Series 65: Quiz Questions, Case Studies, and Examples

Q2A True OR False 1. A final order may be entered only after opportunity for a hearing has been granted 2. If an admin determines that a registration statement for a security is incomplete, he may issue a cease and desist order 3. Under the Uniform Securities Act, the city of Atlanta would be included in the definition term person 4 The GEMCO Employees Retirement Plan currently has assets of $750k. Under the USA, the plan would be considered an institutional investor

1. T. A final order, such as a suspension or revocation, may only be entered after the opportunity for a hearing has been granted. 2. F. Cease and desist orders are directed at securities professionals. Stop orders are used for securities offerings. 3. T. Governments and political subdivisions are considered persons under the act. Remember there are only three choices that are not a person—minors, persons since deceased, and those judged mentally incompetent. 4. F. In order for an employee beneit plan to be included in the deinition of institution, it must have assets of not less than $1 million.

Q2B. True Or False 1. In General, a person who effects transactions in securities for itself or for the account of others in the course of business must register in the state as a BD 2. Under the USA, an out-of-state firm that transacts business with an established customer who is on vacation is not considered a BD in the state where the customer is on vacation 3. A person not defined as a BD in the state under the USA need not register as such 4. A BD registered with the SEC and several states

1. T. A person who effects transactions in securities for itself or for the account of others must register in the state as a broker- dealer unless speciically excluded from the deinition or exempt from registration. 2. T. A firm with an out-of-state registration is not considered a broker-dealer in that state if transacting business with a customer who is passing through the state on vacation. 3. T. If a person is excluded from the deinition, that person need not register as a broker- dealer; however, if they are not excluded (or exempt), they must register. 4. F. When a broker-dealer is registered with both the SEC and several states (the usual case), the inancial and operational requirements to be met are those of the SEC.

Q2K Write U for unlawful or prohibited activities and L for lawful activities. 1. An agent guarantees a client that funds invested in mutual funds made up of government securities cannot lose principal. 2. A nondiscretionary customer calls his agent and places a buy order for 1,000 shares of any hot internet company. Later in the day, the agent enters an order for 1,000 shares of Global Internet Services. 3. An agent receives a call from his client's spouse, advising him to sell her husband's

1. U. It is unlawful to guarantee the performance of any security. Even though repayment of the principal of the government securities at maturity is assured, the same cannot be said about the mutual fund. 2. U. It is unlawful to exercise discretion without prior written authorization. Because the client was a nondiscretionary client, the agent could not, on his own initiative, select which internet company to invest in. 3. L. An agent must refuse orders from anyone other than the customer unless that person has prior written trading authority. 4. U. All written customer complaints must be forwarded to a designated supervisor of the agent's employing broker-dealer. 5. L. Agents may borrow from clients who are banks or inancial institutions that are in the business of lending money to public customers. Agents may not borrow money from customers who are not in the business of lending money. 6. U. An agent may not guarantee the performance of a security. 7. L. It is lawful to cha

Q2D True Or False 1. A consent to service of process must be submitted with each renewal application 2. A Canadian BD, properly registered with the admin of the province in which he is headquartered and with no office in the state, may do business with his customers who are on a skiing trip in Vail without registering with the admin of Colorado 3. When a securities professional registers in a state, he must provide the state Admin with a list of all the states where he intends to register

1: F. A consent to service of process is iled with the initial application and permanently remains on ile with the Administrator. 2: F. In order to do business with their Canadian customers who are temporarily in any state(s), Canadian broker-dealers (and their agents) must obtain a form of limited registration. 3: T. Whether the Form BD for a broker- dealer or the Form U-4 for an agent, the registrant must check the box(es) listing all jurisdictions in which the applicant is registering (or already registered). This is also required for investment advisers and their representatives.

Q2G: True or False 1. ABC shoe company has applied for the registration of its securities with the SEC as required, and wants to register its securities in the state o Illinois and several neighboring states. ABC would most likely register by coordination 2. Any company may register by qualification whether or not it files a statement with the SEC

1: T Registration by coordination involves coordinating a state registration with that of a federal registration. 2: T Any company may register by qualiication. However, in virtually all cases, qualiication is only used when it is the only choice, such as for intrastate offerings.

Q2I Indicate an exempt transaction with a Y and a non-exempt transaction with N 1. Mr. Thompson, an agent with First Securities, Inc. (a broker-dealer), receives an unsolicited request to purchase a security for Mary Gordon, a long-time clientQ2I Indicate an exempt transaction with a Y and a non-exempt transaction with N 2. The sale of an unregistered security in a private, nonpublicly advertised transaction, offered to 10 or fewer retail investors over the previous 12 months 3. The Sale of uncl

1: Y Mr. Thompson's receipt of an unsolicited order from Ms. Gordon is an exempt transaction. 2: Y The sale of an unregistered security in a private, nonpublicly advertised transaction to 10 or fewer offerees over the previous 12 months is an exempt transaction under the limited offering exemption (a private placement). 3: Y. Any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator (but not a custodian for a minor underUTMA) is considered an exempt transaction under the USA 4: N The sale of stock of a previously privately owned company to the public in an initial public offering is not an exempt transaction.

Q2C3-7 Write A for agent and B if not 3. Person who effects transactions in municipal securities on behalf of a BD 4. An agent's salaried secretary who takes orders 5. An employee of a bank that is issuing shares who receives a commission for selling the bank's securities 6. An individual who represents her nonexempt employer in the sale of its securities to existing employees for commission 7. A person who represents an issuer in effecting transactions with underwriters

3. A. Persons must be registered as agents when they effect transactions on behalf of broker- dealers whether or not the securities are exempt. 4. A. Any individual taking orders on behalf of a broker-dealer must be registered whether or not they receive a commission. 5. B. Employees of a bank engaging in retail sales of securities issued by that bank are not agents regardless of how they are compensated. 6. A A person who represents an employer in selling securities to employees must register as an agent if the person receives a commission. If no commission is paid, registration is not necessary. 7. B Persons who represent issuers in exempt transactions, such as with underwriters, need not register as agents.

EX. ABC Shoe Co. issues shares to the public. Mr. B (an investor) buys the shares through his broker Mr. T at First Corp.

ABC Shore is the issuer, Mr. B is the investor, First Corp is the BD, and Mr. T is the registered representative or agent

EX. The first time ABC issued shares to the public, it engaged in an IPO because it directly received the proceeds of selling those shares.

After ABC went public transactions between investors executed on exchanges through brokerage agents were secondary transactions in non-issuer securities

Case Study: Publishing and Broadcast Exemptions Situation: First Securities & Co., broker-dealers with ofices in New York state and Illinois, offers to sell shares in a new retail shoe chain store located in New York. First Securities advertises the offering to residents of New York in the local newspaper, the New York Gazette. First Securities also advertises through the Gazette's wholly owned radio station. The Gazette and its radio station are both located in western New York near the Pennsyl

Analysis: Although more than half the readers and listeners of the Gazette live in Pennsylvania, under the terms of the publishing and broadcasting exemp- tion of the USA, the offer is not made in Pennsylvania because the paper is not published in Pennsylvania, so the Administrator of New York state has sole jurisdiction over the offering. No dual or multiple jurisdiction applies in this case unless the offer is actually accepted in Pennsylvania. The fact that First Securities is registered in Illinois in addition to New York is not relevant to this offering because no securities were sold there, nor were any offers or advertising directed to the state.

