Series 63 Midterm
Investment advisers must disclose any material disciplinary action to all current and prospective clients. The broadest definition of material would include any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. Fines levied by any SRO required disclosure if they were in excess of A) $5,000. B) $2,500. C) $10,000. D) $1,000.
B) $2,500. SRO proceedings in which the adviser or management person received a fine in excess of $2,500 meet the definition of material disciplinary action and require disclosure.
Under the SEC Release IA-1092, which of the following would be considered to be in the business of rendering investment advice? A) An accountant who provides investment advice to clients as an incidental part of the business B) A financial planner who charges no fee for developing a financial plan but who takes commissions on recommended trades C) An individual who provides investment advice to family members but receives no compensation D) An agent who receives no separate compensation for investment advice but who takes commissions on recommended trades
B) A financial planner who charges no fee for developing a financial plan but who takes commissions on recommended trades A financial planner who takes commissions from a broker-dealer on trades that are recommended as part of the financial plan is considered to be indirectly compensated for giving advice and, therefore, is in the business of rendering investment advice. Agents and broker-dealers who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice, as long as any advice given is incidental to the practice of the profession.
Providential Monetary Services (PMS) is a new broker-dealer whose registration with the state became effective on September 22, 2020. PMS will receive a renewal notice on A) September 22, 2021. B) December 31, 2020. C) December 31, 2021. D) September 30, 2021.
B) December 31, 2020. Regardless of the date of initial registration, the renewal date for all securities professionals is the next December 31.
Conviction of a securities-related misdemeanor can lead to statutory disqualification. The look-back period for statutory disqualification is generally a maximum of A) 20 years. B) 5 years. C) 3 years. D) 10 years.
D) 10 years. Explanation A person may be subject to a statutory disqualification (not permitted to work in the securities industry) if the person is enjoined temporarily or permanently from violating securities laws by a court of competent jurisdiction; is barred or suspended from association with a broker-dealer by the SEC, a state regulator, a self-regulatory organization (SRO), or foreign equivalent; or has been convicted of any felony or certain misdemeanors within the past 10 years.
As defined in the Uniform Securities Act, which of the following can only be a natural person? A) An investment adviser B) A holding company C) A broker-dealer D) An agent
D) An agent Explanation Only a natural person can be an agent. Although there are sole proprietorship investment advisers and broker-dealers, those business more often are structured as legal persons (e.g., corporations or partnerships).
Karly Wilson CFP® is the owner of KW Advisors, an LLC specializing in comprehensive financial planning solutions for middle-income families. Wilson is registered as an investment adviser representative with Megatrends Money Multipliers (MMM), an SEC-registered investment adviser. Which of the following statements is true? A) Wilson's business card must indicate registration as an investment adviser representative with MMM. B) Wilson's business card must indicate registration as an investment adviser representative with KW Advisors. C) KW Advisors must register as an investment adviser with the state. D) As a CFP®, Wilson is exempt from the registration requirements.
A) Wilson's business card must indicate registration as an investment adviser representative with MMM. It is common for financial planners to set up an independent financial planning business while registering as an IAR with a separate entity. When that is the case, the business card should show the name of the financial planning business (KW Advisors in our question) and must show the IAR registration with the registered IA (MMM in our question). Those with the CFP® designation are generally exempt from taking the Series 65 exam, but if functioning as an IAR, must register as such.
Vervet Investments is a business whose primary activity is execution of transactions for customers. Vervet Investments is most likely A) a broker-dealer. B) an agent. C) an investment banker. D) an investment adviser.
A) a broker-dealer. The Uniform Securities Act states that broker-dealer means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. Investment bankers assist issuers in raising capital from investors. Investment advisers are in the business of giving advice, not executing transactions. Agents are always individuals not business entities.
As described in Section 401(c) of the Uniform Securities Act, the term broker-dealer does not exclude A) a person who has a place of business in this state if he effects transactions in this state exclusively with other broker-dealers. B) a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transaction. C) an issuer. D) a bank, savings institution, or trust company.
