Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices

According to the Uniform Securities Act, an offer or a sale does not exist if it is a(n): reclassification of the issuer's securities. bona fide pledge or loan. act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares. stock dividend of stock other than the issuer's for which nothing of value was given. A) I, II, III and IV. B) II and IV. C) II and III. D) I and II.

Your answer, I, II, III and IV., was correct!. The Uniform Securities Act specifically excludes these four choices from the definition of offer and sale.

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker/dealers and their agents. Under the act, the maximum that a purchaser would be entitled to claim would be: attorney's fees. court costs. interest at the state's legal rate. the greater of the original consideration paid for the security or the current market value. A) I, II and III. B) III and IV. C) I and II. D) I, II, III and IV.

Your answer, I, II, III and IV., was incorrect. The correct answer was: I, II and III. In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker/dealer or agent is liable for courts costs and attorney's fees.

There are several ways that a securities professional's registration can be terminated. Nonpunitive termination of a securities professional's registration could be done through: cancellation. suspension. revocation. withdrawal. A) I and III. B) II and III. C) II and IV. D) I and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and IV. Cancellation and withdrawal are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment.

FinCEN Form 112, the Currency Transaction Report, is filed with the: A) SEC. B) National Security Agency. C) Department of the Treasury. D) Federal Bureau of Investigation (FBI).

Your answer, National Security Agency., was incorrect. The correct answer was: Department of the Treasury. Currency transactions in excess of $10,000 are reported electronically on FinCEN Form 112 to the Department of the Treasury.

Which of the following transactions would NOT be exempt under the Uniform Securities Act? A) A registered dealer sells Canadian government securities to an individual client. B) Securities are sold that were collateral for a defaulted loan. C) The executor of an estate sells securities to liquidate the property. D) A customer calls his broker/dealer to order a specific security.

Your answer, The executor of an estate sells securities to liquidate the property., was incorrect. The correct answer was: A registered dealer sells Canadian government securities to an individual client. Unsolicited, nonissuer transactions (customer calls the broker/dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees or, conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not.

An investment adviser renews its registration with the SEC by filing: A) Forms ADV Part 1 and Part 2. B) an annual audited balance sheet. C) an annual updating amendment. D) a certificate of good standing along with the renewal fee.

Your answer, an annual updating amendment., was correct!. Investment advisers renew their registration with the SEC by filing an annual updating amendment within 90 days (including weekends and holidays) of the end of their fiscal year. An important part of the annual updating amendment is the computation of assets under management (AUM) which confirms the adviser's continued eligibility for SEC registration.

A" fiduciary" is a: A) person entrusted with the duty of acting for the benefit of another party. B) person who sells securities to the public on a nondiscretionary basis. C) principal in a broker/dealer who specializes in proprietary trading. D) broker who solely conducts agency trades.

Your answer, principal in a broker/dealer who specializes in proprietary trading., was incorrect. The correct answer was: person entrusted with the duty of acting for the benefit of another party. A person entrusted with the duty of acting for the benefit of another party is a fiduciary and must follow the standards of fiduciary duty appropriate to the nature of the relationship.

Unless qualifying for an exemption, which of the following advisory fee structures is NOT allowed under the USA? A) Fees based on a percentage of the aggregate value of funds under management. B) Fees based on a fixed dollar schedule tied to the value of funds under management. C) Fees based on an hourly rate. D) Fees based on a percentage of the change in value of funds from quarter to quarter.

Your answer, Fees based on a percentage of the change in value of funds from quarter to quarter., was correct!. Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures.

When filing the consent to service of process, which of the following is TRUE? A) It expires simultaneously with the registration on December 31. B) It is not required of investment adviser representatives, only investment advisers. C) It is supplied with the initial registration and remains on file permanently. D) It must be filed annually on the dates specified by the Administrator.

Your answer, It is not required of investment adviser representatives, only investment advisers., was incorrect. The correct answer was: It is supplied with the initial registration and remains on file permanently. The consent to service of process is supplied with the initial registration and remains on file permanently.

Under the Uniform Securities Act, if no denial or proceedings are pending, when does an investment adviser registration become effective? A) No sooner than 15 days. B) When the Administrator so orders, but not to exceed 30 days. C) 60 days after application or an amendment is filed. D) When the Administrator so orders, but not to exceed 90 days.

Your answer, When the Administrator so orders, but not to exceed 90 days., was incorrect. The correct answer was: When the Administrator so orders, but not to exceed 30 days. Registrations become effective at noon on the 30th calendar day after the date of filing if there are no denial orders or pending proceedings.

A state securities Administrator does NOT require the filing of: A) financial reports from broker/dealers and investment advisers. B) pamphlets and marketing letters used by broker/dealers. C) advertising and sales literature relating to the sale of exempt securities. D) advertising and sales literature relating to the sale of nonexempt securities.

Your answer, advertising and sales literature relating to the sale of exempt securities., was correct!. A state securities Administrator may require the filing of advertising and sales literature relating to the sale of nonexempt securities, financial reports from broker/dealers and investment advisers, and pamphlets and marketing letters used by broker/dealers in an attempt to increase their business. Exempt securities are not required to register with the state Administrator and, therefore, are exempt from the filing requirements for advertising and sales literature.

Which of the following is NOT a security? A) A variable annuity. B) An interest in a real estate condominium sold with a rental pool. C) A $1,000,000 whole life insurance policy. D) Commercial paper with a 6-month maturity.

Your answer, A $1,000,000 whole life insurance policy., was correct!. Under the Uniform Securities Act, whole life insurance policies are not securities. Condominiums used as a personal residence are not securities, but when a rental pool arrangement exists, third-party management seeking profit for the investor exists, which meets the Howey definition of an investment contract.

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move? A) Wallace and Rockland. B) Gibraltar Securities and Wallace. C) Rockland Securities and Gibraltar. D) Rockland, Gibraltar, and Wallace.

Your answer, Gibraltar Securities and Wallace., was incorrect. The correct answer was: Rockland, Gibraltar, and Wallace. When an agent with one broker/dealer resigns and affiliates with another, both broker/dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U-5 and U-4 with FINRA's CRD.

Under the Uniform Securities Act, an offer to sell would NOT include: stock acquired through a merger. the issuance of warrants or convertible securities. the issuance of stock rights to existing shareholders. A) I and III. B) I only. C) I, II and III. D) II and III.

Your answer, I, II and III., was incorrect. The correct answer was: I only. An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.

To transact business in a state as an investment adviser representative, a person must: A) have passed the agent's exam and taken no other exams. B) be employed by a commercial bank located in the state. C) be registered as an agent of a brokerage house and have passed the appropriate NASAA exam for IARs. D) be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs.

Your answer, be employed by a commercial bank located in the state., was incorrect. The correct answer was: be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs. To transact business in a state as an investment adviser representative, a person must be registered as a representative of an investment adviser and have passed either the NASAA Series 65 or Series 66 exam. One is not considered a registered investment adviser representative as a result of passing the Series 6 or 7 registered representative exam, or by virtue of employment with a bank.

When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT: A) the details of the order. B) the current market price of the security. C) the broker dealer's name. D) the agent's name.