Case Study: Offer Directed to Admin's State Situation: The day after he completes his irst transaction with Ms. Gordon, Mr. Thompson mails sales offering materials to her home address in Indiana. Ms. Gordon is not in a position to buy any more securities, so she discards the mate- rial without reading it.

Analysis: By sending sales materials to Ms. Gordon's home address in Indiana, Mr. Thompson directed the offer to Indiana. Even though Ms. Gordon discarded the information, the Administrator in Indiana has jurisdiction because the sales offer was directed to Indiana. The Administrator of Illinois also has juris- diction because the offer originated in Illinois.

Case Study: Agent As defined by the USA: Situation: the city of Chicago issues bonds for the maintenance of local recreational facilities. Buyers have two choices: they can purchase the bonds directly from the city through Ms. Smith (an employee of the city responsible for selling the bonds), or they can buy them from Mr. T of First Corp (he is given an underwriter fee)

Analysis: City of Chicago is an issuer of exempt securities (municipal bonds). Ms. Smith, as an employee of the issuer, is not an agent as defined in the USA because she is representing the issuer in the sale of an exempt security, she does not need to register with the admin in Illinois. Mr. T must register because he represents a BD

Case Study: Who is A Broker Dealer? Situation: First Corp of Illinois sells securities to both the public and other securities firms. Indiana Institutional Service is their biggest customer and is a BD registered in Indiana with no offices in Illinois and limits its business to banks and insurance companies.

Analysis: First Corp is a BD while Indiana Institution is not a BD in Illinois because it has no office and limits its customers to other BDs or financial institutions

Case Study: Exclusion from the Definition of Broker-Dealer: Situation: First Securities Corp is a registered BD with offices in Illinois. Mr. T, a registered agent in the Illinois office of First Corp, recommends the purchase of ABC security to his customer Jon an Illinois resident, on vacation in Hawaii, He agrees to the purchase as the Hawaii state admin does not issue a cease and desist order

Analysis: First Corp is not required to register as a BD in Hawaii because their client is only temporarily there, they have no offices in that state, and are registered and have an office in Illinois

Case Study: Practices—Trades not on the books Situation: Mr. Thompson, a registered agent for First Securities, Inc., of Illinois, is also a part owner of Computer Resources, Inc., a privately held company in the state. Mr. Thompson is also a friend of Mr. Byers, the chairman of Aircraft Parts, Inc., a large manufacturing company traded on the NYSE. Mr. Byers has an account with Mr. Thompson at First Securities. Mr. Thompson decides to sell his shares in Computer Resources to one of his client

Analysis: In both cases, Mr. Thompson has engaged in a prohibited practice. A registered agent may not conduct transactions with customers of his employing broker-dealer that are not recorded on the books without prior written consent. It makes no difference whether the shares Mr. Thompson sold were privately held; when an agent effects trades with clients of the firm, the transactions must be recorded on the books of the irm unless prior written authorization is obtained from the firm.

Case Study: Borrowing MOney or Securities From Clients: Situation: On occasion, Mr. Thompson borrows cash from his discretion- ary client, Mr. Bixby, when Mr. Bixby's account is not fully invested. Mr. Bixby has given Mr. Thompson much latitude because Mr. Thompson has done well in managing the account and Mr. Thompson always repays the money in time to reinvest Mr. Bixby's funds in new securities purchases. Mr. Thompson justiies these borrowings as within the discretionary power Mr. Bixby had g

Analysis: Mr. Thompson has engaged in a prohibited practice because secu- rities professionals may not borrow from customers who are not in the business of lending money. Furthermore, Mr. Thompson violated the USA in exceeding the speciic discretionary authority that Mr. Bixby had authorized. Mr. Bixby had authorized Mr. Thompson to trade in securities—not to take his money for personal use. Had Mr. Thompson decided to borrow from The First National Bank, it would have been permitted because it is an entity engaged in the business of lending money.

Case Study: Practices—Customer Complaints and Front Running Situation: Mr. Thompson, an agent with First Securities, a broker-dealer, rec- ommends to his client, Mr. Byers, that he purchase ABC Shoe Co., a thinly traded chain store that First Securities's analysts have highly recommended subsequent to its initial public offering. Mr. Byers agrees. Just before entering Mr. Byers's order, Mr. Thompson purchases several hundred shares for himself. Mr. Byers learned of Mr. Thompson's purchase and

Analysis: Mr. Thompson has engaged in two practices that violate industry practice. First, although the recommendation of ABC Shoe Co. was perfectly appropriate, it was not appropriate for Mr. Thompson to enter his personal order for the same shares before completing Mr. Byers's purchase. This is known as front running, a prohibited practice. Additionally, Mr. Thompson (as a registered agent) must bring all written complaints to the attention of his employer. Had Mr. Byers simply lodged an oral complaint, Mr. Thompson would not have been under an obligation to bring it to the attention of the manager of his ofice. Tak- ing Mr. Byers out for a drink did not violate industry standards.

Case Study: Making Unsuitable Investment Recommendations Situation: Mr. Thompson has a wide variety of clients: high-net-worth indi- viduals, trusts, retirees with limited incomes and resources, and college students. Mr. Thompson has strong beliefs about First Tech, a growth stock that pays no dividends. He aggressively recommends the stock to all his clients without informing them of the volatility of First Tech and the irm's research department's pending downgrade in earnings

Analysis: Mr. Thompson has violated the USA on several counts. First, he made a recommendation without regard to the separate inancial conditions, needs, and objectives of his diverse client base. The recommendation is unsuitable for the investment objectives of his retired clients with ixed incomes and limited inancial resources. In addition, he made the recommendation in an unsuitable manner by failing to reveal the earnings volatility or risk and the downgrade in earnings.

Case Study: Fraudulent Sale of Securities Situation: Mr. Thompson, the registered sales agent, knowingly omitted the fact that the shares of a company he sold to his client, Mr. Bixby, were down- graded to speculative grade and that their bonds were placed on a credit watch by one of the major credit rating agencies. A month after the sale, the shares became worthless.

Analysis: Mr. Thompson sold these securities to Mr. Bixby in violation of the USA because he deliberately or knowingly failed to mention material information—information that was important for Mr. Bixby to know for him to make an informed investment decision. Mr. Bixby has the right to recover the inancial losses that result from the sale.

Case Study: Making Leading or Untrue Statements Situation: Mr. Thompson, a registered securities agent in Illinois, informs a long-standing client, Ms. Gordon, that her largest equity holding, First Tech Internet Services, Inc., will be listed on the NYSE upon completion of its application for listing. In addition, he exaggerates the earnings by $1 per share to make her more comfortable and encourage her to buy more shares. Mr. Thompson is convinced the earnings will rise to that amount and does

Analysis: Mr. Thompson violated the USA by deliberately misrepresenting the earnings of First Tech Internet Services. Although Mr. Thompson's motives may have been good, he must be truthful in his effort to encourage clients to purchase more stock—his conviction that the stock would rise upon its listing on the NYSE is not suficient. No violation of the act occurred with respect to First Tech's Exchange listing because Mr. Thompson knew that the stock had a pend- ing application to be listed on the NYSE. To state that she will be ahead from the start because the irm will not charge a commission, but failing to state that a sale from inventory would include a markup, is a fraudulent act.

