Series 63 Questions

Upon filing a withdrawal of registration with the State, the Administrator can commence a revocation or suspension proceeding for up to: A. 1 year from the effective date of the withdrawal B. 2 years from the effective date of the withdrawal C. 3 years from the effective date of the withdrawal D. 10 years from the effective date of the withdrawal

A. 1 year from the effective date of the withdrawal The Administrator retains jurisdiction over anyone who withdraws from registration in the State for 1 year following the effective date of the withdrawal. Thus, if one withdraws from registration, and 6 months later, there is a complaint filed by a customer with the Administrator against that person; the Administrator can still investigate, and can issue a suspension, revocation; or a cease and desist order.

An investment adviser directs its trades to a broker-dealer paying non-discounted rates. In return, the broker-dealer provides the adviser with proprietary investment analysis software that it has developed. This is: I a soft dollar arrangement II a quid pro quo arrangement III permitted under the Uniform Securities Act IV prohibited under the Uniform Securities Act A. I and III B. I and IV C. II and III D. II and IV

A. I and III The SEC and State Administrators permit so called "soft dollar" arrangements. An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients.

The policy of securities regulators regarding emails sent or received by agents maintains that: I business related emails must be recorded and retained II business related emails are not required to be recorded and retained because they are a privileged communication III personal emails must be recorded and retained IV personal emails are not required to be recorded and retained because they are a privileged communication A. I and III B. I and IV C. II and III D. II and IV

A. I and III The recordkeeping rules require the retention of e-mail. Both FINRA and SEC rules require the retention of BOTH business and personal emails, since representatives will often send business related e-mails from home computers and personal electronic devices.

A Chinese Wall must be maintained by a broker-dealer between all of the following EXCEPT: A. Sales and Back Office Operations B. Research and Trading C. Investment Banking and Research D. Investment Banking and Sales

A. Sales and Back Office Operations Chinese Walls to stop information flow must be maintained between: -Investment Banking and each of the following: Trading, Sales and Research -Trading and each of the following: Research and Sales The intent of the information barriers around investment banking is to stop the flow of information on upcoming underwritings, mergers or takeover deals being done by the underwriting department to others that might trade on the information for a profit before the public knows about the upcoming deal. Regarding the Chinese Wall required between investment banking and research, the intent is to make sure that research is truly independent and not influenced by the investment bankers at that firm that might demand a "favorable" research report on an issuer so that they can curry favor with that issuer to get future underwriting business. The M & A department and the underwriting department are usually one and the same at investment banking firms. There are no barriers required between these two groups. The intent of the information barrier between research and trading is to stop a trading desk from getting advance knowledge of a research report that the firm will issue and trading on that information before it is publicly released. The intent of the information barrier between trading and retail sales is that if retail brokers know in advance of a broker-dealer's trading strategy, they could use the information to front-run those trades.

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

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

An agent accepts an unsolicited telephone order from a new customer to buy 200 shares of a listed common stock. The salesman has the order executed and then forwards the new account form, with the executed order ticket, to the manager. Under the Uniform Securities Act, which statement is TRUE? A. The agent's actions are prohibited since the account must be approved by the manager prior to opening B. The agent's actions are prohibited since the customer must open a new account in person C. The agent's actions are allowed as long as the manager approves of the first trade D. The agent acted properly

A. The agent's actions are prohibited since the account must be approved by the manager prior to opening The procedure to open a new account is to have the manager approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

Under the Uniform Securities Act if it is in the public interest, the Administrator may inspect a broker-dealer's books and records: A. at any time B. weekly C. monthly D. quarterly

A. at any time Under the Uniform Securities Act, if it is in the public interest, the Administrator may inspect a broker-dealer's books and records at any time.

Under the Uniform Securities Act, an Investment Adviser CANNOT be required by the Administrator to: A. post a surety bond, if the Adviser will not take custody of customer funds or securities B. furnish information to the Administrator, if this is in the public interest and for the protection of investors C. file an amended Form ADV Part 2 promptly if the filing becomes incomplete or inaccurate in any material respect D. retain customer records in the format required by the Administrator

A. post a surety bond, if the Adviser will not take custody of customer funds or securities The Administrator has the power to require an investment adviser to furnish information; retain records; and amend its Form ADV promptly (defined as within 30 days in most States) if any information in it becomes materially inaccurate. If an adviser takes custody, the Administrator can require the posting of a surety bond. If the Adviser does not take custody, the Administrator will not require the posting of a surety bond.

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

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

Which of the following would constitute an "involuntary assignment" of an investment advisory contract under the Uniform Securities Act? I An investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer II An investment adviser formed as a partnership has a partner with a 25% interest resign III An investment adviser formed as a partnership has 1 partner leave and take the contract to a new advisory firm A. I only B. I and III C. II and III D. I, II, III

B. I and III If an investment advisory contract is assigned to someone else, the customer must sign a new contract with whoever takes control of that contract. If an investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer, then all of the investment adviser's contracts have legally been assumed by that broker-dealer. This is the same as an assignment. If a minority partner leaves an adviser formed as a partnership, this is not considered to be an assignment (note that if this was a majority partner leaving, then technically this would be an assignment). If a partner at an advisory firm leaves and takes the contract with him or her to a new firm, again this is an assignment of the contract to the new firm.