Your answer, the current market price of the security., was correct!. Any order ticket submitted by an agent for execution at a broker/dealer will always include the agent's name and that of the B/D. All order details must be listed, e.g. the number of shares, limit or market, etc. but the current market price is never included.

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a Code of Ethics. Which of the following is charged with the responsibility of enforcing that Code? A) Each individual IAR. B) Administrator of the state in which the IA has its principal office. C) The SEC. D) Chief compliance officer of the IA.

Your answer, Administrator of the state in which the IA has its principal office., was incorrect. The correct answer was: Chief compliance officer of the IA. Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the Code of Ethics is being followed. Although each individual IAR must follow that Code, it is the CCO with the supervisory responsibility.

Which of the following would fall under the USA's definition of exempt transaction? A) An agent accepts an order from a client after having sent a research report dealing with that security. B) An issuer sells a new issue to a broker/dealer C) An investment adviser purchases securities from the issuer D) A real estate partnership sells interests to the public with no commission charge

Your answer, An agent accepts an order from a client after having sent a research report dealing with that security., was incorrect. The correct answer was: An issuer sells a new issue to a broker/dealer Transactions between issuers and broker/dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is as the result of the research report.

Over which of the following would the investment adviser representative have discretionary authority? A) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative. B) An account in which a trustee has power of attorney over another individual's account. C) An account in which a customer has power of attorney over another individual's account. D) An account in which the investment adviser representative chooses portfolio securities on behalf of the client.

Your answer, An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative., was incorrect. The correct answer was: An account in which the investment adviser representative chooses portfolio securities on behalf of the client. An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.

Under the Investment Advisers Act of 1940, which of the following meets the definition of an investment adviser? A) Karen calls herself a financial planner; she helps people budget wisely, pay off their debts, establish savings plans, and set financial goals. B) Harry provides a range of financial services for a fee; investment advice is included but is not his primary business. C) Jack is paid to advise clients regarding the purchase of futures contracts. D) Ellen gives investment tips to friends who work with her at a department store; her friends often make money when they follow her advice.

Your answer, Ellen gives investment tips to friends who work with her at a department store; her friends often make money when they follow her advice., was incorrect. The correct answer was: Harry provides a range of financial services for a fee; investment advice is included but is not his primary business. Neither Karen nor Jack provides investment advice, and futures contracts are not securities. In Ellen's case, there is no compensation for the investment advice. Harry is a person providing investment advice as part of a regular business for compensation, which is the definition of investment adviser. The fact that investment advice is a minor part of that business is irrelevant.

Under the Investment Advisers Act of 1940, the SEC is empowered to: set bail. take evidence. subpoena witnesses. A) I and III. B) I, II and III. C) I and II. D) II and III.

Your answer, I, II and III., was incorrect. The correct answer was: II and III. Setting bail is the function of a court. The SEC is empowered to take evidence, subpoena witnesses, administer oaths, and require the production of books and records in conducting a formal investigation.

The Uniform Securities Act provides an exemption from registration as an investment adviser for which of the following persons who have no place of business in the state? Advisers who deal exclusively with broker/dealers. Advisers who deal exclusively with insurance companies. Advisers who deal exclusively with investment companies. Advisers who have no more than 5 clients in that state in a 12-month period. A) I, II and III. B) I and III. C) I, II, III and IV. D) I only.

Your answer, I, II, III and IV., was correct!. Investment advisers who have no place of business in the state are exempt from registration provided their clients are broker/dealers, other advisers, insurance companies, institutions, or government agencies. Also exempt are those advisers who have 5 or fewer clients in a 12-month period. All of these exemptions are lost when the adviser has a place of business in the state.

Which of the following regarding the SEC under the Securities Exchange Act of 1934 are TRUE? It regulates the securities exchanges. It requires the registration of broker/dealers. It prohibits inequitable and unfair trade practices. It regulates over-the-counter markets. A) III and IV. B) I and IV. C) I, II, III and IV. D) I and II.

Your answer, I, II, III and IV., was correct!. Under the Securities Exchange Act of 1934, the SEC is concerned with the regulation of exchanges, registration of broker/dealers, inequitable and unfair trade practices, and regulation of OTC markets.

An agent terminates his association with broker/dealer A and begins to work for broker/dealer B. Under the Uniform Securities Act, which of the following must take place? Broker/dealer A must notify the Administrator. Broker/dealer B must notify the Administrator. The agent must notify the Administrator. The supervisor to which the agent reported must notify the Administrator. A) II, III and IV. B) I, III and IV. C) I, II, III and IV. D) I, II and III.

Your answer, I, II, III and IV., was incorrect. The correct answer was: I, II and III. In the event an agent transfers from one broker/dealer to another broker/dealer, all three (the former employer, the new employer, and the agent) must report the transfer to the Administrator.

Under the USA, which of the following are exempt transactions? A transaction between an issuer and an underwriter. An unsolicited customer order to buy an exempt security. U.S. Treasury bonds. Municipal securities. A) I and III. B) III and IV. C) I and II. D) II and IV.

Your answer, III and IV., was incorrect. The correct answer was: I and II. Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.

Which of the following statements regarding registration of investment advisers is (are) TRUE under the Investment Advisers Act of 1940? If any material information filed in the registration becomes inaccurate, an amendment must be filed promptly. If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year. Material information requires a prompt amendment, but nonmaterial changes do not require amendment. A) I only. B) II only. C) III only. D) I and II.

Your answer, III only., was incorrect. The correct answer was: I and II. The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.

Under the Uniform Securities Act, which of the following statements regarding Form ADV Part 2 is TRUE? A) It must be delivered no later than receipt of the client's funds. B) It must be delivered no later than 48 hours prior to entering into an investment advisory contract. C) It must always accompany the investment adviser's brochure. D) It must be delivered to clients annually unless there are no material changes.

Your answer, It must be delivered to clients annually unless there are no material changes., was correct!. Under the USA, ADV Part 2, or brochure, must be delivered to clients on an annual basis unless there have been no material changes. If it is not delivered 48 hours in advance of the initial contract, the client has a 5-day termination clause. It does not accompany the brochure-it is the brochure.

Which of the following is NOT included in Form ADV Part 2A? A) Investment policy of the adviser. B) States in which the investment adviser is registered or intends to register. C) Educational background of the adviser. D) Types of investments made by the adviser.

Your answer, States in which the investment adviser is registered or intends to register., was correct!. ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, educational background, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered in are not contained in ADV Part 2A. If the IA is registering with the SEC, on Part 1A, they list only the largest five offices (in terms of numbers of employees). If state registered, they list each state they will be registering in or are already registered in.

A transactional exemption would be offered when a sale is made by: A) a broker/dealer. B) a custodian for a minor appointed under the Uniform Transfer to Minors Act. C) an investment adviser. D) a court appointed guardian for a minor.

Your answer, a custodian for a minor appointed under the Uniform Transfer to Minors Act., was incorrect. The correct answer was: a court appointed guardian for a minor. Among the list of exempt transactions are sales made by fiduciaries, such as court appointed guardians. Because there is no legal paperwork required, the custodian for a minor under UTMA (or UGMA), is not considered a fiduciary for purposes of this rule.