Case Study: Discretionary Trading Authorization Situation: Mr. Thompson's client, Mr. Bixby, has indicated over the phone that he authorizes Mr. Thompson to make trades for him. Mr. Bixby's family lawyer, Mr. Derval, has speciic power of attorney over some of Mr. Bixby's businesses. Mr. Bixby promised Mr. Thompson that he would send in the trading authorization within the next day or two to give Mr. Thompson discretion over the account. However, Mr. Thompson immediately executed trades in First

Analysis: Mr. Thompson violated the USA by trading in Mr. Bixby's account before receipt of the written trading authorization. Having authorization in the mail is not suficient. Mr. Thompson also violated the USA by accepting the order from Mr. Derval because although he is Mr. Bixby's attorney, he was not specifically authorized to trade in Mr. Bixby's securities account. The trading authoriza- tion signed by Mr. Bixby only gave authority to Mr. Thompson. Had Mr. Derval provided Mr. Thompson with speciic written third-party trading authorization from Mr. Bixby, Mr. Thompson then could have accepted the order for Colonel Electric without a violation of the act.

Case Study: Failure to State Material Facts Situation: Upon NYSE acceptance of the listing application, there is an announcement that First Tech Internet Services will publish its inancial statements in a newspaper advertisement. Mr. Thompson deliberately failed to men- tion this advertisement to Ms. Gordon. After its listing on the NYSE, the research department in Mr. Thompson's irm prepares a negative report on First Tech. The research department discovered a change in accounting practices tha

Analysis: Mr. Thompson violated the USA even though he made no mislead- ing statements to Ms. Gordon with respect to First Tech. Mr. Thompson did not have to mention the advertisement in the newspaper because it is not material, yet he violated the act when he failed to mention the accounting change that would result in signiicantly lower earnings. Although an accounting change is not ordinarily a material fact, in this case it was because it would have a detrimental impact on the company's earnings and its market price. An informed investor must have such information.

Case Study: Cease and Desist Orders Situation: Mr. Thompson is registered to conduct business in the state of Illi- nois and makes plans to sell a security within the next few days. The Administra- tor considers this security ineligible for sale in the state. The Administrator orders Mr. Thompson to stop his sales procedures immediately.

Analysis: The Administrator of Illinois issued a cease and desist order to Mr. Thompson because there was insuficient time to conduct a public hear- ing before the sale to determine whether the security was eligible for sale in the state.

Case Study Offer Originated in Admin's State: Situation: Mr. Thompson (a registered agent in Illinois and Indiana), on the recommendation of his best client (Mr. Bixby), phones Ms. Gordon, who is a friend of Mr. Bixby's and a resident of Indiana. After having Ms. Gordon open an account with his broker-dealer, Mr. Thompson sells a security to Ms. Gordon, who then mails payment to Mr. Thompson's ofice in Illinois.

Analysis: The Administrators of both Illinois and Indiana have jurisdiction— the Administrator of Illinois has jurisdiction because the call (offer) originated in Illinois, and the Administrator of Indiana has jurisdiction because the offer was accepted by Ms. Gordon in Indiana.

Case Study: Rules and Orders of the Admin Situation: The Iowa state securities Administrator requires by rule that all companies registering their securities in Iowa must supply inancial statements in a speciic form and with content prescribed by the Administrator. However, the Administrator does not publish the rule because the rule is too long and complex.

Analysis: The USA allows state Administrators to issue rules and orders in carrying out their regulatory functions, and the Iowa Administrator acted properly in designing the form and content for inancial reports. However, it is required by the USA that Administrators publish all rules and orders. The Administrator, despite the latitude given him in administering the USA, cannot suspend any provision of the USA itself. The Iowa Administrator acted within his authority in designing the forms but acted without authority—that is, he violated the USA— by suspending the requirement that all rules and orders be published.

Case Study: Out-Of-State Advice: Situation: A California-registered investment adviser with no offices located in any other state has directed investment advice on five separate occasions over the past year to individual residents of the state of Nevada. Is the investment adviser required to register in the state of Nevada?

Analysis: The answer is no. Registration is not required because the invest- ment adviser does not have an ofice in Nevada and directs business to ive or fewer individual residents of the state during the year. If the irm had an ofice in Nevada, registration would be required in that state. Also, even if the irm had no ofice in Nevada, registration would be required if business had been transacted with six or more individual residents of the state during the previous 12 months. If the business had been transacted with other investment advisers, broker- dealers, or institutional investors, there is no limit as long as there is no ofice in the state.

Case Study Using Inside Information Situation: Mr. Thompson is a friend and neighbor of Mr. Cage, president and owner of more than half of First Tech's securities. Mr. Cage discloses to Mr. Thompson that the company has just discovered a new technology that will double First Tech's earnings within the next year. No one outside of the company, except for Mr. Thompson, knows of this discovery. On this basis, Mr. Thompson buys additional shares of First Tech for Ms. Gordon.

Analysis: The information on First Tech's new technology is material inside information that has not been made public. It is material information that only Mr. Thompson and company oficials know. Mr. Thompson violated the USA by acting on this information. Mr. Thompson should have communicated the pos- session of the information to his compliance oficer and refrained from making recommendations on the basis of this information.

Case Study Offer Accepted in an Admin's State Situation: Mr. Thompson sends additional offers to Ms. Gordon, who is now on a three-month summer vacation in Florida. The offers are sent directly to her vacation location in Florida. Upon receiving Mr. Thompson's materials in Florida, she decides to purchase the securities. She pays for the securities by mailing a check to Mr. Thompson drawn on her local bank in Indiana.

Analysis: The offer is accepted by Ms. Gordon while she was in Florida; there fore, the Administrator of Florida has jurisdiction. Additionally, the Adminis- trator in Illinois has jurisdiction because the offer originated in Illinois. However, the Administrator in Indiana does not have jurisdiction; a check written on an Indiana bank account and mailed from elsewhere does not create jurisdiction. This is another situation where the Administrators of two different states have jurisdiction.

Q1E: Under the securities exchange act of 1934, as amended, registration with the SEC would be required of: I a BD whose business is strictly municipal securities II a bd whose business is strictly in non-Nasdaq over-the-counter securities A. I and II B. I and III C. II and III D. I, II, and III

Answer A The 1975 amendments required for the first time, that any firm engaged in the municipal securities business be registered with the SEC. Ever since 1934. BDs engaged in any phase of the securities markets have been required to register with the SEC. Banks (financial institutions) are members of the MSRB but are exempt from SEC registration.