A Registered Investment Adviser is also a registered representative that manages a client's account. The customer is paying a fixed annual advisory fee and is paying a commission for each execution of a recommended trade, both of which have been disclosed to the customer. Which statements are TRUE? I The account may be charged both the advisory fee and a commission on each trade II The account may not be charged an advisory fee and a commission on each trade III This is an unethical practice IV This is not an unethical practice A. I and III B. I and IV C. II and III D. II and IV

B. I and IV An investment adviser can charge advisory fees to a client for recommending securities; and then can charge commissions to that client on trades performed, as long as both of these fees are disclosed to the customer. The overriding theme here is that all charges to customers must be disclosed. Note that 2 fees are permitted because the firm is acting in 2 capacities - for recommendations it is acting as an adviser; while for trade executions it is acting as a broker. Also note that if disclosure was not made of the 2 fees and "double capacity," then this would be an unethical practice.

Which of the following statements are TRUE regarding the suspension of a broker-dealer's registration and an agent's registration through that broker-dealer? I If a broker-dealer's registration is suspended, the agent's registration through that broker-dealer ceases to be effective II If an agent's registration is suspended, the broker-dealer's registration ceases to be effective III The Administrator may revoke a registration solely if it is in the public good IV The Administrator may revoke a registration if it is in the public good and the person has violated the Uniform Securities Act A. I and III B. I and IV C. II and III D. II and IV

B. I and IV If a broker-dealer's registration is suspended, the agent's registration through that broker-dealer ceases to be effective. However, if an agent's registration is suspended, it has no effect on the broker-dealer's registration. The Administrator may revoke a registration if it is in the public good and the person has violated some aspect of the Act. Registration cannot be revoked solely because it is in the public good.

Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act? I Broker-dealers are subject to post-registration requirements II Broker-dealers are not subject to post-registration requirements III Agents of broker-dealers are subject to post-registration requirements IV Agents of broker-dealers are not subject to post-registration requirements A. I and III B. I and IV C. II and III D. II and IV

B. I and IV Post-registration requirements cover such things as maintaining books and records; making required filings with the Administrator; giving reports to customers; and filing advertising and sales literature with the State. These are requirements for both broker-dealers and investment advisers. This portion of the Uniform Securities Act does not apply to their agents, however.

Which statements are TRUE about the filing of the annual surprise audit results with the Administrator by investment advisers? I Only advisers that take custody must be audited II All advisers must be audited III Audit results must be filed with the Administrator within 60 days of completion of the audit IV Audit results must be filed with the Administrator within 120 days of completion of the audit A. I and III B. I and IV C. II and III D. II and IV

B. I and IV The NASAA custody rule requires that each adviser that takes custody be audited on a "surprise" basis annually, so the actual date of the audit is only known to the CPA. There is no audit requirement for advisers that do not take custody. After the CPA shows up for the audit and completes the examination, a copy of the auditor's report and financial statements must be filed with the Administrator within 120 days of completion.

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

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

An investment adviser has 1 main office and 3 branch offices, all located in different States. Which statement is TRUE about recordkeeping requirement for the adviser under the Uniform Securities Act? A. The adviser must keep separate records in each State based on that State's requirements B. The adviser must keep its records based on the rules of the State where its main office is located C. The adviser must keep its records based on the rules of the State where it has the greatest number of customers D. The adviser must keep its records based on the rules of the State where it has the greatest dollar amount of customer assets

B. The adviser must keep its records based on the rules of the State where its main office is located The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.

A Registered Investment Adviser has discretionary control over 50 accounts that range in value from $200,000 to $1,500,000. She receives a free due diligence trip from a real estate limited partnership sponsor to inspect a property in Florida. She is enthusiastic about the investment potential and purchases a $50,000 real estate limited partnership unit in the property for each of her accounts. The RIA disclosed the fact that she received the free trip to each of her customers before making the purchases. Which statement is TRUE? A. This is unethical because taking the free due diligence trip and then buying the partnership units for her clients is a conflict of interest B. This is unethical because the adviser did not determine the suitability of the investment for each account C. This is unethical because the adviser violated her fiduciary responsibility to her clients D. This is an ethical business practice

B. This is unethical because the adviser did not determine the suitability of the investment for each account It really does not seem likely that the partnership units were suitable for each and every one of the investment adviser's 50 accounts - the investment appears to have been bought for these accounts without regard to suitability.

Under the provisions of the Uniform Prudent Investor Act, a trust: A. can only invest in securities that are included on that State's "Legal List" B. can customize its investments based on suitability as determined by the needs of the beneficiaries C. must determine that each individual investment is prudent D. gives the trustee complete discretion as to which investments are suitable

B. can customize its investments based on suitability as determined by the needs of the beneficiaries The Uniform Prudent Investor Act allows the plan trustee to consider overall portfolio composition when determining whether an investment is prudent, with the goal of diversification. The trustee cannot be held liable for a "bad pick" as long as this is adhered to. It also states that when selecting investments, the trustee must take into account the suitability and needs of the beneficiaries. Thus, the trustee has some flexibility as to investment choices. Prior to this, the only permitted investments were those that were included on the State's "Legal List" - and these were typically only investment grade bonds. Note that the trustee does not have complete discretion as to investment choices - for example, the trustee is still liable if the investments are overly speculative.