A) a person who has a place of business in this state if he effects transactions in this state exclusively with other broker-dealers. The USA specifically excludes agents, issuers, and banking institutions from the definition of broker-dealer. There is also an exclusion when there is no place of business in the state and his clients are limited to other broker-dealers and institutions. Another one of the items in that exclusion is if the only transactions in the state are with the issuers of the securities that are the subject of the transaction. The most common example of that is when the BD is doing an underwriting of the issuer's stock or bonds. On the other hand, when the person has a place of business in the state and is effecting transactions in securities, there are no exclusions or exemptions.
Title IV of the Dodd-Frank Act of 2010, known as the Private Fund Investment Advisers Registration Act of 2010, contains a comprehensive overhaul of the registration process for investment advisers. The bill provided for new exemptions from registration under the Investment Advisers Act of 1940 for all of the following except A) advisers solely to unit investment trusts (UITs) registered under the Investment Company Act of 1940 (the UIT adviser exemption). B) certain non-U.S. advisers with no place of business in the U.S. and minimal assets under management (less than $25 million) attributable to U.S. clients and investors (the foreign private adviser exemption). C) advisers solely to venture capital funds (the venture capital fund exemption). D) advisers solely to private funds with less than $150 million in assets under management in the U.S., without regard to the number or type of private funds (the private fund adviser exemption).
A) advisers solely to unit investment trusts (UITs) registered under the Investment Company Act of 1940 (the UIT adviser exemption). First, there is nothing private about UITs—they are publicly offered. Secondly, one of the specific characteristics of a UIT is that there is no ongoing management of the portfolio. Third, UITs were around before 2010.
One way in which registering as an investment adviser on the state level differs from registering with the SEC is that state-registered investment advisers A) file the Form ADV Part 1B while those registering with the SEC do not. B) must file an annual updating amendment within 90 days after the end of the adviser's fiscal year while the filing requirement for those registered with the SEC is within 120 days. C) include an audited balance sheet if the investment adviser requires or solicits substantial prepayment of fees or maintains custody while those registered with the SEC include a balance sheet only when requiring substantial prepayment of fees. D) file the Form ADV Part 2A while those registering with the SEC do not.
A) file the Form ADV Part 1B while those registering with the SEC do not. It is only state-registered investment advisers who file the Form ADV Part 1B. Both file the Form ADV Part 2A, and an audited balance sheet is required for any IA who takes substantial prepayments or maintains custody. Do not confuse this requirement with the one regarding including a balance sheet in the brochure delivered to customers. In that situation, only state-registered IAs maintaining custody must deliver the balance sheet. In both cases, the annual updating amendment is due within 90 days after the end of the IA's fiscal year.
The Uniform Securities Act's definition of a security would not include A) fixed index annuities. B) a certificate of interest or participation in a profit-sharing agreement. C) a bond issued by the Dominion of Canada. D) commercial paper in the top three grades in $100,000 denominations and 30-day maturities.
A) fixed index annuities. It is always best to remember those few items that are not securities. On that list are products of an insurance company that do not include the word variable. The commercial paper and Canadian bond are exempt from registration, but that does not change the fact that they are securities.
Many of the Uniform Securities Act's regulations apply solely to retail clients. Which of the following are included in that term? A) Credit unions B) Individuals who are accredited investors C) Retail banks D) Mutual funds
B) Individuals who are accredited investors Retail clients are those who are not institutions and are always natural persons regardless of their wealth. Banks, including credit unions, are institutional investors as are investment companies such as mutual funds.
Recalcitrant Portfolio Advisers (RPA) is a state-registered investment adviser with $97 million in AUM. Which of these employees of RPA would be required to register as an investment adviser representative? A) Calvin, who is the vice-president in charge of human relations B) Cheryl, who has no customer accounts but supervises the activity of three IARs C) Chris, who is the IT specialist that keeps everyone's computers running smoothly D) Courtney, who distributes the daily recommendations to each IAR in the office
B) Cheryl, who has no customer accounts but supervises the activity of three IARs An investment adviser representative must have some role in giving advice or soliciting for clients. The only exception is when an individual, like Cheryl, supervises those who are IARs. Because there is no principal level registration, those who supervise IARs must themselves register as such. Employees whose job function does not relate to the giving of or soliciting for investment advice are not IARs. This is true even in the case of officers.