You inform a customer that you are not allowed to solicit an order for a stock but will accept that customer's buy order if placed. This is: A) an offer to sell only if it is accepted. B) an offer to purchase. C) an offer to sell. D) an unsolicited transaction.

Your answer, an unsolicited transaction., was incorrect. The correct answer was: an offer to sell. Under the Uniform Securities Act, the term "offer" is the solicitation of an offer. In this example, the agent is soliciting an offer from the customer to buy a security. A solicitation is considered to have occurred even if the customer fails to act on the solicitation.

Which of the following are NOT exempt securities under the Uniform Securities Act? A) Preferred stock underwritten by a local broker/dealer. B) $50,000 denomination commercial paper maturing in 6 months. C) Anglican church bonds. D) B&O Railroad equipment trust certificates.

Your answer, $50,000 denomination commercial paper maturing in 6 months., was incorrect. The correct answer was: Preferred stock underwritten by a local broker/dealer. Corporate securities, such as preferred stock, are ordinarily required to be registered and are not exempt from registration unless the issuer fell into specific exempted categories, which are not mentioned in this question. The other answers are specifically exempted from registration under the Uniform Securities Act: nonprofit religious organizations, securities issued or guaranteed by a regulated common carrier, and commercial paper with a maturity of 9 months or less and in minimum $50,000 denominations.

Which of the following would not be an issuer? A) A partnership selling partnership interests. B) A corporation selling certificates of interest in a mining lease. C) A governmental agency borrowing money for short-term needs. D) An investment company.

Your answer, A governmental agency borrowing money for short-term needs., was incorrect. The correct answer was: A corporation selling certificates of interest in a mining lease. Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.

Which of the following would probably be an acceptable hedge clause under SEC interpretations? A) A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions. B) A hedge clause that seeks to limit liability to acts done in bad faith or pursuant to willful misconduct but also explicitly provides that rights under state or federal law cannot be relinquished. C) "Kapco Advisers shall not be liable for any loss or depreciation in the value of the account unless it shall have failed to act in good faith or with reasonable care.". D) "It is understood that we will expend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in good faith if negligence, willful or reckless misconduct, or violation of applicable law is not involved.".

Your answer, A hedge clause that seeks to limit liability to acts done in bad faith or pursuant to willful misconduct but also explicitly provides that rights under state or federal law cannot be relinquished., was incorrect. The correct answer was: A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions. A clause containing provisions that are beyond the IA's control is acceptable since they do not attempt to limit or misstate the adviser's fiduciary obligations to its clients.

Under the Uniform Securities Act, which of the following statements about federal covered securities is NOT true? A) The issuer of a federal covered security may be required to pay fees to the states. B) Federal covered securities must be registered with the states. C) A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security. D) Federal covered securities include securities sold under Regulation D of the Securities Act of 1933.

Your answer, A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security., was incorrect. The correct answer was: Federal covered securities must be registered with the states. Federal covered securities are not required to be registered with the states, but issuers of federal covered securities may be required to pay fees to the states. Private placements (Regulation D) and investment companies both describe types of federal covered securities.

Which of the following parties is most likely to be considered an investment adviser under the Investment Advisers Act of 1940? A) A CPA who manages investment accounts for 50 clients and charges hourly fees for the service. B) An expert in fixed income securities whose only clients are individuals and whose only recommendations deal with securities issued or guaranteed by the U.S. Treasury. C) The trust department of Citibank, which handles billions of dollars in trust assets. D) Dow Jones, Inc., publisher of "The Wall Street Journal".

Your answer, An expert in fixed income securities whose only clients are individuals and whose only recommendations deal with securities issued or guaranteed by the U.S. Treasury., was incorrect. The correct answer was: A CPA who manages investment accounts for 50 clients and charges hourly fees for the service. The Investment Advisers Act of 1940 excludes accountants providing investment advice from the definition of investment adviser only when the advice is given on an incidental basis and with no specific compensation. A publisher of periodicals of general circulation, whether or not the publication covers financial matters, is excluded from the definition, as is an adviser whose advice is exclusively limited to U.S. government securities. Banks are also excluded from the definition of investment adviser under the act.

A client who has a margin account is out of town for a week. The securities in the client's account fall dramatically, which requires the client to make immediate deposits into the account. Which of the following can the agent do to assist the client? A) Arrange for a different client to give his client a loan. B) Arrange for the firm to give the client another loan. C) Make every reasonable attempt to contact the client. D) Deposit funds into the client's account on behalf of the client.

Your answer, Arrange for the firm to give the client another loan., was incorrect. The correct answer was: Make every reasonable attempt to contact the client. In this instance all that the agent can do is to try to contact the client. The agent cannot arrange for a loan or deposit her own funds into the client's account.

Under the Uniform Securities Act, which of the following activities is an example of churning? A) Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter. B) Frequent purchases one day and sales of the same stock the next day to make changes in a client's portfolio in order to align with a customer's investment objectives. C) A client engaging in day trading. D) Bond swap.

Your answer, Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter., was correct!. Churning is defined as excessive activity in a customer's account for the purpose of generating commissions. Because Class A mutual funds carry a front-end load and are considered long-term investment vehicles, frequent trades constitute churning. Frequent purchases one day and sales of the same stock the next day in order to align with a customer's investment objectives is not necessarily churning if it is done for the benefit of the customer. A bond swap is not churning; it is generally done for tax purposes. If the client is initiating the day trades, the agent is not the one doing the trading so no churning is taking place.

Which of the following is NOT a person as defined by the Uniform Securities Act? A) A child prodigy for whom his mother, as custodian, opened an account at a major securities firm. B) A small unincorporated investment club. C) Guelph, a small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds. D) XYZ Dry Cleaners, Inc., whose shareholders all work on the premises and also offer financial advice to customers who request it.

Your answer, Guelph, a small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds., was incorrect. The correct answer was: A child prodigy for whom his mother, as custodian, opened an account at a major securities firm. Under the Uniform Securities Act, the term "person" has a specific meaning. "Person" refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child, is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

According to the Uniform Securities Act, a consent to service of process must accompany which of the following? Agent's registration application. Civil complaint against a broker/dealer. Broker/dealer's initial registration application. A cease and desist order. A) II and IV. B) I and IV. C) I and III. D) II and III.

Your answer, I and III., was correct!. A broker/dealer, an agent, an investment adviser representative, or a state registered investment adviser must file a consent to service of process with the Administrator upon filing a registration application. The consent to service of process gives the Administrator the right to process legal complaints against the applicant. In some states, a federal covered adviser may also be required to furnish a consent to service of process.

Which of the following situations would require registration as an investment adviser? A broker/dealer provided investment research services to a customer and charged a fee for the service. An agent of a broker/dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. An agent of a broker/dealer prepares a complete financial plan for a customer for a nominal charge. The plan recommends specific securities transactions, which the customer orders. The agent earns commissions on the securities transactions. A broker/dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I only. B) I, II, III and IV. C) I and III. D) I, III and IV.

Your answer, I and III., was correct!. Under the Uniform Securities Act, broker/dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker/dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker/dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.