An Investment Adviser wants to change its approach and management style, focusing more on growth funds and emerging company stocks and less on strategies that provide stable income. In order for the Investment Adviser to do this: A. prior approval must be obtained from the Administrator B. each customer must approve the change by signing a new advisory agreement C. no action need be taken by the Investment Adviser D. the IA must be a Federal Covered Adviser

B. each customer must approve the change by signing a new advisory agreement A change in the adviser's style requires that each customer sign a new advisory contract. Remember, the customer signed on with this adviser because its approach was to invest with the objective of stable income, and now this adviser must change that to "growth and aggressive growth." This is a material change to the advisory agreement and thus, it requires customer agreement. Note that the Form ADV filed in the State must be amended within 30 days for this change, but there is no Administrator approval of this.

If the Administrator summarily suspends a registration of an agent, all of the following statements are true EXCEPT: A. the Administrator must notify the agent promptly that the order has been entered B. the Administrator must obtain a court order prior to issuing its own order C. an opportunity for a hearing must be given within 15 days of written request D. the individual is prohibited from acting as an agent in that State

B. the Administrator must obtain a court order prior to issuing its own order The Administrator is permitted to summarily suspend a registration, which means that he or she can take this action without obtaining a court order. If the administrator does this, the agent must be notified promptly of the action and the reasons for the action; and the agent must be given the opportunity for a hearing within 15 days of the agent making a written request.

In order for an investment adviser to be compensated with a performance fee, all of the following must be disclosed in writing EXCEPT: A. the periods that will be used to measure performance and their significance in the computation of the fee B. the fee arrangement is based solely on realized capital gains C. the nature and significance of any index used as a comparative measure D. the reason why the adviser believes that any comparative index used is appropriate

B. the fee arrangement is based solely on realized capital gains Before entering into an advisory contract that charges a performance fee, the adviser must disclose in writing: -that the fee arrangement may create an incentive for the adviser to make investments that are riskier; -that the investment adviser will get compensation based on both unrealized appreciation and realized capital gains; -the basis for valuing any illiquid investments used in computing unrealized appreciation; -the periods that will be used to measure performance and their significance to the computation of the fee; and -the nature of any index used as a comparison of investment performance, the significance of the index, and the reason why the adviser believes the index is appropriate.

If an agent of a broker-dealer wishes to withdraw his registration, which of the following statements are TRUE? I Both the agent and the broker-dealer must notify the Administrator II Notification to the Administrator of the withdrawal must be made promptly III The withdrawal does not become effective for 30 days IV If there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 5 years from the withdrawal date A. III only B. II and IV C. I, II, III D. I, II, III, IV

C. I, II, III Both the agent and the broker-dealer must notify the Administrator promptly of the withdrawal. The withdrawal does not become effective for 30 days. Finally, if there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 1 year (not 5 years) from the withdrawal date.

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

C. "The fund yielded 20% last year and is expected to yield the same this year, though the actual yield may be more or less" An agent cannot guarantee a return to a customer (Choice A), nor can an agent state that income from a fund consists of both dividends and capital gains (the income portion consists solely of dividends), nor can the agent state that the SEC approves of the fund. It is perfectly acceptable to state the historical yield for the fund, and then to state that similar results are expected in the future, although the actual result may be more or less.

An agent of a broker-dealer may: I charge a fee for investment advice in addition to any commission charged if a recommendation performs well II not charge a fee for investment advice in addition to any commission charged if a recommendation performs well III charge for clerical services where the charge is not based on performance IV not charge for clerical services A. I and III B. I and IV C. II and III D. II and IV

C. II and III The only fee that can be accepted for executing a transaction is the original commission charged. A broker-dealer cannot charge separately for investment advice; any charge for investment advice is included in the broker's commission charge. Charges for clerical services are permitted as long as the charges are fair and reasonable and do not discriminate among customers.

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

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

Which statement is TRUE? A. All securities sold through a broker-dealer in a State must be registered in the state An agent may maintain his registration without being affiliated with a broker-dealer C. An agent's registration can never be revoked without an opportunity for a hearing D. A broker-dealer cannot also be registered as an investment adviser at the same time

C. An agent's registration can never be revoked without an opportunity for a hearing The true statement is that a registration can never be revoked without the opportunity for a hearing. It is not true that all securities sold in a State must be registered - no registration is required if the securities are exempt, federal covered, or if they are sold in an exempt transaction. An agent must be affiliated with a broker-dealer to maintain his registration. If he leaves the broker-dealer and does not affiliate with another broker-dealer, the registration is terminated. A firm is permitted to register as both a broker-dealer and an investment adviser.

What constitutes "taking custody" under the NASAA rule for investment advisers? A. An employee of an advisory firm who is given discretionary authority to trade the account by a client B. A client who signs a power of attorney, giving the adviser the right to trade on the client's behalf C. An employee of an advisory firm acting as a trustee for a firm D. An introducing broker-dealer receiving checks made out to the carrying broker-dealer that are to be deposited at a broker-dealer

C. An employee of an advisory firm acting as a trustee for a firm Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Finally, having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have access to client funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

Which of the following MUST notify the Administrator if an agent of a broker-dealer is terminated? I Agent II Ex-employer III FINRA * A. I only B. II only C. I and II D. I, II, III

C. I and II Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him an agent; both the agent and the broker-dealer must notify the State Administrator promptly. Note, in contrast, that if an agent of an investment adviser is terminated, only the adviser is required to notify the Administrator; and if an agent of a federal covered adviser is terminated, only the agent is required to notify the Administrator.