Q2J: With regard to the registration requirements of the Uniform Securities Act, which of the following is NOT a correct statement? A. Only the issuer itself can ile a registration statement with the Administrator. B. An application for registration must indicate the amount of securities to be issued in the state. C. The Administrator may require registrants to ile quarterly reports. D. The Administrator may require the proceeds of an offering be placed into an escrow account until the issue

Answer A. A registration statement may be iled by the issuer, any other person on whose behalf the offering is to be made, or a registered broker- dealer.

Q3C: Which of the following investment advisers are exempt from registration under the Investment Advisers Act of 1940? I. An adviser whose only clients are insurance companies II. An adviser who maintains ofices in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating to only tax-exempt municipal bonds III. An adviser whose only clients are banks A. I and II B. I and III C. II and III D. I, II and III

Answer A. Advisers who only service insurance companies are exempt, as are advisers performing intrastate who do not give advice on listed securities (municipal bonds are not listed). Advising banks only does not qualify one for the exemption.

Q2K14 It is permitted under the USA for an individual licensed as an agent in the state to tell a client that A. a registered security may lawfully be sold in that state B. an exempt security is not required to be registered because it is generally regarded as being safer than a nonexempt security C. her qualiications have been found satisfactory by the Administrator D. a registered security has been approved for sale in the state by the Administrator

Answer A. An agent may indicate that a security is registered or is exempt from registration. All of the other statements are prohibited

Q1A: The term issuer, as defined in the Securities Act of 1933, would include: I A government entity issuing exempt securities II a corporation issuing securities is an exempt transaction III an antique dealer selling items from a collection of rare books A. I and II B. II and III C. III only D. I, II, and III

Answer A. An issuer is a person who issues a security, whether or not the security is exempt. In the question, the antique dealer is issuing collectibles not a security

Q2G3: XYZ Corp has been in business for over 20 years. They need additional capital for expansion, and determine that a public offerings in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register A. Coordination B. Notice Filing C. Qualification D. Registration

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

Q1F: Which of the following would be considered investment companies under the act of 1940 I Face-amount certificate company II Unit investment trust III Management company IV Holding company V Insurance company A. I, II and III B. I, II, III, and IV C. I, II, III, and V D. I, II, III, IV, and IV

Answer A. Holding companies and insurance companies are specifically excluded from the definition of an investment company

Q1G2: A financial reporter notices that the quoted price of one investment company's shares is at a 22% discount from the NAV. From this information, it can be deduced that the company must be a(n) A. Closed-end investment company B. A.contractual plan of a mutual fund C. open-end investment company D. unit investment trust

Answer A. If the selling price of an investment company is less than the NAV, the fund must be a closed-end investment company

Q2O4 The Administrator has authority to I. issue a cease and desist order without a hearing II. issue a cease and desist order only after a hearing III. suspend an effective securities registration upon discovering an oficer of the registrant has been convicted of a nonsecurities related crime IV. sentence violators of the USA to 3 years in prison A. I only B. I and IV C. II and III D. II and IV

Answer A. The Administrator may issue a cease and desist order without a hearing, but does not have the authority to convict violators of the 1933 Securities Act in criminal prosecutions or sentence violators of the USA. The Administrator may suspend a security's effective registration upon subsequently discovering that an oficer of the irm has been convicted of a securities-related crime, not a nonsecurities-related one.

Q1I: The investment company act of 1940 prohibited registered investment companies from engaging in any of the following practices EXCEPT: A. issuing common stock B. selling short or purchasing securities for the companies portfolio on the margin C. Owning more than 3% of another investment company D. Opening a joint account with another investment company

Answer A. The one thing all investment companies must do is issue common stock. That is the form of ownership. All other activities are prohibited

Q1C: A man owns 15% of the stock of a company. His wife owns 5% of the stock of the same company. If the wife wishes to sell her shares, which of the following statements are TRUE? I Both the husband and wife are affiliates II He is an affiliate, but she is not III She must file under rule 144 IV She does not have to file under ruler 144 A. I and III B. I and IV C. II and III D. II and IV

Answer A: His 15% ownership is control. Her 5% ownership is not, but the fact that she is the spouse of an affiliate makes her one, causing this to be a sale of control stock. All sales of control stock (unless exemption applies) must be accompanied by a rule 144 filing.

Q1D2: Alice Allison is the president of Podunk University and sits on the board of directors at KAPCO Securities, a BD registered with the SEC. President Allison A. would be considered an associated person of KAPCO B. Would not be considered an associated person at KAPCO C. would be required to register as an Agent of KAPCO D. Must resign her position at Podunk university in order to remain on KAPCO's board

Answer A: University presidents are a popular choice for serving as outside directors. Under the Securities Exchange act of 1934, the term associated person of a BD would include an outside director of a BD and all registered personnel but not employees who are strictly clerical and administrative

Q1D: An agent receives instructions from a client to buy 100 shares of KAPCO common stock at what the agent thinks is the best price. Two days later, the agent enters the order. In this case, the agent has A. acted appropriately B. Acted inappropriately C. failed to follow the customer's instructions D. Potentially become subject to statutory disqualification

Answer B Whenever the order calls for time/price discretion, it is considered a day order and must be executed that day. Waiting two days is inappropriate.

Q2F4: A non-issuer transaction is a transaction A. between two corporations where one is issuing the stock and the other is purchasing B. in which the issuer of the security will not receive the proceeds from the transaction C. Where a mutual fund purchases a treasury bond directly from the government D. where registration is always required

Answer B. A nonissuer transaction is one where the company that is the issuer of the security does not receive the proceeds from the transaction. A nonissuer transaction is a transaction between two investors and may or may not require the security to be registered depending on whether the security or the transaction (or both) are exempt. Whenever the proceeds go to the issuer, it is an issuer transaction.

Q2G4: KAPCO Dividend Yield Fund (a closed investment company registered under the Investment company act of 1940) whishes to commence offering its shares in the States A, B, C, and D. It could be required to A. coordinate its federal registration with each of the four states B. notice file C. register by qualification in each of those states D. do none of these because investment companies registered under the investment company act of 1940 are federal covered securities and are exempt from reg

Answer B. Although these are federal covered securities and exempt from traditional registration, it could, at the discretion of the Administrator, be required to engage in a notice filing.

Q2M4 Under powers granted by the Uniform Securities Act, the Administrator may take all of the following actions EXCEPT A. issue a cease and desist order against a broker-dealer B. issue an arrest warrant for an investment adviser representative C. refer evidence concerning violations of this act to the attorney general or the proper district attorney who may then institute the appropriate criminal proceedings D. File a civil complaint against an agent

Answer B. An arrest warrant can only be issued by a court of law

Q2H4: Securities exempt under the Uniform Securities Act are exempt from I. registration requirements II. antifraud provisions of state securities laws III. Filing sales and advertising literature with the Administrator A. I and II B. I and III C. II and III D. I, II, and III

Answer B. An exempt security is exempt from the registration requirements and the provisions that require the iling of advertising and sales literature. Exempt securities are never exempt from the antifraud provisions of the act.