Under the Securities Act of 1933, the SEC may: conduct formal investigations of persons under its jurisdiction. make, amend, and rescind rules. arrest and detain suspected violators, subject to the observance of due process and the preservation of citizens' rights. A) I, II and III. B) I and III. C) I only. D) I and II.

Your answer, I and III., was incorrect. The correct answer was: I and II. The SEC has the power to make, amend, and rescind rules in administering the securities laws. The SEC may also conduct a formal investigation whenever it deems it necessary to enforce federal securities laws. In conducting a formal investigation, the SEC may administer oaths, obtain written statements, subpoena witnesses, take evidence, and require the production of books and records. The SEC does not have the power to arrest and detain suspects.

Under the Uniform Securities Act, an investment adviser is exempt from registration if the person has no place of business in a state and does not direct communication: to more than five noninstitutional clients. to more than 15 noninstitutional clients. within nine consecutive months. within 12 consecutive months. A) I and III. B) I and IV. C) II and IV. D) II and III.

Your answer, I and IV., was correct!. As long as communications are directed to no more than five noninstitutional clients in a 12-consecutive-month period and the adviser does not have a place of business in the state, an exemption from registration is provided.

According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first two years? In written form on site. On microfilm on site. On magnetic tape or computer on site. On computer disks at an off-site storage facility that requires 30 days' notice to retrieve. A) I only. B) II and III. C) I, II and III. D) I, II, III and IV.

Your answer, I, II and III., was correct!. The act requires certain records of business activities to be kept for five years (the first two in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule and, in both cases, the key point is that any storage vehicle used must be able to generate a "hard" copy while the examiner is present. One other requirement applies to computer disks and that is that they can not be re-written.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state registered investment adviser is (are) TRUE? The investment adviser must notify the Administrator whenever a representative is terminated. An investment adviser is not required to notify the Administrator when a representative begins employment. The registration of a representative is effective only as long as the individual is employed by a registered investment adviser. A) I and III. B) III only. C) I only. D) I, II and III.

Your answer, I, II and III., was incorrect. The correct answer was: I and III. Whenever an individual begins or ends employment with a state registered investment adviser, the investment adviser must notify the Administrator. A representative's registration is only valid while employed by a registered investment adviser.

Which of the following is (are) required to register with a state Administrator? An adviser who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation. Investment adviser representatives of federal registered advisers who have natural person clients and have a place of business in the state. An investment adviser who has no place of business in the state and has five advisory clients in the state. A person who is an officer of a federal registered investment adviser who has no natural person clients. A) II only. B) II and III. C) I only. D) I, II, III and IV.

Your answer, I, II, III and IV., was incorrect. The correct answer was: II only. Under federal law, publishers of bona fide newspapers, magazines, and financial publications of general and regular circulation are excluded from the definition of an investment adviser. Under state law, the publication of investment advice that is not based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. Based on these definitions, the publisher of an investment advisory newsletter providing only impersonal investment advice available only on a subscription basis is not required to register under federal or state law. The investment adviser representatives of a federal registered adviser are required to register in each state in which they have a place of business. The Uniform Securities Act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients resident in the state. A person employed by and supervised by a federal registered investment adviser who is not an investment adviser representative with natural person clients (as defined by federal law) is not required to register with state Administrators.

As defined in the NSMIA, federal covered securities would include open-end investment companies registered under the Investment Company Act of 1940 closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board bonds listed on the ​OTC-Link where the company's common stock trades on Nasdaq Bonds issued by the Province of Ontario A) I and II B) I, II, III, and IV C) III and IV D) I, II, and III

Your answer, I, II, III, and IV, was incorrect. The correct answer was: I, II, and III Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian municipal securities are not federal covered (although under the Uniform Securities Act they are exempt securities).

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? Commissions on recommended securities transactions Commissions on insurance sales Incentives from the issuer of a recommended security A) I, II, and III B) I and II C) I and III D) II and III

Your answer, I, II, and III, was correct!. Advisers must disclose compensation received on sales of securities and nonsecurities products and also compensation received from the issuer of a recommended security.

Under the Uniform Securities Act, it is permissible for an agent to: solicit transactions in unregistered exempt securities. share in the profits in an account with a customer with written permission of the customer and the broker/dealer. split commissions with another agent at an affiliated broker/dealer. charge larger commissions because of a larger array of services the agent's firm offers. A) I and II. B) I, III and IV. C) I only. D) I, II, III and IV.

Your answer, I, III and IV., was incorrect. The correct answer was: I, II, III and IV. All of these are permissible actions. Exempt securities are unregistered because they are exempt and solicitations for trades are no problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker/dealer or different broker/dealers under common control is also permitted. However, two registered agents representing nonaffiliated broker/dealers may never share commissions. The Uniform Securities Act does permit commission charges to reflect the quality and quantity of services provided to the client.

Which of the following statements regarding email communications are correct? They are sometimes referred to as electronic communications Customer complaints received by email are not considered to be in writing Once received and reviewed, they may be discarded They must be retained in the same fashion as any other record. A) I and IV B) II and III C) III and IV D) I and II

Your answer, II and III, was incorrect. The correct answer was: I and IV Emails are generally referred to as electronic communications on the exam and meet the requirement for customer complaints to be in writing. Just as with any other written record, these must be kept for the time periods specified in the Uniform Securities Act.

ABCO Materials, Inc., is in the process of raising money from the public for the first time. Which of the following must be disclosed in ABCO's registration statement filed with the SEC? Biographical sketches of each of the members of the board of directors as well as ABCO's principal officers. Expected use of the proceeds of the offering. Performance of the company's stock over the last five years or since the founding of the company, whichever is the shorter period. Public offering price. A) III and IV. B) II and III. C) I and II. D) I and IV.

Your answer, II and III., was incorrect. The correct answer was: I and II. A registration statement will always include the expected use of the proceeds of the offering as well as short biographies of the members of the board of directors (and key officers as well). This question stated it was the company's IPO, so there could not be any previous stock performance, and the public offering price is not determined until the effective date.

Under the Investment Advisers Act of 1940, which of the following investment advisers are exempt from federal registration? All of John's clients reside in his home state, and John offers no advice on any exchange-listed securities. He manages $50 million in assets and none of his clients are investment companies. All of Paula's clients are private funds and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors. Marie Legard maintains her only office in Paris, France, deals with fewer than 15 clients (none of whom is a registered investment company) in private funds advised by Ms. Legard, has AUM in the U.S. of less than $25 million, and does not hold herself out as an investment adviser in the United States. A) I and II. B) II and III. C) I, II and III. D) I and III.

Your answer, II and III., was incorrect. The correct answer was: I and III. The exemptions from the SEC registration requirement under the Advisers Act include advisers who render no advice on any exchange-listed security and whose clients are all in one state and certain foreign advisers who do not hold themselves out as investment advisers and have fewer than 15 clients per year. In order to qualify for the private fund adviser exemption, total AUM must be less than $150 million.

The Administrator may impose disciplinary action against a registrant when the registrant has: violated the provisions of federal securities law. engaged in unethical practices, even if no law was broken. failed to properly supervise an employee who committed prohibited practices as defined by the act. failed to lend money to a very good client. A) I, II and III. B) I and III. C) II, III and IV. D) II and IV.