Which of the following statements is (are) TRUE regarding the conduct of customer accounts? I An agent may not personally guarantee a customer's account against loss II An agent may not recommend the use of options to hedge a customer's account against loss III Agents may not share in the gain or loss in a customer's account A. I only B. I and II C. I and III D. II and III

C. I and III Agents may not personally guarantee a customer's account against loss, nor may they share in the gains and losses of a customer's account unless very specific requirements are met. There is no prohibition on agents' recommending the use of options to hedge a customer's account, since this is a valid and popular reason for using options.

Which of the following conditions must be met in order for an agent to share in the gains and losses of a customer's account? I The agent and customer must enter into a written agreement to share in the account II The agent can only share to the extent of capital contributed by the agent, and must share in both gain and loss III The agreement must be approved by the broker-dealer before it takes effect A. I only B. II only C. I, II, III D. None of the

C. I, II, III Agents are prohibited from sharing in the gains and losses of a customer's account unless there is a written agreement between the customer and the agent which has been approved by the broker-dealer; and the agreement specifies that sharing in gain and loss is proportionate to the capital contribution of each participant in the account.

The State Administrator is empowered to require the filing of advertising and sales literature relating to offers of which of the following? I U.S. Government securities II Municipal securities III Agency securities IV Equity securities A. I and III only B. II and IV only C. IV only D. I, II, III, IV

C. IV only The Administrator can require filing of advertising and sales literature unless the security involved is exempt; or the security is offered in an exempt transaction; or the security involved is a federal covered security. An equity security, such as common stock or preferred stock in a corporation, is non-exempt. U.S. Governments municipals and agencies are exempt securities, so the Administrator cannot require the filing of advertising related to these issues.

An investment advisory firm with $300,000,000 under management that is registered with the SEC as a federal covered adviser uses an unaffiliated broker-dealer to execute its customers' trades. In return for directing the trades to the broker-dealer, the broker-dealer provides the adviser with "free" research, but charges a higher commission rate than a discount broker. Which statement is TRUE? A. This is a prohibited and unethical practice B. The investment adviser is prohibited from paying commission rates to the executing broker-dealer that are higher than the commission rates charged by average of the 3 lowest-priced brokers used by the adviser C. The investment adviser is permitted to pay the higher commission rate as long as it is disclosed to customers that the value of research received is considered when choosing an executing broker D. The investment adviser is permitted to choose any broker-dealer to execute its customer transactions as long as the broker-dealer is completely independent of the investment adviser

C. The investment adviser is permitted to pay the higher commission rate as long as it is disclosed to customers that the value of research received is considered when choosing an executing broker This is a so-called "soft dollar" arrangement, where the investment adviser chooses an executing broker-dealer to effect its portfolio trades based not just on lowest price, but rather based on trade execution capability and the value of services offered by the broker-dealer to the investment adviser such as "free" research and portfolio management tools. Thus, the broker-dealer is being compensated for these extra services with "soft dollars" by the investment adviser - that is, by being paid a higher than normal commission rate. This is permitted by the SEC as long as disclosure of the practice is made to customers on Form ADV.

A clearing broker-dealer that makes markets in most NASDAQ securities has decided that holding its trading securities inventory together with its customer's securities positions would result in a substantial cost savings to the firm. As a result, the firm would be able to reduce the amount that it charges its customers for safekeeping of securities. Which statement is TRUE about this action, if taken? A. This action is permitted if the firm can demonstrate that overall costs to customers would be lowered B. This action is called rehypothecation and is prohibited C. This action is called commingling and is prohibited D. This action is permitted without restriction

C. This action is called commingling and is prohibited An unethical business practice is the commingling of customer securities with the proprietary positions held by the member firm. Customer securities positions must always be kept physically separate from the firm's proprietary positions. Note, however, that the broker-dealer is permitted to commingle one customer's margin securities with those of other customers; and these securities can be rehypothecated (pledged) to a bank to get a margin loan for those customers.

An agent of a broker-dealer publishes a web page that offers a free suitability determination to each customer that fills out a form electronically. Furthermore, if the customer agrees to open an account, the site states that: "The first month of trading will be free." Which statement is TRUE regarding this communication? A. This communication is permitted without restriction B. This communication is prohibited in each State C. This communication is permitted only if the broker-dealer and the agent are registered in each State where a customer completes the Web form D. This communication is permitted only if the broker-dealer and the agent are Federally registered

C. This communication is permitted only if the broker-dealer and the agent are registered in each State where a customer completes the Web form Because this is not a "general" Internet Communication and the communication is being followed-up with specific client interaction, this is considered to be an offer of brokerage services in each State where a customer completes and submits the electronic suitability form. As such, the maker of the offer (the broker-dealer) and its agents must be registered in each State where this occurs. The fact that the first month of trading is free has no bearing. The broker-dealer will charge for its trades thereafter.

Under the NASAA Model Rule covering Investment Adviser records, the adviser's articles of incorporation must be retained for: A. 3 years B. 5 years C. for the life of the firm plus an additional 3 years D. for the life of the firm plus an additional 5 years

C. for the life of the firm plus an additional 3 years NASAA's recordkeeping rule for investment advisers requires that "partnership articles and any amendments, articles of incorporation, charters, minute books and stock certificate books of any investment adviser be preserved for at least 3 years after termination of the enterprise."