Q1D3: A securities order that is initiated by a client is what type of order? A. Nondiscretionary B. Unsolicited C. Discretionary D. Solicited

Answer B. Definition of unsolicited transaction

Q2O5 If a broker-dealer wishes to conduct operations on the premises of a financial institution, it is required to I. disclose both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution II. make a reasonable attempt to be in a location physically distinct from that where retail deposits are taken III. attempt to obtain written acknowledgement from customers that they have received and read the

Answer B. It is a NASAA Model Rule that broker- dealers operating on the premises of a inancial institution make certain disclosures. Every attempt should be made to locate separately from the banking operation and to obtain something in writing from the clients indicating that they have received the disclosures. It is not necessary that there be any relationship between the BD and the institution other than a business one.

Q2M3 To protect the public, the Administrator may I. deny a registration if the registrant does not have suficient experience to function as an agent II. consider that an applicant for registration as an investment adviser is not necessarily qualiied solely on the basis of experience as a broker- dealer or agent and, therefore, when he inds that an applicant for initial or renewal registration as a broker-dealer is not qualiied as an investment adviser, he may by order condition the applicant's

Answer B. The Administrator can deny, suspend, or revoke a registration for many reasons, but they must be in the interest of the public. The Administrator may not deny the registration simply because it is prudent. The Administrator may determine that an applicant is not qualiied to act as an adviser and thus limit the registration to that of a broker-dealer; the Administrator can also take into consideration whether the registrant will work under the supervision of a registered investment adviser or broker- dealer when approving an application. Lack of experience is insuficient for denial.

Q3B: The Investment Advisers Act of 1940 excludes certain persons from the definition of an investment adviser if their performance of advisory services is solely incidental to their professions. This exclusion would apply to all of the following EXCEPT A. an accountant B. an economist C. an electrical engineer D. a college professor teaching a course on economics

Answer B. The act speciically excludes accountants, lawyers, any professional engineer (aeronautical, civil, mechanical, or others), and teachers. Economists are not included in this listing.

Q2O Which of the following statements relating to penalties under the USA is TRUE? A. Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act. B. A purchaser of a security where an agent committed a violation of the USA may recover the original purchase price plus legal costs plus interest, less any income already received. C. A seller who notices that a sale was made in violation of the act may offer a right of rescission to the

Answer B. To be subject to time in prison, a sales agent must knowingly have violated the USA. A client who purchased a security in violation of the USA may recover the original purchase price plus costs involved in iling a lawsuit. In addition, the purchaser is entitled to interest at a rate stated by the Administrator, less any earnings already received on the investment. The right of rescission must be accepted within 30 days of receipt of the letter of rescission. Although any person aggrieved by an order of the Administrator may request an appeal of the order within 60 days, such appeal does not function as a stay order during the appeal process. The person who is the subject of the order must comply with the order during the period unless a stay is granted by the court.

Q2O3 If convicted of a willful violation of the Uniform Securities Act, an agent is subject to A. imprisonment for 5 years B. a ine of $5,000 and/or imprisonment for 3 years C. a ine of $10,000 D. disbarment

Answer B. Under the USA, the maximum penalty is a fine of 5k and or 3 years in jail

Q2B.5 Under the Uniform securities act a BD is defined as any person who A. buys securities B. Sells securities C. is in the business of effecting securities transactions for its own account or for the accounts of others D. is registered with the SEC

Answer C. A broker-dealer is any person, partner, oficer, director, or securities irm engaged in the business of effecting securities transactions for the accounts of others (broker) or for its own account (dealer)

Q2L2 An Admin has jurisdiction over an offer to sell securities if it is made in a newspaper published within the state with no more than A. 1/3 of its circulation outside the state B. 1/2 of its circulation outside the state C. 2/3 of its circulation outside the state D. 90% of its circulation outside the state

Answer C. A state Administrator has jurisdiction over a securities offering made in a bona ide newspaper published within the state, but only whose circulation is not more than ²⁄₃ outside the state.

Q2K10 Market manipulation is one of the prohibited practices under the Uniform Securities Act. Which of the following is an example of a broker-dealer engaging in market manipulation? I. Churning II. Arbitrage III Wash trades IV Matched orders A. I and II B. I, III, and IV C. III and IV D. IV only

Answer C. A wash trade, the practice of attempting to create the appearance of trading activity by entering offsetting buy and sell orders, is a form of market manipulation. Matched orders or matched purchases occur when market participants agree to buy and sell securities among themselves to create the appearance of heightened market activity; this is also a form of market manipulation. Although churning is a prohibited practice, it does not involve manipulating the market, and arbitrage is the perfectly legal practice of buying a security in one marketplace and simultaneously selling it in another to beneit from a price disparity.

Q2M2 Although the Administrator has great power, the USA does place some limitations on the ofice. Which of the following statements regarding those powers are TRUE? I. In conducting an investigation, an Administrator can compel the testi- mony of witnesses. II. Investigations of serious violations must be open to the public. III. An Administrator in Illinois may only enforce subpoenas from South Carolina if the violation originally occurred in Illinois. IV. An administrator may deny the regist

Answer C. An admin may compel the testimony of witnesses when conducting an investigations. Investigations of serious violations need not be held in public. An Admin in Illinois may enforce subpoenas from South Carolina whether or not the violation occurred in Illinois. Conviction for any felony within the past 10 years is one of a number of reasons that the Admin had for denying a license.

Q2L3 What is the difference between an offer and a sale of a security A. An offer can be made only by a customer and a sale can be made only by a BD B. An offer is a binding proposal to sell and a sale is a non binding proposal to sell C. An offer is the attempt to sell and a sale is a binding contract to transfer a security for value D. An offer must be approved by a designated supervisory person and a sale needs no such approval

Answer C. An offer is made in an attempt to sell; a sale is the binding contract to sell a security for value. An offer will not require prior approval, but a designated supervisory individual must approve all sales on the date the order is executed.

Q1K: Under which of the following circumstances would a purchase of mutual fund shares at a price below the public offerings price be allowed I The purchase is made by the designated agent of an incorporated investment club that reaches the breakpoint II A parent buys enough to reach the breakpoint but places half the order in his account and the other half in an account for which is wife is designated a custodian for their son III The receptionist for the XYZ Growth fund purchases $100 of that

Answer C. Any family unit may combine purchases in as many accounts as it wishes to reach the breakpoint for reduced sales charges. Most often, this is spouses and custodial accounts for minor children. If an employee of the fund purchases for his own account, the sales charge is usually eliminated. A purchase made for a group, like and investment club or multiple clients with no common purpose other than investment, is not eligible for a reduction

Q1G: How do closed-end investment companies differ from open-end investment companies I Closed-end companies register their shares with the SEC; open-end companies do not. II The only time a prospectus is used with the sale of a closed-end company is on the IPO; sales of open-end shares must always be preceded or accompanied by a prospectus III Closed-end companies issue a fixed number of shares to institutional investors; open-end companies continuously issue new shares IV Closed-end companies

Answer C. Closed-end companies issue a fixed number of shares, whereas open-end companies do not specify the number of shares to be issued. Both types of company register issues with the SEC< and any investor may invest in either type of company. Open-end shares must always be sold with a prospectus because each is a newly issued share.