Your answer, II, III and IV., was incorrect. The correct answer was: I, II and III. Disciplinary action may be imposed by a state Administrator for violations of federal securities regulations, improper supervision, and unethical practices committed, whether or not a law was broken. Even in those few cases where a broker/dealer or investment adviser is permitted to lend money to a client, there is never a case where they are obligated to do so.

Which of the following practices violate(s) NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? Recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy Hypothecating customer securities held in margin accounts Effecting a transaction with no change in beneficial ownership Conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer A) II and III B) II, III, and IV C) I only D) I, III, and IV

Your answer, II, III, and IV, was incorrect. The correct answer was: I, III, and IV According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, agents may not recommend securities without reasonable basis. Even then, when the same security is recommended to a majority of the firm or agent's clients, it is likely going to be the prohibited practice of blanket recommendations. Effecting transactions with no change in beneficial ownership is a form of market manipulation in conflict with NASAA's Statement of Policy. Conducting securities transactions not reflected on the books of the employing broker-dealer and without the employing broker-dealer's prior written authorization is known as selling away, considered by NASAA to be an unethical practice. The normal method of financing customer margin accounts is by hypothecating their securities.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply(ies)? The board of directors has sole approval authority. The majority of the outstanding shares has sole approval authority. Both the board and the majority of outstanding shares must approve it. A distribution plan must be written. A) I and III. B) III and IV. C) I only. D) II and III.

Your answer, III and IV., was correct!. For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares as well as a majority of the board of directors, including a majority of directors classified as outside directors.

When using the process of registration by coordination under the Uniform Securities Act, issuers shall simultaneously submit to the state, the documents filed with the SEC under the: A) Investment Company Act of 1940. B) Securities Exchange Act of 1934. C) National Securities Markets Improvement Act (NSMIA). D) Securities Act of 1933.

Your answer, National Securities Markets Improvement Act (NSMIA)., was incorrect. The correct answer was: Securities Act of 1933. Under the Uniform Securities Act, an issuer registering its securities with the Securities and Exchange Commission (SEC) in accordance with the procedures found in the Securities Act of 1933 shall use the documents it submits to the SEC in its concurrent registration with states in which it plans to offer its securities.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, when may an investment adviser be given discretionary power to buy or sell securities for a client? A) If authority is given within one month after the discretionary act. B) Only when the authority is specific, provided in advance, and specifies the amount, type, and timing of the transaction. C) Never. D) When authority is given by an advisory contract or a separate document.

Your answer, Only when the authority is specific, provided in advance, and specifies the amount, type, and timing of the transaction., was incorrect. The correct answer was: When authority is given by an advisory contract or a separate document. Discretionary authority must be in written form either by advisory contract or a separate document. Investment advisers and their representatives have the ability to exercise discretion with oral authority for a period of 10 business days (not one month) from the initial discretionary trade in the account. The only exception is when the discretion relates to time and/or price because, under the law, that is not considered to be discretion.

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

Your answer, Providing access to the broker/dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements., was incorrect. The correct answer was: Clearance and settlement services provided by the broker/dealer. Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.

Under the Uniform Securities Act, which of the following is included in the definition of an investment adviser? A) Antiques dealer who receives a fee for advising customers as to the value of antiques and rare coins. B) A broker/dealer who receives a flat fee for analyzing a customer's investment objectives and recommending a portfolio of securities. C) Publisher that receives a yearly subscription fee for a newsletter that provides nonspecific investment advice. D) Bank that offers investment counseling to its high net worth customers.

Your answer, Publisher that receives a yearly subscription fee for a newsletter that provides nonspecific investment advice., was incorrect. The correct answer was: A broker/dealer who receives a flat fee for analyzing a customer's investment objectives and recommending a portfolio of securities. A broker/dealer who receives fees for investment recommendations is an investment adviser because that fee is considered special compensation relating to securities advice. The antiques dealer provides nonsecurities related advice. Publishers may provide generic investment advice without registering as investment advisers. Commercial bankers are excluded from the definition of an investment adviser.

Malcolm Munger CLU, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers: A) the finders fee would be disallowed if the IA did not have an insurance license. B) no disclosure is necessary unless it will result in the IA's fee being higher than it would have been without the finder's fee. C) SAMCO must disclose the existence and circumstances of the finder's fee to the client. D) SAMCO must make sure that Malcolm discloses the fee to his client.

Your answer, SAMCO must disclose the existence and circumstances of the finder's fee to the client., was correct!. Finder's fees are permitted, but it is the obligation of the IA to make full disclosure to the client. Since nothing here indicates that Mr. Munger is registered, he does not have any responsibility under NASAA regulations to make disclosure to his client. There really is a lot more required here, but there are no alternative choices (and it may be like that on the exam).

Which of the following statements regarding an investment adviser's use of a full service broker for an account over which the adviser has investment discretion is TRUE? A) A full service broker may be used only if the broker is not affiliated with the adviser. B) A full service broker may not be used for any transaction that could be done by a discount broker. C) Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full service broker. D) A full service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided.

Your answer, Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full service broker., was incorrect. The correct answer was: A full service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided. Use of a full-service broker to effect transactions, for an account over which an adviser has investment discretion, is not a breach of fiduciary duty provided the full-service broker's commission is reasonable in view of the services he provides. Services include advice, analyses, research, and custodial services, but not sales incentives offered to the adviser; investment advisers are required to disclose this fact on the ADV Part 2.

Which of the following is the best example of an exaggerated claim that may NOT be used in investment adviser advertising? A) Reporting actual portfolio returns of 15% in the prior year, accompanied by a disclaimer that past performance does not indicate future performance. B) Saying that every one of the firm's securities analysts has earned the CFA designation. C) Saying that the firm has $300 million under management when it manages only $50 million. D) Saying that the firm practices asset allocation principles when it generally designs portfolios consisting of equity, debt, and other investment classes.

Your answer, Saying that every one of the firm's securities analysts has earned the CFA designation., was incorrect. The correct answer was: Saying that the firm has $300 million under management when it manages only $50 million. Overstating the amount of client funds under management is an exaggeration. It is not an exaggeration to state the qualifications of the firm's analysts, unless the statement is untrue. Referring to asset allocation principles when the firm practices such principals is not an exaggeration. If superior investment performance is fact (actual), it is not an exaggeration to report such returns, as long as the report is accompanied by an appropriate disclaimer explaining that past performance does not indicate future performance.

Mary bought 1,000 shares in the morning and sold 1,000 shares of the same security in the afternoon. Under the Securities Exchange Act of 1934's rules dealing with the regulation of the use of manipulative and deceptive devices, which of the following statements is TRUE? A) She has violated the act only if she was trying to create market activity for the security to give a misleading appearance. B) She has violated the act if a profit was made. C) She has violated the act. D) Her broker has violated the act.

Your answer, She has violated the act only if she was trying to create market activity for the security to give a misleading appearance., was correct!. The purchase and sale of the same security on the same day are permissible as long as the investor is not attempting to create the appearance of market activity.There is nothing in the act prohibiting "day-trading"; only trading made for the purpose of manipulating market prices.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it is NOT breach of fiduciary duty if investment advisers do not inquire into a client's: A) Social Security or tax ID number. B) financial situation. C) investment objectives. D) specific financial needs.