It is an unethical business practice for an investment adviser to borrow money from a: A. bank that is the adviser's client B. broker-dealer that is the adviser's client C. pension fund that is the adviser's client D. any of the above

C. pension fund that is the adviser's client Investment advisers and their agents are prohibited from borrowing money from customers - unless the customer is in the business of lending money (which is the case with banks and broker-dealers).

An investment adviser wishes to charge a "2 and 20" management fee, consisting of a management fee equal to 2% of annual average net assets and a performance fee equal to 20% of the asset appreciation. This fee arrangement is: A. prohibited under all circumstances B. permitted only if the clients are accredited investors as defined by Regulation D of the Securities Act of 1933 C. permitted only if the clients invest at least $1 million or have a net worth, exclusive of residence, of $2.1 million D. permitted only if each client is a general partner in the venture

C. permitted only if the clients invest at least $1 million or have a net worth, exclusive of residence, of $2.1 million Investment advisers cannot charge fees based on asset appreciation under both NASAA and SEC rules. However, if the adviser limits its clientele to very wealthy investors (a client who invests at least $1 million or has a net worth, exclusive of residence, of $2.1 million), then a performance fee can be charged under SEC rules and because of "federal supremacy," NASAA rules cannot override this exemption.

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A. trade date B. settlement date C. 10 business days following the end of the month in which the transaction was effected D. 10 business days following the end of the quarter in which the transaction was effected

D. 10 business days following the end of the quarter in which the transaction was effected NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Who can make a loan to a Registered Investment Adviser? A. A customer with a net worth of $2 million B. A customer that is another registered investment adviser C. A customer that is an accredited investor D. A customer that is a broker-dealer

D. A customer that is a broker-dealer A Registered Investment Adviser cannot borrow money from a client, unless that client is a broker-dealer, bank or an affiliate of the investment adviser.

An Investment Adviser must inform a client about all of the following EXCEPT: A. Change of address B. Addition of new partners to the advisory partnership C. Change of phone number D. Addition of client accounts from another advisory firm that was "bought out"

D. Addition of client accounts from another advisory firm that was "bought out" Investment advisers must inform their clients about a change of address or a change of phone number (this is common sense). It is also a requirement to inform clients about the addition of new partners to an advisory partnership. There is no requirement to notify customers of the addition of new advisory clients, since this has no impact on the customer.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices are prohibited? A. Effecting a wash trade for a security that trades on the NYSE B. Quoting a stock based on the price shown in today's Wall Street Journal because no quotation source is available for real time quotes C. Soliciting an order for an unregistered non-exempt security D. All of the above

D. All of the above Buying a security and simultaneously selling it to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading" (also known as "painting the tape"), regardless of the exchange on which the stock trades. Quoting a stock based on a newspaper listing would not be a current quote - the listing gives yesterday's closing price and giving fictitious quotes is considered a manipulative practice. Solicitation of orders for unregistered non-exempt securities is prohibited - non-exempt securities must be registered to be sold in a state.

All of the following media can be used to store data under Uniform State Law EXCEPT: A. Microfiche B. Digital storage C. CD-ROM D. Audio tape

D. Audio tape The Uniform Securities Act states that any records that must be retained must be kept in compliance with SEC rules on recordkeeping. The SEC updated its recordkeeping rules to allow electronic recordkeeping (but paper records, as well as microfilms or microfiches, are still permitted). Electronic storage is permitted on computer disks, computer tapes, or any other digital storage medium. Audio tape is NOT an electronic storage medium.

Which of the following is considered to be "churning"? A. Buying ABC stock on the NYSE and simultaneously selling ABC stock short on the Midwest Stock Exchange B. Day trading by an agent with discretionary authority in a customer margin account where the customer has a speculative investment objective C. Swapping a municipal bond for another municipal bond to obtain a capital loss deduction D. Buying and selling ABC stock on the same day in a discretionary account that has a long term growth objective

D. Buying and selling ABC stock on the same day in a discretionary account that has a long term growth objective Churning is the excessive trading of a customer's account with the intention of generating commissions for the agent. Engaging in an arbitrage transaction (Choice A) is not churning - this is done to capture small momentary price differences that can exist between markets. Day trading in a discretionary account for a customer who wishes to speculate would be churning only if the trading was considered to be excessive - so Choice B is not churning. Performing a municipal bond tax swap for a customer (Choice C) is not churning either. Buying and then selling the same stock on the same day in a discretionary account that has a long term growth objective is likely to be churning. In such an account, a buy and hold strategy is appropriate - not quick in and out trading of positions.

Which of the following is NOT considered to be unethical under the Uniform Securities Act? A. Taking an order from the spouse of a customer who has an individual account, only when the customer is traveling and is out of the country B. Telling a customer that wishes to invest in a speculative stock that the agent believes to be unsuitable, that the prospects for the company are considerably more bearish than the agent believes C. Telling a customer to sell a security based on material negative non-public information that an agent has obtained, as long as the agent does not sell the stock for his or her personal account D. Executing a customer's order to buy at the market at the current ask price when the bid price is lower

D. Executing a customer's order to buy at the market at the current ask price when the bid price is lower Unless the customer has given spouse "discretion" to trade the account in writing, a verbal order cannot be taken from the spouse. An agent cannot misrepresent the prospects for a company - it makes no difference that the agent is trying to "discourage" the customer from making an "unsuitable" investment. Under the "tipper-tippee" insider trading doctrine, not only is a person that trades on material non-public information liable (the "tippee"); but the person who gave the tip (the "tipper" is the agent in this case) is also liable as well. Customer orders to buy are executed at the current ask price (the customer must buy from the dealer at the dealer's ask). Customer orders to sell are executed at the current bid (the customer must sell to the dealer at the dealer's bid). The bid price will always be lower than the ask price - this is the dealer's trading profit, known as the spread.

