S65 Midterm (U1-U12)

MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation B) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price C) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation D) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price

A) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread. U7LO4

Under the Investment Advisers Act of 1940, which of the following would NOT meet the criteria of persons associated with an investment adviser? A) An individual whose only function is posting trades to client accounts B) An individual whose only connection to the firm is a position on the board of directors C) The individuals responsible for bringing new clients to an advisory firm D) A manager in an investment advisory firm who supervises 5 investment adviser representatives

A) An individual whose only function is posting trades to client accounts Persons associated with an investment adviser include members of the board of directors, officers, partners, or managers of an investment advisory firm. Sales representatives and other employees whose duties are not limited to clerical or ministerial functions are included as well. In most, but not all, cases, associated persons are required to register as investment adviser representatives. U2LO1

Centripetal Investment Advisers (CIA) has it principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) checks made out to 3rd parties are forwarded within 3 business days B) CIA has a power of attorney granting authority to withdraw funds from the custodian C) CIA's advisory contract calls for the automatic deduction of advisory fees D) checks made out to CIA are deposited within 3 business days

A) checks made out to 3rd parties are forwarded within 3 business days When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. U7LO2

XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ's, the Administrator would be able to do all of the following EXCEPT A) examine those records located in State U B) do so during normal business hours without prior notice C) ask FINRA to perform the examination D) ask the State C Administrator to perform the examination

A) examine those records located in State U This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don't exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator. U5LO2

Anyone who represents an issuer in effecting transactions between the underwriter and the issuer A) is excluded from the definition of agent under the Uniform Securities Act B) must be registered as an investment adviser C) must be registered as an agent D) must be registered as an Administrator

A) is excluded from the definition of agent under the Uniform Securities Act Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act. U3LO4

Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules B) permission was obtained from the Administrator and custody was not prohibited by that state's rules C) customer permission was obtained prior to entering into the contract D) the IA maintained adequate net worth or a surety bond

A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if 1. the Administrator, by rule, prohibits custody; or 2. in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers. U7LO2

A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the SEC B) the state with the most stringent requirement C) the state where the principal office of the BD is located D) the state where the BD is incorporated

A) the SEC One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located. U3LO5

After an investigation, the Administrator wishes to have the registration of an investment adviser revoked. In order to do so, all of the following are true EXCEPT A) the investment adviser may elect to withdraw its registration B) the investment adviser has a right to a hearing C) an appeal may be filed within 60 days of the final order D) the Administrator must be able to point to specific facts of law violated by the investment adviser

A) the investment adviser may elect to withdraw its registration Withdrawal is a form of non-punitive termination and cannot be employed once an investigation has begun. U5LO2

Which of the following firm's earnings are likely to exhibit the greatest degree of sensitivity to the business cycle? A) Entertainment producer B) Furniture producer C) Telecommunications provider D) Food and beverage producer

B) Furniture producer Consumers buy fewer durable goods, such as furniture, during recessions and buy more during expansions. As a result, producers of these goods tend to have cyclical demand, revenues, and earnings. People do not decide to go to a movie (or rent one) based on the economy. Food and beverages is the stereotypical defensive industry and people use their phones regardless of the economic cycle. U8LO2

BC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and I. its only clients were insurance companies II. it had contact with fewer than 6 State N residents in any 12-month period III. its only solicitation of State N residents was through radio advertisements originating in State M but received in State N IV. it occasionally engaged in firm commitment underwriting with issuers based in Nebraska A) II and III B) I and IV C) I and II D) III and IV

B) I and IV A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state. U3LO5

Which of the following corporate actions would have an effect on the company's working capital? A) Paying a utility bill B) Declaring a 15% stock dividend C) Calling in a portion of a 20-year bond at par D) Borrowing money from the bank on a 90-date note

C) Calling in a portion of a 20-year bond at par Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash. U10LO7

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

C) 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. U7LO1

Under the Uniform Securities Act, which of the following would be least likely to be civilly liable for making false registration statements, using a prospectus that is untrue, or failing to meet the prospectus delivery requirements of the act? A) Every expert who is named in the registration statement B) Every underwriter of the security C) Every stockholder named in the registration statement D) Any and every person who has signed the registration statement

C) Every stockholder named in the registration statement Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own 10% or more of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). U4LO3

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? I. An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only II. An adviser with a place of business in the state whose total fee income in the state amounts to $150 III. An adviser with no place of business in a state who only provides advice on fixed annuities IV. An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I only B) I, II, and III C) I and II D) I, II, and IV