Your answer, Social Security or tax ID number., was correct!. Although there are regulations requiring that a securities professional obtain certain client information, such as the Social Security or tax ID number, that has nothing to do with the fiduciary responsibility to always act in the client's best interests. Advisers must make reasonable inquiry into the client's financial situation, investment objectives, and needs before making recommendations. Recommendations must be suitable in light of any other information known to the adviser.

Which of the following is an unlawful activity for an agent? A) Stating a belief that a security's price will fall. B) Stating a belief that a security's price will rise. C) Artificially creating the impression of market activity. D) Stating that a security's registration has been declared effective by the SEC.

Your answer, Stating that a security's registration has been declared effective by the SEC., was incorrect. The correct answer was: Artificially creating the impression of market activity. Securities regulations prohibit an agent from engaging in manipulative and deceptive devices in the trading of securities, such as misleading investors with the false appearance of active trading in a security. Stating that a registration is effective is fine as long as it is true. An agent may state a belief in the future price movement of a security, up or down, as long as no guarantees are given.

Under the Uniform Securities Act, if the Administrator does not deny an application for registration and no disciplinary proceeding is underway in regard to it, how many days after filing the application as an investment adviser representative does registration generally become effective? A) Ten days. B) Seven days. C) Five days. D) 30 days.

Your answer, Ten days., was incorrect. The correct answer was: 30 days. Registration becomes effective 30 days after the application is filed unless the Administrator begins a proceeding or issues a stop order before that time. The Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed.

An individual with $100,000 to invest will require these funds in six months for the purchase of a house. In which of the following circumstances did the agent act correctly? A) The agent convinced the client to invest in an IPO on the basis of its high growth prospects. B) The agent convinced the client to invest in a real estate partnership as a hedge against the rise of real estate values until the client purchases the house. C) The agent convinced the client to invest in a Treasury bill on the basis of its safety. D) The agent convinced the client to purchase a $100,000 lump sum annuity on the basis of its security and backing by an insurance company.

Your answer, The agent convinced the client to invest in a real estate partnership as a hedge against the rise of real estate values until the client purchases the house., was incorrect. The correct answer was: The agent convinced the client to invest in a Treasury bill on the basis of its safety. Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a real estate partnership are long-term investments not suitable to an individual who wants to invest funds on a short-term basis. Although an IPO may be liquid, it is not suitable for short-term funds earmarked for the purchase of a house because there is too much risk to the principal.

Which of the following statements is TRUE about the compensation of an investment adviser? A) The investment adviser may be compensated on the basis of the total assets of the portfolio over a period of time. B) It is not necessary to disclose compensation received from the sale of non-securities products to advisory clients. C) The investment adviser may be compensated on the basis of a share in the capital appreciation of the funds of the client. D) The investment adviser's compensation is not taxed.

Your answer, The investment adviser may be compensated on the basis of a share in the capital appreciation of the funds of the client., was incorrect. The correct answer was: The investment adviser may be compensated on the basis of the total assets of the portfolio over a period of time. The Investment Advisers Act of 1940 (as well as the Uniform Securities Act) permits the adviser to be compensated on the basis of the average total value of the client's funds between specified dates. It may not be based on portfolio appreciation or capital gains. The most common way to compensate the adviser is based on a percentage of average assets under management each month. As with any rule, there are exceptions. Because this question does not address the exceptions, it should be answered from the basic premise that performance-based fees are prohibited. All compensation, even when from non-securities products, must be disclosed.

An investment advisory firm is organized as a partnership and there are five equal partners. During the year, one of the partners passes away and two others leave to start their own firm. Which of the following is required by the Uniform Securities Act? A) Cancellation of the registration of the firm. B) The successor firm must pay the required fees. C) Permission of the clients to have their contracts assigned to the surviving entity. D) Notification to all clients as to the change in the partnership's majority interest.

Your answer, The successor firm must pay the required fees., was incorrect. The correct answer was: Permission of the clients to have their contracts assigned to the surviving entity. Because three of the five partners are no longer with the firm, that represents a majority interest and the partnership must be re-formed as a new entity. The state does not require fees from successor firms, as they will be paid the fee at annual renewal time. Since this represents a new firm, the USA considers this as if the contracts are assigned so permission is required; not merely notification (as would be the case if only two of the partners had left or died).

Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator? A) When a case is pending. B) It need not be filed, unless requested by the Administrator. C) With the original application only. D) With the original application and renewal.

Your answer, With the original application and renewal., was incorrect. The correct answer was: With the original application only. Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.

A longtime client recently asked about investing in a product that she heard about on the local financial news network. Since the investment is substantially different from financial products previously recommended to her, the best action is to: A) tell her she should do some more research before you discuss it further. B) advise the client not to trust what she hears on television and ignore her inquiry. C) tell her if she likes the investment you will execute the trade. D) agree to research the investment to determine if it is a suitable investment for her.

Your answer, advise the client not to trust what she hears on television and ignore her inquiry., was incorrect. The correct answer was: agree to research the investment to determine if it is a suitable investment for her. The IAR has the ultimate responsibility for determining suitability because generally clients lack the experience and knowledge to fully understand an investment. In this case, the client's interest in this product should be addressed and the IAR should research the investment to determine whether it is suitable.

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include each of these EXCEPT A) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b) B) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors while no such obligation falls upon issuers in a 506(b) offering C) securities issued under Rule 506(c) are federal covered while those under Rule 506(b) are not D) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501 whereas Rule 506(b) permits a limited number of sophisticated, but not accredited investors

Your answer, all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501 whereas Rule 506(b) permits a limited number of sophisticated, but not accredited investors, was incorrect. The correct answer was: securities issued under Rule 506(c) are federal covered while those under Rule 506(b) are not Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered to be a federal covered security.

While making a sales presentation of a mutual fund, the registered agent states to a customer that reinvesting the dividends will ensure selling shares at a profit. Making such a statement is: A) misleading and may result in proceedings against the representative. B) allowed if the representative does not use the word "guarantee" in the presentation. C) allowed if the representative does not put the statement in writing. D) allowed if the representative explains to the customer that reinvested dividends are still subject to federal income tax.

Your answer, allowed if the representative does not use the word "guarantee" in the presentation., was incorrect. The correct answer was: misleading and may result in proceedings against the representative. This statement is misleading at best. It is untrue in most cases and, therefore, in violation of the act.

All of the following are exempt transactions under the USA EXCEPT: A) a bank buying common shares in a publicly traded railroad. B) an executor selling shares of common stock for an estate. C) an agent soliciting a customer to buy a new issue of corporate bonds. D) an agent buying a listed stock at the client's request.

Your answer, an agent soliciting a customer to buy a new issue of corporate bonds., was correct!. Solicited trades are generally not exempt transactions unless with institutional buyers. Sales by a fiduciary (such as an executor of an estate) are exempt from the registration provisions. Sales to financial institutions (such as a bank) are also exempt under the act. Unsolicited trades in securities traded in the secondary markets are exempt from state registration and advertising filing requirements.