If an agent changes employment from one broker-dealer to another broker-dealer, all of the following would notify the State Administrator EXCEPT: A. Agent B. Former Employer C. New Employer D. FINRA

D. FINRA Under the Uniform Securities Act, when an agent associates with a broker-dealer; or terminates those activities that make him an agent; both the agent and the broker-dealer must notify the State Administrator promptly. FINRA has nothing to do with State registration requirements; it is only concerned with Federal registration requirements under the Securities Exchange Act of 1934.

All of the following may be required by the Administrator to maintain registration EXCEPT: A. Filing financial reports with the Administrator B. Filing of renewal fees with the Administrator C. Filing of sales literature with the Administrator D. Filing of a renewal consent to service of process with the Administrator

D. Filing of a renewal consent to service of process with the Administrator Consent to service of process is only filed with initial registration applications; it is not required for renewals. The Administrator can require the filing of financial reports, sales literature, and the payment of renewal fees.

A State Administrator may, by order, cancel the registration or application for registration of a broker-dealer, agent, investment adviser, or investment adviser representative if the: I firm or individual cannot be located after a reasonable search II firm or individual has ceased to do business as a broker-dealer, agent, investment adviser or investment adviser representative III individual is the subject of an adjudication of mental incompetence due to a medical diagnosis A. I only B. I and II C. II and III D. I, II, III

D. I, II, III "If the Administrator finds that any registrant or applicant for registration is no longer in existence or has ceased to do business as a broker-dealer, agent, or investment adviser or investment adviser representative, or is subject to an adjudication of mental incompetence or to the control of a committee, conservator, or guardian, or cannot be located after a reasonable search, the Administrator may by order cancel the registration of application." This is the exact wording of the Uniform Securities Act.

In connection with the sale of an issue to a customer, the agent of a broker-dealer must disclose any material public facts about the issuer if: I by not disclosing the information, the presentation to the customer would be misleading in any material respect II the customer is not an employee or officer of the issuer and therefore is not in a position to have knowledge of these material public facts III the information was disclosed to the agent by the broker-dealer, regardless of the broker-dealer's policies and procedures covering disclosure of information to customers A. I only B. I and II C. II and III D. I, II, III

D. I, II, III Omissions or misstatements of material fact, when making a sales presentation to a customer, are prohibited. If the customer is not an officer or employee of the company that is the subject of the sales presentation, then that customer is not in a position to know that much about the company and must be told the material public facts that are relevant to the sales presentation. Finally, regardless of the broker-dealer's internal policies and procedures on disclosure of information, all material information about that issuer necessary for the customer to form an opinion as to whether to trade that security, must be disclosed.

Which of the following are defined as "persons" under the Uniform Securities Act? I Joint Stock Company II Partnership III Estates IV Unincorporated Organization A. II only B. I and IV only C. I, III, and IV D. I, II, III, IV

D. I, II, III, IV "Persons," as defined under the Uniform Securities Act, include Joint Stock Companies, Partnerships, Estates, and Unincorporated Businesses. It is important to know who are defined as "persons," since these entities may then be further defined as "agents" (which can only be individuals), "broker-dealers" (which can be incorporated or unincorporated businesses); or "issuers" (which can be incorporated or unincorporated businesses, joint ventures, municipalities etc.).

Under NASAA recordkeeping rules, advisers must retain records for no less than: I 3 years II 5 years III with the first 1 year's records kept in the principal office of the adviser IV with the first 2 years' records kept in the principal office of the adviser A. I and III B. I and IV C II and III D. II and IV

D. II and IV Advisers must retain records for 5 years under NASAA rules (note that this differs from SEC rules for broker-dealer records, most of which must be retained for 3 years). The first 2 years' worth of records must be kept at the adviser's principal office, where it is available for inspection.

Under NASAA rules, which of following are unethical practices when recommending a mutual fund to a customer? I Recommending a letter of intent if the customer does not have the immediate funds to reach a breakpoint II Not disclosing to a customer the sales charge discount if a purchase is made at the breakpoint level III Not disclosing to a customer that dividends can be automatically reinvested without any sales charge imposed IV Recommending the purchase of shares which results in the customer simultaneously holding shares in different investment company portfolios with similar investment objectives A. I and III B. I and IV C. II and III D. II and IV

D. II and IV If a customer is getting "close" to the purchase amount needed to qualify for a breakpoint (a reduced sales charge), it is unethical under NASAA rules not to make the customer aware of the relevant sales charge discount on the purchase of shares in dollar amounts at or above the breakpoint. Thus, the agent must tell the customer the amount of any additional investment needed to qualify for the next breakpoint. Furthermore, the customer must be made aware of any letter of intent (LOI) feature that can be used to reduce the sales charge (the LOI gives the customer 13 months to complete the breakpoint). A way that an agent could maximize his or her compensation would be to recommend that the customer buy mutual fund shares with similar objectives in different fund families, so that the customer does not reach a breakpoint (Choice IV). This is an unethical practice. There is no requirement to make the customer aware of automatic dividend reinvestment when recommending mutual funds.