The Uniform Securities Act has a rather lengthy list of exempt transactions. Included in that list would be all of the following except A) unsolicited transactions in unlisted stocks. B) U.S. government Treasury bonds. C) sales by the executor of an estate. D) transactions with institutional investors.
B) U.S. government Treasury bonds. For something to be an exempt transaction, there must be a transaction. Treasury bonds are an exempt security, but no transaction is indicated. Unsolicited trades, sales by certain fiduciaries, and transactions with institutions are all included in the definition of exempt transaction.
The broad term that defines a person in whom another has placed the utmost trust and confidence to manage and protect property or money is A) guardian. B) fiduciary. C) trustee. D) executor.
B) fiduciary.
The common stock of Alternative Energy Resources Organization (AERO), previously trading on the OTC Pink Market has just become listed on the New York Stock Exchange. If AERO wishes to make its securities available for sale in several states where the common stock is not registered, the process used would most likely be A) qualification. B) notice filing. C) amplification. D) coordination.
B) notice filing. When a company's stock is listed on an exchange, it becomes a federal covered security. As such, it is exempt from registration in any state. However, in some states, the Administrator can require the issuer to notice file. When AERO was on the OCT Pink Market, registration with the states was done using coordination because the security had to register with both the SEC and the states. For exam purposes, the only time qualification will be used is for an intrastate offering.
Broker-dealers are usually registered in more than one state. Indeed, some are registered in every state. This can present a problem when a customer in a state geographically far removed from the broker-dealer's principal office files a complaint with the Administrator of that state. If the investigation determines that a hearing is to be held in the customer's state, it can be difficult to get legal representation of the broker-dealer to travel extensively. A legal agreement permitting the Administrator to act as the defendant's attorney in fact for the receipt of legal documents is A) the writ of habeas corpus. B) the consent to service of process. C) the Administrator's consent decree. D) the durable power of attorney.
B) the consent to service of process. The consent to service of process is a legal document entered into by all registrants granting the Administrator the power to accept legal papers on behalf of the registrant. It is a part of the initial registration of every securities professional.
In addition to the annual updating amendment, an investment adviser must amend the Form ADV by filing additional amendments promptly if information relating to certain items becomes inaccurate in any way. Prompt amendment would not be required when there is a change to A) any of the questions regarding disciplinary actions. B) the number of shareholders if the firm is organized as a corporation. C) the firm's name. D) the contact person preparing the form.
B) the number of shareholders if the firm is organized as a corporation. Many of the large investment advisory firms are publicly traded corporations. The count of the shareholders changes every day as the stock is traded on the stock exchanges or OTC market. Even a small privately held corporation does not have to report the number of shareholders.
When a security is registered by qualification, the registration statement may be filed by all of the following except A) the issuer. B) a broker-dealer. C) the Administrator. D) a selling stockholder.
C) the Administrator. Although most registration statements are filed by the issuer, the exam may require you to know that they may also be filed by any other person, such as a stockholder making a large block sale or by a broker-dealer. The registration statement is filed with the Administrator, not by the Administrator.
Unless qualifying for an exemption, any person who meets the definition of broker-dealer must register with the state. To register with the state securities Administrator, such persons must submit an application containing all of the following except A) the location of the principal office. B) the proposed method of doing business. C) the hours the business will be open. D) disclosure of any charge of committing any felony.
C) the hours the business will be open. The Administrator is not interested in the business hours of the firm. The location of the principal office and the method of doing business (e.g., market maker, underwriter, retail brokerage) are required. It is not just convictions of felonies that must be disclosed. Even if an arrest or charge that results in a not guilty verdict or dismissal must be reported. There is no time limitation.
