AUM is less than $100 million. The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM - Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent a(n): A) Prohibited transaction B) Gift C) Offer D) Sale

Answer: D) Sale The USA states that "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value."

Under the state law, all of the following investment advisers are exempt from registration except A) advisers solely to venture capital funds. B) foreign private advisers with no place of business in the United States and less than $25 million in assets under management. C) advisers solely to private funds with less than $150 million in assets under management in the United States. D) advisers whose only clients are insurance companies.

Answer: D) advisers whose only clients are insurance companies. It is the federal law, the Investment Advisers Act of 1940, that exempts investment advisers from registration if their only clients are insurance companies. State law does not have that exemption. Among other exemptions, the Uniform Securities Act exempts investment advisers whose only clients are private funds. This would include the foreign private advisers and advisers to venture capital funds.

As defined in the Investment Advisers Act of 1940, the term "person associated with an investment adviser" would include all of the following EXCEPT A) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions B) a silent partner in an advisory firm organized as a general partnership C) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account D) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications

Answer: D) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications The term "person associated with an investment adviser" means any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except that persons associated with an investment adviser whose functions are clerical or ministerial shall not be included in the meaning of the term. Graphic design would be considered a clerical function.

Manhattan Brokerage Associates (MBA), specializes in bringing midwestern companies public. Shortly after underwriting the IPO of a farm equipment manufacturer, MBA publishes a research report that is highly favorable regarding that company's growth potential. Doing so would require MBA to A) obtain permission from the Administrator to issue a report on a new company B) agree to repurchase any shares tendered at the original offering price C) refrain from underwriting any further issues of that company for a period of 2 years D) disclose the potential conflict of interest

Answer: D) disclose the potential conflict of interest A common industry conflict of interest is underwriting a new issue and then preparing a favorable research report about that company. There is nothing improper about doing so, as long as the potential conflict of interest is disclosed.

An applicant for registration as an investment adviser discloses on Form ADV that it plans to use palm readers to help determine investments most suitable for their clients. Under the Uniform Securities Act, the Administrator: A) is empowered to deny this application. B) will probably turn to the SEC for guidance. C)will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit. D) may deny applications only on the basis of the limitations of the law.

Answer: D) may deny applications only on the basis of the limitations of the law. A denial of registration must be based on the concept of law. There are stated reasons, such as felony convictions, outstanding injunctions, and insolvency. Although it is required to disclose methods of analysis used, the Administrator is not empowered to pass judgment on them.

All of the following statements relating to the USA's provisions dealing with the registration of securities are correct EXCEPT: A) any registrant may use qualification, even if it has filed a concurrent registration with the SEC. B) the NSMIA preempted the state registration of certain securities known as federal covered securities. C) a corporation registering a new issue with the SEC and wishing to sell in the state may register by coordination. D) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA.

Answer: D) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA. The NSMIA did take the registration powers away from the states for certain securities, defined in the law as federal covered securities. However, the states still have the right to require notice filings in order to, among other things, determine the appropriate fee to charge the registrant. Coordination is the usual method when registering with the SEC and the state at the same time. While not the expected practice, any security may register using qualification, even if it has an SEC registration in process.

All of the following must be specified in the state registration statement of a security EXCEPT: A) the total amount of the security that will be offered in this state. B) a stop order from another state that affects the offering of the security within that state. C) all other states where the security is currently registered or will be registered. D) the total amount of the security that will be offered in each state.

Answer: D) the total amount of the security that will be offered in each state. It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes, the amount to be sold in this state must be disclosed.

Civil liability may arise under the Uniform Securities Act if an agent I. acting on behalf of an issuer fails to guarantee the safety of a new issue of debt securities rated BBB or higher II. uses an artifice or scheme that could reasonably be considered misleading in connection with a securities offering III. effects a sale of a nonexempt new issue of securities before filing a registration statement in that state IV. fails to disclose an immaterial fact

Answer: II and III. An agent who deliberately misleads or uses some artifice to deceive customers is in violation of the law. An agent selling a nonexempt security prior to registration in a state is also violating the law. Guaranteeing customers against loss is prohibited, and an agent who fails to guarantee is acting within the law and rules of the Uniform Securities Act. Failure to disclose an immaterial fact is acceptable. Failure to disclose a material fact is fraudulent.