Which records MUST be retained in a state-registered investment adviser's principal office? I Financial reports II Customer securities positions III Investment adviser's bank statements IV Records of customer purchases and sales orders A. I and III B. I and IV C. II and III D. II and IV

D. II and IV NASAA rules require that State-registered advisers keep, in their principal office, records of: -customer purchases and sales; and -customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.

If a representative that transacts business in a State terminates employment with an investment adviser, notice must be given to the Administrator by the: A. Investment Adviser only B. Investment Adviser Representative only C. both the Investment Adviser and the Investment Adviser Representative D. Investment Adviser, but if the representative learns that the adviser has not given notice, the representative must do so

D. Investment Adviser, but if the representative learns that the adviser has not given notice, the representative must do so If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. If the representative learns that the adviser has not given notice, then the representative must do so promptly. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

An agent of a broker-dealer is opening a new client account. The agent has completed the new account application and the suitability determination. The customer has an investment objective of safety of principal and income. The agent makes an initial recommendation of a conservative blue chip stock with a track record of paying a consistent cash dividend. The customer accepts the recommendation. When must the commission charged on the transaction be disclosed to the customer? A. At the time that the order is placed B. At the time when the order is filled C. At the time when the account is opening D. On the confirmation of the transaction

D. On the confirmation of the transaction There is no requirement to disclose the commission charged to customers at the time of the trade or at the time of account opening. The only requirement is that the commission be disclosed on the trade confirmation. Also remember that any commission charged must be "fair and reasonable."

An agent of a broker-dealer recommends a security to a customer. The customer buys 1,000 shares, paying the firm a commission. The stock reaches a new market high in two weeks. Under the Uniform Securities Act, which statement is TRUE? A. The firm can charge the customer a separate amount for investment advice B. The firm can increase the commission charged to the customer based on the excellent performance of the investment C. The agent can accept a large gift from the client for the advice D. The only compensation that can be accepted by the broker-dealer is the original commission charged

D. The only compensation that can be accepted by the broker-dealer is the original commission charged The only fee that can be accepted is the original commission charged. It is prohibited to be paid based on the gains in a customer's account. A broker-dealer earns its fee for investment advice within the commission charged. It cannot charge a separate fee for investment advice, since this would be a "double charge" to the customer.

An agent of a broker-dealer that works out of a branch office during the week sends e-mails to customers about potential investment ideas from his home when he works during weekends. Which statement is TRUE? A. These e-mails are not required to be retained because they originate from the agent's home and not from the agent's regular place of business B. These e-mails are not required to be retained because only physical, not electronic, records are subject to the record retention requirements C. These e-mails must be retained for a minimum of 1 year D. These e-mails must be retained for a minimum of 3 years

D. These e-mails must be retained for a minimum of 3 years Any e-mails sent by an agent to customers, from any location, are a record that must be retained. The retention period is either that specified by the State Administrator; or in the absence of such a rule, they must be kept for the time period required under the Securities Exchange Act of 1934. The 1934 Act requires a 3 year retention period for these records.

A customer buys 500 shares of ABCD stock in a cash account and pays for the securities in full on settlement date. The customer requests that the broker-dealer transfer the securities into the customer's name and ship them to his home address. Which statement is TRUE? A. This request cannot be honored because equity securities are only issued in book-entry form B. This request cannot be honored because all customer securities must be held in a depository C. This request cannot be honored unless the customer makes it in writing D. This request should be honored as given

D. This request should be honored as given Fully paid customer securities can either be held in custody of the firm (where they must be segregated and kept in safekeeping); or the customer may request that the securities be transferred into his or her name and shipped to the customer. Note that securities held in margin accounts cannot be transferred and shipped - they are kept in "street" name as collateral for the customer margin loan. There is no requirement for such a request to be made in writing.

An investment adviser prepares an advertisement that will be used in newspapers in a large city. Under NASAA rules, the advertisement would be permitted to contain a(n) A. testimonial from a famous client of the firm B. offer of free research given to any customer that signs an investment contract C. listing of the firm's "Top 10 Picks" showing performance over the past year D. a toll-free number to call for more information

D. a toll-free number to call for more information The NASAA rule on IA advertising parallels the SEC rule included under the Investment Advisers Act of 1940. The NASAA rules states that any advertisement from an investment adviser: -cannot contain a testimonial (broker-dealer advertising may, however); -cannot state that any report or research will be provided for free unless this is offered without condition; -cannot contain false, untrue or misleading statements; -can include a list of recommendations made with their performance as long as all recommendations over that period are included, along with the market price at the time of the recommendation and the current price of the security. This list cannot be deliberately selective.

All of the following are defenses against identity theft that must be used at a broker-dealer or investment adviser EXCEPT: A. encryption of data B. installation of anti-malware software C. password protection for system entry D. cyber insurance

D. cyber insurance Data encryption, installation of anti-virus and anti-malware programs, and the use of password-protection are all defenses against identity theft, where customer account data is stolen from broker-dealers or investment advisers. Cyber insurance to protect the firm against the cost of a data breach is a good thing to have, but is not a defense against a data breach.