Under the USA, the term "sale" means: A) a contract to dispose of a security for value. B) an offer to sell. C) an attempt to dispose of a security for value. D) a solicitation of an offer to sell.

Your answer, an attempt to dispose of a security for value., was incorrect. The correct answer was: a contract to dispose of a security for value. A sale is a contract, verbal or otherwise, to dispose of a security for value; all of the other choices describe an offer to sell.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT: A) open-end investment companies must redeem securities within seven days after their tender. B) an investment company must have more than $100,000 capitalization to be offered to the public. C) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company. D) an investment company's board of directors may be composed of up to 70% of the company's interested persons.

Your answer, an investment company's board of directors may be composed of up to 70% of the company's interested persons., was correct!. At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company.

For purposes of the definition found in Rule 501 of Regulation D of the Securities Act of 1933, the term accredited investor would not apply to: A) a large employee benefit plan. B) an officer of the company involved in the underwriting. C) an investment adviser representative. D) an investment company registered under the Investment Company Act of 1940.

Your answer, an officer of the company involved in the underwriting., was incorrect. The correct answer was: an investment adviser representative. An individual is not an accredited investor solely by virtue of being an IAR. If that person had the net worth or income specified in the Rule, OK, but just being in the business does not qualify someone.

While a student at college 9 years ago, Joe was convicted of possession of marijuana (a misdemeanor in that state) and received a suspended sentence. Joe now resides in a different state where the same offense is a felony. If Joe disclosed the matter on his application to ABC Securities, Joe's registration may: A) not be denied based on this conviction because it was a misdemeanor in the state where he went to college. B) not be denied based on this conviction because it was 9 years ago. C) be denied based on this conviction because the crime is a felony in the state where he seeks registration. D) be denied based on this conviction because it was less than 10 years ago.

Your answer, be denied based on this conviction because the crime is a felony in the state where he seeks registration., was incorrect. The correct answer was: not be denied based on this conviction because it was a misdemeanor in the state where he went to college. In this context, only a conviction for a felony within the past 10 years may be grounds for denying a registration. Since the conviction does not show up on Joe's records as a felony, the fact that this state has different penalties for the same offence is irrelevant.

Sharon Smith is an agent for Highwater Securities, a broker/dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them B) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X C) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X D) Sharon must be registered in State X in order to accept the order

Your answer, because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X, was incorrect. The correct answer was: Sharon must be registered in State X in order to accept the order Regardless of whether the security is exempt or the transaction is exempt, an agent must be licensed in any state which is the domicile of a client placing an order (unless the agent is representing a broker/dealer that is exempt from registering in that state). An agent does not have to be registered as an agent in every state the B/D is, only in those where the agent expects clients to reside. Remember, there is no de minimis exemption for B/Ds and agents as there is for IAs and IARs.

If a customer is upset with his agent for not servicing his account properly and sends a complaint letter, the agent should: A) bring the customer complaint to his employer immediately. B) call the customer and apologize, promising to do a better job. C) tell the customer he is willing to make restitution. D) do nothing and hope that he doesn't hear any more about it.

Your answer, bring the customer complaint to his employer immediately., was correct!. The agent must bring all customer written complaints to his employer immediately.

Under the USA, the term guaranteed refers to all of these EXCEPT: A) dividends. B) interest. C) capital gains. D) principal.

Your answer, capital gains., was correct!. When a security is guaranteed, that means that someone other than the issuer has guaranteed timely payment of interest and principal on a debt security, or the payment of dividends on an equity security. No one ever guarantees that the investor will have a capital gain.

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to: A) charge commissions. B) have discretion over a clients assets. C) charge fees based on performance. D) charge fees in advance of services performed.

Your answer, charge fees based on performance., was correct!. Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

A federal covered investment adviser feels that some recent industry regulations will limit his ability to provide the returns to clients that both he and they desire. He communicates this to his clients and urges those who are willing, to sign an agreement waiving their rights to take any legal action in the event of loss due to his refusal to follow those rules. This means: A) that as long as this is part of the agreement with the IA, no legal action can be taken. B) clients would still be permitted to sue because there is no way that legal rights can be waived. C) a suit would be possible, but only if agreed to by the IA. D) clients would not be able to sue because they have executed a document waiving their rights.

Your answer, clients would still be permitted to sue because there is no way that legal rights can be waived., was correct!. There is no way, NEVER, NEVER, that a waiver of legal rights is ever enforceable.

If a person not registered in a state knowingly makes a misleading filing with the Administrator, that person may be: A) fined $5,000. B) fined $10,000. C) imprisoned for 5 years. D) excused from liability, because the person is not registered.

Your answer, fined $10,000., was incorrect. The correct answer was: fined $5,000. Willful violation is punishable by a fine of up to $5,000, imprisonment of up to 3 years, or both. A state Administrator has jurisdiction over any transaction conducted in that state and over all applications filed in the state.

Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he: A) had no more than five clients in that state within the past 12 months. B) had no more than ten clients in that state within the past 12 months. C) is registered as a broker/dealer. D) had no more than 15 clients in that state within the past 12 months.

Your answer, had no more than ten clients in that state within the past 12 months., was incorrect. The correct answer was: had no more than five clients in that state within the past 12 months. An adviser who had no more than five clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business.

Greater Wealth Managers (GWM) is a federal covered investment adviser that has no place of business in the state of Wisconsin although they serve several institutional clients located in the state. The Wisconsin Administrator: A) is vested with the authority to request the Administrator of the state where GWM has its principal office to audit GWM's records. B) is vested with the authority to audit GWM's records without prior notice. C) is vested with the authority to audit GWM's records, but must give prior notice. D) cannot audit nor request any other Administrator to audit GWM's records.

Your answer, is vested with the authority to request the Administrator of the state where GWM has its principal office to audit GWM's records., was incorrect. The correct answer was: cannot audit nor request any other Administrator to audit GWM's records. The practical effect of the NSMIA was to bifurcate regulation of investment advisers. Those who are federal covered only answer to the SEC, not to any state (other than perhaps the requirement to file notice and pay fees). Therefore, the Administrator has no power to view the books and records of a federal covered adviser.

A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe its business as investment counsel if: A) it receives SEC approval to use the definition. B) a substantial part of his business is providing investment supervisory services. C) it maintains custody of customer funds and/or securities. D) it maintains its registration by filing an updating amendment to its Form ADV annually.

Your answer, it maintains custody of customer funds and/or securities., was incorrect. The correct answer was: a substantial part of his business is providing investment supervisory services. The Investment Advisers Act of 1940 prohibits the use of the term "investment counsel", unless the principal business of the person is as an investment adviser and a substantial part of the business is providing investment supervisory services (i.e., continuous advice for individual client portfolios).

Commercial paper with a maturity of nine months or less: A) can only be issued by underwriters. B) need not be registered as a security. C) must be registered as a security. D) must be sold on the New York Stock Exchange.

Your answer, must be sold on the New York Stock Exchange., was incorrect. The correct answer was: need not be registered as a security. Any short-term debt instrument in the top three grades of a recognized rating service (such as Moody's or Standard & Poor's) with 270 days or less to maturity issued in face amounts of $50,000 or more as commercial paper, promissory note, bill of exchange, draft, or banker's acceptance is exempt from registration.