C) I and II Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable. U1LO5

A consent to service of process allows the Administrator to A) ensure that the legal appeal process is expedited as a result of the Administrator's access to information B) verify the accuracy and completeness of registration without obtaining the registrant's prior approval C) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant or the registrant's successor D) terminate a registrant's application

C) be the registrant's attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against the registrant or the registrant's successor The consent to service of process provides the Administrator with power of attorney to accept legal papers on behalf of registrants. This power of attorney does not grant the Administrator the authority to terminate the registration at will nor does it empower the Administrator to verify information or expedite the registration process. U3LO5

The NASAA Model Rule dealing with business continuity plans is NOT concerned with A) the protection, backup, and recovery of the investment adviser's books and records B) office relocation in the event of temporary or permanent loss of a principal place of business C) ensuring that the investment adviser continues to generate profits during a business interruption D) assignment of duties to qualified individuals in the event of the death or unavailability of key personnel

C) ensuring that the investment adviser continues to generate profits during a business interruption Although it would be nice if the IA could continue to be profitable, that was not NASAA's concern when drafting this Model Rule. All of the other choices are important concerns. U7LO8

A corporate executive decides it is in the company's best interest to purchase a yacht. Over the years, the company has built up substantial retained earnings and will use accumulated funds to make the purchase. An analyst interested in how this purchase will affect the company's debt to asset ratio would examine A) the seaworthiness of the ship B) the statement of cash flows C) the balance sheet D) the income statement

C) the balance sheet Where do we find a company's assets, liabilities, and retained earnings? On the balance sheet. U9LO1

If the yield curve becomes inverted, a likely cause would be that the Fed has A) loosened short-term credit B) tightened long-term credit C) tightened short-term credit D) loosened long-term credit

C) tightened short-term credit The Fed's influence on rates is primarily on the short end of the yield curve. Both the discount rate, which it sets, and the federal funds rate, which it influences, are short-term rates. The Fed tightens short-term credit when the economy appears to be overheating. To slow things down, the Fed raises short-term rates to extremely high levels. U8LO4

An investment adviser who has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? I. Notify the Administrator by the close of business on the day after discovery II. File a report of its financial condition with the Administrator no later than the close of business on the day after notification III. Cease doing business A) I and III B) II and III C) I, II, and III D) I and II

D) I and II When an investment adviser fails to meet its minimum financial requirements, it must notify the Administrator by the end of business on the day after discovery and then must file a report of its financial condition by the end of the next business day. Included in the report must be the number of client accounts. U1LO5

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

D) I and II When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required. U3LO5

The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is I. a broker-dealer II. an insurance company III. an investment company IV. a person receiving impersonal advice for which the annual fee is less than $500 A) I, II, III and, IV B) I and II C) I, II, and III D) III and IV

D) III and IV There are two exemptions from the brochure rule. 1. The first is if the client is an investment company . 2. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year. U6LO4

Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security? A) It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction. B) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. C) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. D) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period.

D) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders is recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another. U4LO3

Federal covered securities, as defined under the Uniform Securities Act, A) would not include securities senior to a common stock listed on the NYSE B) must be registered with the SEC before they can be offered in the state C) must be registered in the state before they can be offered within the state D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940

D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered. U4LO3

The Uniform Securities Act requires that broker-dealers and investment advisers maintain certain records relating to their business operations. If the firm wished to upgrade to a modern system, such as disk storage, A) it must keep its records in paper form B) the most modern form currently permitted is microfilm or microfiche C) it must obtain approval from the Administrator prior to determining its method of record retention D) it could do so if the system met certain requirements, including that the information on the disk could not be altered

D) it could do so if the system met certain requirements, including that the information on the disk could not be altered Computer disk storage is acceptable provided a printed copy can be readily obtained and the information on the disk cannot be overwritten. U3LO5

A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should A) accept the order because it is unsolicited B) accept the order because she received it in State A C) accept the order because her broker-dealer is registered in all 50 states D) reject the order because she is not registered in State B

D) reject the order because she is not registered in State B Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident. U3LO5

When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering B) all other states in which the security is to be registered C) the amount of securities to be offered in the state D) the effective date of the offering

D) the effective date of the offering The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering. U4LO3

An investment adviser reviewing the past performance of a portfolio observes that annual returns have been 6%, 11%, -5%, 8%, 14%, 1%, and 7%. From this information, the adviser would determine that the median value was A) 19.0% B) 7.4% C) 7.0% D) 6.0%

C) 7.0% The median of a set of numbers is the one in the middle. That is, the number with an equal number of values above and below. It is easiest to compute if the numbers are presented in ascending values. In this question, we have -4, +1, +6, +7, +8, +11, and +14. This way, it is plain to see that 7 has 3 values below and 3 values above. U10LO2