Under the Uniform Securities Act, the registration of a broker-dealer may be revoked for all of the following reasons EXCEPT the firm does not: A. maintain required records B. file financial reports with the Administrator C. file advertising with the Administrator D. file customer complaints with the Administrator

D. file customer complaints with the Administrator A broker-dealer's registration may be revoked if the firm fails to maintain required records, fails to file financial reports with the Administrator or fails to file advertising with the Administrator, if required to do so. There is no requirement under the Uniform Securities Act for customer complaints to be filed with the Administrator.

All of the following are true about registration of agents under the Uniform Securities Act EXCEPT: A. a non-resident agent can solicit business in another State only if both the agent and broker-dealer are registered in that State B. an agent can only sell securities that have been registered in a State, or that are exempt from registration C. if an agent resigns and affiliates with another broker-dealer, the agent, old broker-dealer and new broker-dealer must notify the Administrator D. if a broker-dealer's registration in a State is revoked, it has no effect on the agent's registration

D. if a broker-dealer's registration in a State is revoked, it has no effect on the agent's registration If a broker-dealer's registration is revoked in a State, then the agent(s) registration(s) are revoked as well. On the other hand, if an agent's registration is revoked, it has no effect on the broker-dealer's registration. Non-resident broker-dealers and agents that solicit in another State must be registered in that State. Agents can only sell securities that are either registered, or that are exempt from registration, in a State. If an agent resigns, and affiliates with another broker-dealer, the agent, old broker-dealer and the new broker-dealer, must all notify the Administrator.

A firm's market making desk, aware that the firm is about to publish a bullish research report on ABCD stock, purposefully increases its long position in order to satisfy anticipated retail demand. This action is: A. permitted without restriction B. permitted as long as the research report is released within 48 hours of the first trade made to increase the firm's position C. permitted as long as the market listing the stock is notified, in writing, of the impending research report D. prohibited

D. prohibited "Trading ahead of research" is prohibited. A member firm cannot alter its inventory position in anticipation of a research report that it is about to release. In essence, the member firm is treated as an "insider." Once the favorable report is released, this may cause the general public to become more bullish and buy the stock, pushing the price up. If the firm were to increase its inventory position prior to the release of the report, it could make a nice profit based on the stock's upward movement once the report is disseminated. This is prohibited.

All of the following are violations of the "suitability" rule EXCEPT: A. recommending speculative common stocks to a customer who has income objectives B. recommending to a customer who is 3 years from retirement that he get a second mortgage on his home to invest in growth stocks C. recommending trades of excessive size to a customer D. recommending municipal bond funds to a customer who seeks income that is exempt from Federal income tax

D. recommending municipal bond funds to a customer who seeks income that is exempt from Federal income tax Since municipal bonds offer income that is exempt from Federal income tax, they would be suitable for a customer seeking tax free income. Recommending speculative stocks to a customer with income objectives is unsuitable; recommending that a customer mortgage his house to invest in growth stocks when he will need retirement funds soon is unsuitable (and unethical); and recommending trades that are beyond a customer's financial capacity is unsuitable.

All of the following are violations of the Uniform Securities Act EXCEPT an agent: A. of a broker-dealer telling a customer that by purchasing a bond with a 5% coupon, the customer will earn a 5% yield B. splitting profits evenly in a customer account where the customer has contributed all of the capital in the account C. backdating a trade confirmation so that the customer will get a better execution price D. refunding a customer's money for a transaction that violated the registration provisions of the Uniform Securities Act

D. refunding a customer's money for a transaction that violated the registration provisions of the Uniform Securities Act Since a bond is not necessarily purchased at par, telling a customer that a 5% coupon rate on a bond means that the customer will get a 5% yield is deceptive. Splitting profits in a customer account between an agent and a customer is prohibited unless each contributes capital to the account; sharing is in proportion to capital contributed; and the firm approves of the arrangement in writing. Trade records must be accurate and backdating of trades is prohibited. Finally, refunding a customer's money (plus interest and attorney's fees) is the basic remedy for having committed a violation of State law, so that is a good thing - not a violation!

If an agent withdraws from employment from a broker-dealer, the withdrawal takes effect: A. promptly B. within 5 days C. within 10 days D. within 30 days

D. within 30 days If an agent withdraws from registration, the withdrawal does not take effect for 30 days (or sooner, if the Administrator so permits).

A broker-dealer and its agent are registered in State A. The agent tells a customer in State A that he is prohibited from making an offer of a security in that State because the security is not registered in State A and the security is non-exempt. However, he tells the customer that he can accept an offer to buy that security from the client because then the transaction would be exempt. Which statement is TRUE? A. There is no violation of Uniform State Law because the transaction will qualify for an unsolicited customer order exemption B. There is a violation of Uniform State Law because the agent has made an offer to sell an unregistered non-exempt security in that State C. There is no violation of Uniform State Law because the broker-dealer is registered in the State D. There is no violation of Uniform State Law because the agent is registered in the State

fffB. There is a violation of Uniform State Law because the agent has made an offer to sell an unregistered non-exempt security in that State The agent and the broker-dealer are both registered in State A, so there is no problem with their making an offer of securities to customers in State A. However, the agent knows that he is prohibited from offering or selling unregistered non-exempt securities in the State. Non-exempt securities (such as common stock) must be registered to be offered or sold in the State. The agent cannot attempt to get around this by having the customer make an offer to buy those securities, calling the transaction "unsolicited" and therefore exempt. The way the law reads is that making an offer to sell, or soliciting an offer to buy, both constitute an "offer to sell" securities under the Uniform Securities Act.