The agreement between an investment adviser and client is the advisory contract. In order to be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they: A) must be in writing. B) must disclose the amount or method of calculation of the adviser's fee. C) typically are renewed on an annual basis. D) generally do not provide for discretion.

Your answer, must disclose the amount or method of calculation of the adviser's fee., was incorrect. The correct answer was: must be in writing. While not the general practice, the federal law does permit oral contracts while the USA requires that all initial and renewal contracts be in writing.

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction EXCEPT a sale of: A) securities to an individual investor with a net worth of more than $5 million. B) securities to a bank. C) nonexempt securities to a broker/dealer. D) unregistered non-exempt securities in an unsolicited transaction.

Your answer, nonexempt securities to a broker/dealer., was incorrect. The correct answer was: securities to an individual investor with a net worth of more than $5 million. Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated non-issuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions . If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.

An agent puts together a recommendation for a customer but is unable to attend the meeting. Another agent from the firm meets with the customer and presents the recommendation, but omits some material facts. According to the Uniform Securities Act, this is: A) prohibited. B) permitted if the second agent was unaware of the omission. C) permitted if the recommendation pertains to an exempt security. D) permitted if the second agent receives no compensation for presenting the recommendation.

Your answer, permitted if the second agent receives no compensation for presenting the recommendation., was incorrect. The correct answer was: prohibited. The agent making a recommendation to a customer is responsible for presenting all of the material facts. Material facts must be presented to a customer regardless of the type of security sold or whether a commission is to be earned or not. Remember, a material fact is one that is critical to the investment decision making of a client.

Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must: A) have a net worth of $100,000. B) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement. C) sell only listed securities. D) avoid the control or custody of client funds and securities.

Your answer, provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement., was correct!. The brochure rule requires that each client be given a written disclosure statement by the adviser no later than the time of entering into the advisory agreement. It may consist of a copy of Part 2A and 2B of Form ADV or another document providing similar information. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.

All of the following statements regarding corporate insiders are true EXCEPT: A) only public information can be used to make transactions. B) short selling is prohibited. C) purchases may not be made through the exercise of options. D) reports of changes in holdings must be filed with the SEC.

Your answer, purchases may not be made through the exercise of options., was correct!. A corporate insider, or affiliate, is defined as an officer, a director, a greater than 10% stockholder, or a family member of an insider. Insiders can purchase stock through the exercise of options. All of the other statements are true.

Under the USA, an investment adviser's current clients must be delivered a brochure A) within 48 hours of renewal B) annually whether or not the adviser has custody or discretion C) quarterly if the adviser has both discretion and custody D) annually​, but only​ if the adviser has neither custody nor discretion

Your answer, quarterly if the adviser has both discretion and custody, was incorrect. The correct answer was: annually whether or not the adviser has custody or discretion Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients,(except those who are exempt from the brochure delivery requirements {impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940}), within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.

Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of: A) rare convertible automobiles. B) gold coins. C) apartments undergoing a conversion to condominiums. D) convertible bonds.

Your answer, rare convertible automobiles., was incorrect. The correct answer was: convertible bonds. Only those individuals in the business of giving advice on securities are required to register as investment advisers; only the convertible bonds are securities.

An agent receives a phone call from a customer's husband who does not have trading authorization over his wife's account. His wife is stranded while traveling and has asked him to instruct the agent to buy 1,000 shares of XYZ stock in her individual account to take advantage of a price drop. In the above situation, the agent should: A) refuse the order because the customer should buy the security for the long term rather than purchase the stock because of a temporary price drop. B) accept the order only if the husband faxes or emails an immediate release to the broker/dealer. C) refuse the order because the husband is not authorized to enter orders for his wife's individual account. D) accept the order and carry out his client's wishes.

Your answer, refuse the order because the husband is not authorized to enter orders for his wife's individual account., was correct!. The agent must refuse the order because the customer did not supply prior written trading authorization. The Uniform Securities Act prohibits the acceptance of orders on behalf of customers from persons who have not been granted third-party trading authority in writing.

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A) send a copy of its brochure, or a summary of the changes, within 7 days of receiving a request from a client B) send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year C) send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year D) send a copy of its brochure, or a summary of the changes, to all clients within 90 days of the end of its fiscal year

Your answer, send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year, was incorrect. The correct answer was: send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state- or federal-covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.

All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 EXCEPT: A) an adviser with 50 clients, all within one state, that furnishes no advice on exchange-listed securities. B) investment advisers whose only clients are insurance companies. C) investment advisers with $110 million or more in assets under management. D) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million.

Your answer, someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million., was incorrect. The correct answer was: investment advisers with $110 million or more in assets under management. Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the NSMIA. Federal exemptions apply to advisers whose clients, none of whom is a private fund, are all in one state, whose principal office is in that state, and whose clients are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the US reaches $150 million.

A broker/dealer is registered in state A and state B. A client in state B files a complaint with the Administrator and, upon further investigation, the Administrator decides to take action against the broker/dealer. In order to complete the case, the Administrator feels that certain information must be subpoenaed from persons in state A and asks that state's Administrator for assistance. Under the Uniform Securities Act, state A's Administrator is required to cooperate only if: A) state A's Administrator has taken action against this broker/dealer prior to state B's getting involved. B) the activities constituting an alleged violation for which the information is sought would be a violation if the activities had occurred in state A. C) the broker/dealer had filed a consent to service of process in state A. D) state A's Administrator is also pursuing action against the broker/dealer.

Your answer, the activities constituting an alleged violation for which the information is sought would be a violation if the activities had occurred in state A., was correct!. Although state Administrators tend to cooperate well with each other, the USA only requires it when the action that is the subject of the complaint would also be a violation of the law in this state.

An investment adviser (IA) is deemed to be maintaining custody under the USA when: A) client funds are kept by a broker/dealer affiliated with the investment adviser. B) the adviser maintains a net worth of not less than $35,000 or has a surety bond in an amount specified by the Administrator. C) client securities are held at the investment adviser's principal office. D) the adviser has been granted discretion over the account.

Your answer, the adviser maintains a net worth of not less than $35,000 or has a surety bond in an amount specified by the Administrator., was incorrect. The correct answer was: client securities are held at the investment adviser's principal office. Possession of a client's securities is considered custody. Although an IA must maintain a minimum net worth of $35,000 (or a surety bond) if custody is maintained, the mere fact that the IA has that level of net worth does not mean that custody is involved. The USA considers that funds and securities held at an affiliated broker/dealer are not under the custody of the IA.

All of the following statements regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are true EXCEPT: A) the contract must not permit assignment without the client's consent. B) the contract must be renewed in writing. C) the contract must detail any prepaid fees to be refunded to the client upon termination. D) the contract's term may not exceed 1 year.

Your answer, the contract must detail any prepaid fees to be refunded to the client upon termination., was incorrect. The correct answer was: the contract's term may not exceed 1 year. The contract must set forth the term of the contract, which need not be for only 1 year. Any renewals or extensions of the contract at the end of the term must be in writing. The contract must describe any refunds upon termination and may not permit assignment without the client's consent.