All of the following statements regarding broker-dealers are true except A) they are regulated by the SEC as well as the appropriate states. B) they may act as dealers who buy and sell securities for their own accounts. C) they employ only registered investment adviser representatives. D) they act in an agency capacity in executing orders to buy and sell securities on the various stock exchanges in the secondary market.
C) they employ only registered investment adviser representatives. Agents work for broker-dealers, while investment adviser representatives work for investment advisers. Depending on the role, they may be brokers acting in an agency capacity for others or dealers (principals) acting for their own accounts. Unless something to the contrary is indicated, all broker-dealers are registered with (and regulated by) the SEC and those states requiring their registration.
Which of the following would be included in the Uniform Securities Act's definition of an agent? A) An individual who is the officer in charge of a broker-dealer's diversity and inclusion program B) A partnership engaged in soliciting securities transactions on behalf of a broker-dealer C) An individual hired by a broker-dealer as a summer intern to file customer trade confirmations D) An individual who solicits securities transactions on behalf of a broker-dealer
D) An individual who solicits securities transactions on behalf of a broker-dealer Explanation Any individual (and it can only be a natural person) who is engaged in soliciting or effecting securities transactions on behalf of a broker-dealer meets the definition of an agent. Partnerships are not natural persons. Officers whose function does not include securities activity with customers are not agents. Clerical and administrative personnel, interns or full-time, are not agents.
Chandra has a PhD in economics and has been employed as an agent by Gibraltar Securities for the past 15 years. Missing academic life, she resigns from the broker-dealer and accepts a position as an economics professor at a state university. Which party is required to notify the state securities Administrator of this change? A) Only Chandra B) Chandra, Gibraltar, and the university C) Only Gibraltar D) Both Chandra and Gibraltar
D) Both Chandra and Gibraltar The license of an agent expires when that agent ceases to be employed by the broker-dealer or issuer for whom they were previously licensed. Both the agent and the former broker-dealer (or issuer) are required to notify the Administrator promptly. The new employer (the university) is not in the securities industry and has no obligation to notify the Administrator. Had Chandra accepted employment at another broker-dealer, that firm would have been required to notify the Administrator of Chandra's employment.
Under the Uniform Securities Act, the term agent does not include an individual who represents an issuer in effecting transactions in certain cases. In which case does receipt of compensation make the individual an agent? A) Effecting transactions in a security issued by a bank or trust company B) Effecting transactions in bonds issued by a Canadian provincial government C) Effecting unsolicited transactions D) Effecting transactions with existing employees, partners, or directors of the issuer
D) Effecting transactions with existing employees, partners, or directors of the issuer Explanation An individual representing an issuer is not an agent when the issuer is one of the five listed in the LEM. Canadian federal and provincial governments are on that list, as are banks and trust companies. In addition, regardless of the issuer, if the transaction is exempt, as is an unsolicited trade, the individual is not an agent. When the only transactions are with employees purchasing the employer's stock, payment of any form of compensation to the individual makes that person an agent.
With the growth of electronic communications, NASAA has established a policy dealing with the registration requirements or exemption from such. Broker-dealers using the internet to distribute information on available products and services through certain communications made on the internet directed generally to anyone having access to the internet, and transmitted through postings on bulletin boards, displays on home pages, or similar methods, shall not be deemed to be transacting business in this state for purposes of requiring registration in this state if the following conditions are observed: Any communication contains a legend in which it is clearly stated that the broker-dealer may only transact business in this state if first registered, excluded or exempted from state registration requirements. Any follow-up, individualized responses to persons in this state by such broker-dealer that involve either the effecting or attempting to effect transactions in securities will not be made absent compliance with state registration requirements or an applicable exemption or exclusion. The communication does not involve effecting transactions in securities and is limited to the dissemination of specific information on products and services that are suitable for the investor. The communication contains a mechanism, including and without limitation, technical firewalls or other implemented policies and procedures, designed reasonably to ensure that prior to any subsequent, direct communication with prospective customers or clients in this state, said broker-dealer is first registered in this state or qualifies for an exemption or exclusion from such requirement.