Q2F: Which list of instruments below is NOT composed of securities A. Stock, treasury stock, rights, warrants, and transferable shares B. Voting trust, certificates and interests in oil and gas drilling programs C. Commodity futures contracts and fixed payment life insurance contracts D. Options on securities and interests in multilevel distributorship arrangements

Answer C. Commodity futures contracts and ixed payment life insurance contracts are included in our list of 6 items that are not securities.

Q2O2 When making an offer of a new issue that is in registration to a prospective client, an agent claims that his registration with the Administrator is proof of his qualiications. Under the USA A. claiming his registration is approved by the Administrator while making an offer of a security undergoing registration subjects this agent to a civil liability claim B. claiming his registration is approved by the Administrator while making an offer of a security does not subject this agent to a civ

Answer C. For an agent to have civil liability, a sale must take place. If the offer is made using a statement like the one in this question and a sale subsequently occurs, a client suffering a loss would be able to sue. Even though one may never claim approval by the Administrator, there is no civil liability unless the client has some kind of a claim. However, even though the client cannot bring a case, the Administrator could bring a disciplinary action against the agent for making this claim. On a law exam, you must be careful to understand who has a claim and when they do.

Q2E2 The regulatory bodies consider which of the following social media sites to be predominantly used for business rather than personal communication. A. Facebook B. Instagram C. LinkedIn D. Twitter

Answer C. LinkedIN is viewed as a site used far more for business purposes than the others

Q2F2: The U.S. Supreme Court defined an investment contract as having four components, Which of the following is NOT part of the four-part test for an investment contract A. the investment of money B. an expectation of profit C. Management activity by the owner D. solely from the efforts of others

Answer C. Management activity on the part of the owner is not part of the Howey, or four-part, test for an instrument to be a security. The four parts are: (1) an investment of money in (2) a common enterprise with (3) an expectation of proit (4) solely from the effort of others.

Q1E2: Provisions under the Securities Exchange of 1934 include all of the following EXCEPT: A. requiring that all issues listed on a national securities exchange be registered with the SEC B. prohibiting manipulative practices such as wash trades and misleading statements C. requiring full disclosure regarding an upcoming IPO D. reqD.uiring registration of transfer agents

Answer C. The disclosure requirement for new issues (IPOs) is found in the Securities Act of 1933

Q2E. Which of the following is NOT a factor when a communication to be distributed to the public is either being reviewed or approved by the BD? A. Whether statements of benefits with statements of potential risks B. The nature of the audience to which the communication is intended C. Whether the piece will be distributed in written form or on the firm's website D. Whether the communication is targeting existing customers or prospective ones

Answer C. The format is not what counts, it is the content that matters

Q1H: All of the following statements regarding a 12b-1 company are true except: A. The plan must be initially approved by at least a majority of the outstanding voting securities of the investment company B. The plan must be renewed by a majority of the fund's directors C. The plan may be terminated by a vote of the majority of shareholders or a majority of board directors D. The rule only applies to open-end investment companies

Answer C. The plan may be terminated by a majority vote of the shareholders or a majority vote of the board of directors who are non-interested directors of the fund. A 12b-1 plan wouldn't work with anything other than an open-end investment company

Q1J: ABC is a FINRA member BD. Among other functions, it serves as the principal underwriter for the XYZ Mutual Fund. Which of the following transactions of ABC would be prohibited unless exemptive relief was offered by the SEC? A. ABC tenders, from its investment account, 500 shares of the XYZ mutual fund for redemption B. ABC purchases, for its investment account, 500 shares of XYZ mutual fund C. ABC purchases some securities directly from XYZ's portfolio D. all of the above.

Answer C. Without an exemptive order from the SEC, it would be a violation of the investment company act of 1940 for any affiliated person to purchase any security from an investment company other than shares of the company itself

Q1A2: Under the Securities Act of 1933, which of the following is not a security: A. convertible bond B. stock warrant C. stock right D. a term of life insurance policy

Answer D. A security is any note, stock, bond, certificate of interest, or participation in any profit sharing arrangement, investment contract, certificate of deposit for a security, interest in oil, gas, or mining rights, or any investment commonly considered a security. (Generally, it is an investment through the efforts of others.) The definition of a security does not include direct ownership of real estate, commodities futures contracts (e.g. corn, wheat), collectibles, precious metals, or life insurance or annuity contracts that have fixed payouts

Q2I8 Under the rules of the Uniform Securities Act, an agent who sells shares of a Nasdaq Stock Market security to an insurance company has engaged in (a/an) A. issuer transaction B. unsuitable transaction C. unlawful transaction D. sale exempt from the registration and advertising provisions of the USA

Answer D. AN Agent who sells any security to an insurance company is engaged in an exempt transaction that is not bound by the advertising and registration requirements of the USA. Any sale to certain institutional customers, such as banks, investment companies, and insurance companies, is an exempt transaction. Neither exempt securities nor exempt transactions must adhere to the registration and advertising provisions of the USA. This is an exempt transaction because of the nature of the purchaser, not the type of security being sold

Q2N Which of the following statements relating to termination of registration is TRUE? A. A registration, once in effect, may never be voluntarily withdrawn. B. An Administrator may not cancel a registration of a securities professional who is declared mentally incompetent. C. An Administrator may revoke the registration of a securities professional who is declared mentally incompetent. D. An Administrator may cancel the registration of a registrant no longer inbusiness.

Answer D. An administrator may cancel the registration of a registrant that is no longer in existence. A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. An Administrator does not revoke the registration of a person who is declared mentally incompetent but instead cancels his registration; this is a nonpunitive administrative action.

Q2K12 A customer is upset with her agent for not servicing her account properly and sends him a complaint letter about his actions. Under the Uniform Securities Act, the agent should A. call the customer, apologize, and attempt to correct the problem B. tell the customer he is willing to make rescission C. do nothing D. bring the customer complaint to his employer immediately

Answer D. Failure to bring customers' written complaints to the attention of the agent's BD is prohibited

Q2K11 All of the following are prohibited practices under the USA EXCEPT I. borrowing money or securities from the account of a former banker with express written permission of the bank II. failing to identify a customer's inancial objectives III. selling rights instead of exercising them IV. supplying funds to a client's account only when or if it declines below a previously agreed-upon level A. I and II B. I, II, and III C. II and IV D. III only

Answer D. It is permissible to sell rights, which are securities. Borrowing money or securities from other than a bank or BD in the business of lending, failing to identify a customer's financial objectives, and guaranteeing a customer's account against loses are all prohibited practices

Q1B: Which of the following statements about accredited investors is true? A. taxpayers who report an income in excess of 200k on a joint return in each of the last two years and who reasonably expect the same for the current year are included in the definition B. An officer, director, or greater than 10% shareholder of any company listed on the NYSE would be considered an accredited investor for purposes of acquiring a private placement your firm is selling C. The term includes an employee ben

Answer D. One of the benefits of this term is that these investors do not count in the numerical limitation placed on private placements made under Rule 506(b). Note that for offerings made under rule 506(c) all investors must be accredited. When filing a joint return, the income requirements is 300k, and an employee benefit plan must have assets in excess of 5 mil. Insiders are only considered accredited investors when it is that issuer's security being offered.