D) I, II, and IV Explanation The communication is limited to the dissemination of general information on products and services. Once the information is specific to a customer, registration is required.
Parsimonious Asset Managers (PAM) has its principal office in State A with branches in States B, C, and D. PAM's last annual updating amendment showed assets under management of $125 million. Latrice is registered as an investment adviser representative with PAM and spends all of her time in the State C branch office advising her retail clients. With three customers in State C, 35 customers in State A, and 14 customers in State D, Latrice must register in A) States A, C, and D. B) States A and C. C) States A, B, and D. D) State C.
D) State C. Explanation PAM is a federal covered investment adviser ($125 million in AUM requires that). Therefore, as an IAR with a covered IA, the requirement to register is solely in those states in which the IAR has a place of business. In this question, Latrice's only place of business is in State C. The de minimis exemption applies to IARs with state-registered IAs, not federal covered ones.
Unless qualifying for an exemption or excluded from the definition, broker-dealers are required to register in each state in which they have customers. An example of a case where the broker-dealer would not have to register is A) a broker-dealer with no office in the state whose only transactions in the state were with five or fewer retail investors during any 12-month period. B) a broker-dealer with no office in the state whose only transactions were with individual customers in the state meeting the accredited investor standard. C) a broker-dealer with an office in the state whose only transactions were with banks and insurance companies. D) a broker-dealer with no office in the state whose only transactions in the state were with large employee benefit plans.
D) a broker-dealer with no office in the state whose only transactions in the state were with large employee benefit plans. Explanation Excluded from the definition is a broker-dealer with no place of business in the state that limits its transactions in the state to institutional investors such as an employee benefit plan with assets of at least $1 million. On the exam, using the term large in reference to an employee benefit plan indicates that it qualifies as an institutional investor. Those meeting the definition of broker-dealer are always going to have to register in any state in which they have a place of business. This is true even when the only customers are institutions like banks and insurance companies. Unlike investment advisers, there is no de minimis exemption. As long as the customer is a retail client (individual), registration is required. Being an accredited investor (a federal term) has no significance here.
The Uniform Securities Act provides certain exemptions from registration as an agent. One of those would be when the individual represents A) an insurance company organized and supervised under the laws of this state. B) a federal covered broker-dealer with no place of business in the state. C) a broker-dealer in the sale of shares of a bank organized and supervised under the laws of any state. D) a trust company organized and supervised under the laws of any state.
D) a trust company organized and supervised under the laws of any state. Explanation When an individual represents an issuer, rather than a broker-dealer, exemption from registration as an agent applies in two instances. One of those is when the issuer is one of the five specified in the LEM. Banks and trust companies are included in the list of five, but insurance companies are not. The other is when the transaction is exempt. There is no such term as federal covered BD; federal covered would only apply to an IA (or a security).
There are conditions under which a broker-dealer must post a surety bond. In lieu of the bond, the Administrator is empowered to accept A) a lien on the broker-dealer's equipment. B) a personal guarantee by the broker-dealer's CEO. C) an insurance policy. D) cash or securities.
D) cash or securities. Explanation In lieu of a surety bond, the Administrator will accept deposits of cash or securities. The bond is an insurance policy; the question is looking for an acceptable substitute.
Section 401(c) of the Uniform Securities Act contains the definition of a broker-dealer. The section also lists exclusions from the broker-dealer definition for a person with no place of business in the state whose only clients in the state are all of the following except A) savings institutions. B) closed-end investment companies. C) existing customers of the person and whose residence is not in this state. D) issuers of securities.
D) issuers of securities. Explanation Because this is a law exam, every word is critical. The exclusion when the firm's only clients are issuers is when they are the issuers of the securities in the specific transactions, not just an entity that issues stocks and/or bonds. Without a place of business in the state, dealing exclusively with institutions, such as banks, insurance companies, or investment companies means the BD is excluded from the definition. When the only clients in the state are existing clients of the BD who are not residents of the state, the snowbird rule applies.