Q2O6 An agent of a broker-dealer who willfully violates the Uniform Securities Act may be subject to which of the following? I. Civil liabilities II. Criminal penalties III. Action taken by the Administrator to deny, suspend, or revoke the agent's registration A. I only B. I and II C. II and III D. I, II, and III

Answer D. Persons who are convicted of violating securities laws may ind themselves subject to criminal penalties, civil liabilities, and suspension, denial, or revocation of registration.

Q2K15 Which of the following is(are) prohibited under the USA? I. Recommending tax shelters to low-income retirees II. Stating that a state Administrator has approved an offering on the basis of the quality of information found in the prospectus III. Soliciting orders for unregistered, nonexempt securities IV. Employing any device to defraud A. I only B. I and II C. I, II and III D. I, II, III, and IV

Answer D. Recommending tax shelters to low-income whereas an injunction is a judicial order. retirees is an example of an unsuitable transaction. Stating that an Administrator has approved an offering on the basis of the quality of information in the prospectus, soliciting orders for unregistered nonexempt securities, and employing a device to defraud are all prohibited practices under the USA.

Q2H. Which of the following securities is/are exempt from the registration and advertising filing requirements under the USA I Shares of investment companies registered under the Investment Company Act of 1940 II Shares sold on the Nasdaq stock market III AAA-rated promissory notes of 100K that mature in 30 days IV Shares sold on the NYSE A. I only B. II, III, and IV C. II and IV D. I, II, III, and IV

Answer D. Securities issued by registered investment companies and those sold on the NYSE and Nasdaq Stock Market are federal covered securities and, therefore, do not register with the states. Commercial paper with a maximum maturity of 270 days, in denominations of no less than $50,000 and a top three rating are exempt under the Uniform Securities Act. administrator, sheriff, marshal, receiver,

Q2L A state's securities Administrator has jurisdiction over a securities offering if it was A. directed to residents of that state B. originated in that state C. accepted in that state D. all of the above

Answer D. The Admin has jurisdiction over a security offering it it was directed to, originated in, or was accepted in that state

Q2H3: Which of the following securities is(are) exempt from the registration provisions of the USA? I. Issue of a savings and loan association authorized to conduct business in the state II. General obligation municipal bond III. Bond issued by a company that has common stock listed on the Chicago Stock Exchange A. Ionly B. II only C. II and III D. I, II, and III

Answer D. The USA exempts from registration a number of different issues. Included in that group are securities issued by depository institutions including a savings and loan association that is authorized to do business in the state. Securities issued by a governmental unit are always exempt. Any security senior to a common stock that is a federal covered security is itself considered federal covered and, therefore, exempt from state registration.

Q2M With regard to the powers of the Administrator, which of the following statements are NOT true? I. The Administrator must seek an injunction to issue a cease and desist order. II. The USA requires an Administrator to conduct a full hearing, public or private, before issuing a cease and desist order. III. The USA grants the Administrator the power to issue injunctions to force compliance with the provisions of the act. A. I and II B. I and III C. II and III D. I, II and III

Answer D. The admin need not seek and injunction to issue a cease and desist order. The USA does not require that an Admin conduct a public or private hearing before issuing a cease and desist order. When time does not permit, the admin may issue a cease and desist before a hearing to prevent a pending violation. The USA does not grant the Admin the power to issue injunctions to force compliance with the act. The act permits the admin to issue cease and desist orders, and, if they do not work, the Admin may seek and injunction from a court of competent jurisdiction. A cease and desist order is an administrative order, whereas an injunction is a judicial order.

Q1J2: Which of the following statements correctly expresses requirements under the investment Company Act of 1940? I A registered open-end investment company using a bank as a custodian must choose one that has FDIC coverage II If an affiliated person of a registered investment company wishes to borrow money from, the fund, there must be at least 300% asset coverage III No investment advisory contract may be entered into that does not provide for termination with no more than 60 days notice in

Answer D. The investment company act of 1940 requires that all advisory contracts contain a provision that the contract may be terminated upon no more than 60 days notice in writing. The act prohibits any registered investment company from owning more than 3% of the shares of another investment company. There are no circumstances under which an affiliated person can borrow from the fund, and it is not a requirement that the custodian bank have FDIC insurance

Q2K13 An agent hears a rumor concerning a security and uses the rumor to convince a client to purchase the security. Under the USA, the agent may A. Recommend the security if its and appropriate investment B. Recommend the investment if the rumor is based on material inside information C. Recommend the security if the source of the sum or came from a reliable source D. not recommend the security

Answer D. The use of information, such as a rumor that has no basis in fact is prohibited

Q2C. Under the USA, the term agent would include an individual who represents an issuer in effecting non-exempt transactions in A. a city of Montreal general obligation bond B. common stock offered by a commercial bank C. A new Jersey Turnpike revenue Bond D. Commercial Paper with a 19-month maturity

Answer D. There is a special group of five exempt issuers (U.S. and Canadian government and municipal issuers; foreign governments; banks; commercial paper; and investment contracts related to employee beneit plans) where an individual representing that issuer is not an agent. This is true whether the transaction is exempt or non-exempt. In addition, when representing any exempt issuer (not just the ive listed), in an exempt transaction, the individual is not an agent. However, if the issue is not exempt (commercial paper's exemption is limited to 9 months) and, as the question points out, the transaction is non-exempt, then the individual must register as an agent of that issuer.

Q2H2: Which of the following securities is NOT exempt from the registration and advertising requirements of the USA A. Shares of commonwealth Edison, a regulated public utility holding company B. Securities issued by the Carnegie Endowment for Peace C. Securities issued by a bank that is a member of the federal reserve D. Variable annuity contracts issued by Metrodential insurance company

Answer D. Variable annuities (whose performance conservator (but not a custodian for a minor depends on the securities in a segregated under UTMA) is considered an exempt fund) are nonexempt, which means they transaction under the Uniform Securities are covered by the act and have to register. Act. Shares in public utilities, charitable foundations, and banking institutions that are members of the Federal Reserve System are included in our list of exempt securities.

Q2D4: According to the USA, a consent to service of process must accompany which of the following? I Agent's initial registration application II Civil complaint against the BD III BD's initial registration application IV A cease and desist order A. I and III B. I and IV C. II and III D. II and IV

Answer: A. A broker-dealer, an agent, an investment adviser representative, or a state registered investment adviser must ile a consent to service of process with the Administrator upon iling a registration application. The consent to service of process gives the Administrator the right to process legal complaints against the applicant. In some states, a federal covered adviser may also be required to furnish a consent to service of process

Q2C8 Under the USA an individual licensed as an agent by the state may NOT A. simultaneously represents two different unrelated BDs in the same transaction B. Be licensed by both an independent insurance company and a securities BD C. be registered with two BDs under common control D. Be registered with a licensed real-estate broker as well as with a licensed securities BD

Answer: A. A registered agent may not simultaneously represent two different unrelated broker- dealers in the same transaction. Under current regulations, only a few states allow agents to have dual registrations with more than one broker-dealer, unless those broker- dealers are under common management. In those cases, the agent may only represent one of the broker-dealers in any single transaction. Agents of broker-dealers may be simultaneously registered with real estate agencies, insurance companies, and with two broker-dealers, provided the broker-dealers are under common ownership or control or the arrangement has been authorized by the Administrator.

Q2A5: What is the official designation of the person or agency that enforces the USA in each state A. Administrator B. Transfer Agent C. Registrar D. Issuer

Answer: A. The USA specifies that a state's securities Administrator has the authority to enforce the act in that state. A transfer agent is the person or corporation responsible for recording the names and holdings of registered security owners.

Q2C2: Under the USA, the term agent would include A. An individual who represents an issuer in an exempt transaction B. An individual who represents a BD in a transaction in an exempt security C. A receptionist for a BD who directs calls for trade info to the appropriate individual D. the vice president of personnel for a national brokerage firm

Answer: B. All of the exclusions from the term agent refer to an individual representing an issuer. As long as the transaction is exempt, the individual is not deemed to be an agent. There is no case on the exam where an individual performing a sales function for a broker-dealer is not an agent. Clerical persons are not agents, nor are oficers with no apparent sales function.

EX. The KAPCO Income fund has a current public offering price of $10.50 and a net asset value per share of $10.00. During the past 12 months, the fund has made four quarterly distributions from net investment income of $0.15 and one distribution from capital gains in the amount of $0.25. The fund's current yield would be? A. 1.5% B. 5.7% C. 6.0% D. 1.1%

Answer: B. It is computed by dividing the annual income (4 x $0.15 = %0.60) by the POP (not the NAV) of %10.50. Only the dividends are used for current yield.

Q3B4: Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of A. apartments undergoing a conversion to condominiums B. convertible bonds C. gold coins D. rare convertible automobiles

Answer: B. Only those individuals in the business of giving advice on securities are required to register as investment advisers; only the convertible bonds are securities.

Q3B2: Which of the following would be excluded from the definition of investment adviser under the Investment Advisers Act of 1940? I. A bank offering advice through its trust department II. A geologist giving advice on the potential prospects of an oil and gas limited partnership program III. A person whose only clients are individuals and whose only advice deals with securities which are direct obligations of the U.S. government A. I and II B. I and III C. II and III D. I, II and III

Answer: B. There is an exclusion from the deinition for all banks, regardless of what they do. Also excluded are persons whose advice relates only to securities that are direct obligations of or guaranteed by the United States—it makes no difference who their clients are. A geologist is not excluded because the law only specifies 4 professional exclusions: accountants, attorneys, engineers, and teachers.

Q3A: Seven Seas Strategic Advisers (SSSA) maintains a place of business in 11 states and is registered with the SEC. As defined in the Investment Advisers Act of 1940, the ofice from which control of the activities of SSSA takes place is known as the A. Office of Supervisory Jurisdiction (OSJ) B. Principal ofice and place of business C. Home ofice D. Executive office

Answer: B. This is the term used in both the federal and state law. OSJ is a FINRA term and has no relevance to investment advisers. In fact, it may be the home ofice or executive ofice, but the exam will be looking for their deinition.

Q2I7: Under the USA, all of the following are exempt securities EXCEPT I. U.S. government securities II. unsolicited transactions III. transactions between issuers and underwriters IV. securities of federally chartered credit unions A. I, II and IV B. I and IV C. II and III D. IV only

Answer: C. Both unsolicited transactions and transactions between issuers and underwriters are exempt transactions, not exempt securities. U.S. government securities and securities of credit unions are exempt securities, not exempt transactions.

Q2I5 Which of the following are exempt transactions? I. A nonissuer transaction with a bank in a Nasdaq Capital Market Security II. An unsolicited request from an existing client to purchase a nonexempt security III. The sale of an unregistered security in a private, nonpublicly advertised transaction to 10 noninstitutional purchasers over a period not exceed- ing 12 months IV. The sale of unlisted securities by a trustee in bankruptcy A. I and II B. I, II, and III C. I, II, and IV D. I, II, II

Answer: C. Choice III is not an exempt transaction because the private placement exemption is limited to 10 offerees, not 10 purchasers. The Administrator would be suspicious of anyone with a 100% closing ratio. All of the others are included in our list of exempt transactions.

Q2F3 Non-exempt securities A. need not be registered in the state in which they are sold B. must always be registered in the state in which they are sold C. need not be registered if sold in an exempt transaction D. need not be registered if sold in a non-exempt transaction

Answer: C. Nonexempt means the security is not exempt from the state's registration requirements. However, if the nonexempt security is sold in an exempt transaction, registration is not required.

Q3B3: Which of the following would meet the deinition of investment adviser under the Uniform Securities Act? I. A broker-dealer making a separate charge for investment advice II. The publisher of a weekly magazine, sold on newsstands, that contains at least 5 stock recommendations per issue III. A civil damages attorney who advertises that she is available to assist clients in suggesting appropriate investments for their successful claims IV. A finance teacher at a local community college who

Answer: C. Publishers of general circulation newspapers and magazines are excluded from the deinition of investment adviser, even if the entire publication is devoted to investment advice. An important key here is that it is published regularly, not upon market events. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds herself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice as would appear to be the case here. On this examination, the term comprehensive inancial planning always includes securities advice.

Q2I6: All of the following describe exempt transactions EXCEPT A. ABC, a broker-dealer, purchases securities from XYZ Corporation as part of an underwriting commitment B. First National Bank sells its entire publicly traded bond portfolio to Amalgamated National Bank C. Amalgamated National Bank sells its publicly traded bond portfolio to ABC Insurance Company D. Joe Smith, an employee of Amalgamated National Bank, buys securities from ABC Brokerage Corporation

Answer: D. The purchase of securities from a broker- dealer by an employee of a bank is a nonexempt transaction—it is a sale of a security by a broker-dealer to a member of the public and is therefore not exempt. Transactions between broker-dealers and issuers as part of an underwriting commitment; transactions between banks; and transactions between banks and insurance companies are exempt because they are transactions between inancial institutions. Exempt transactions are most often identiied by who the transaction is with rather than what type of security is involved.

EX. A bond is issued by the city of Columbus, OH, is a federal covered security everywhere but in the state of Ohio. The effect of this is that no state regulator can enforce any of their rules against the bond

But, in the state of Ohio, even though the security is exempt under Ohio's securities laws, the Admin could request that the issuer (the city) furnish certain details about the issue

EX. Fees that an investment adviser receives from a corporation for advice given to the corporation's employees or retirees are considered compensation. A financial planner who designs a comprehensive financial plan for the corporation's employees without charging a fee but receives commissions on insurance policies sold as part of the plan is acting as an investment adviser representative.

Even though that compensation is indirect, it meets the release's deinition of compensation for investment advice.

EX. An individual's ownership of a cow is not a security.

However, if the farmer makes an investment of money in a tradable interest in a herd of cattle, which he epects to make a profit solely as the result of the breeder's efforts, he has purchased a security.

EX. An order from a customer worded "Buy 100 shares of ABC for my account whenever you think the price is right"

This is not a discretionary order because the client has specified the action (buy), the amount (100 shares) and the asset (ABC). Time or price is not considered discretion and it only lasts until the end of the business day it was given.

EX. The Administrator may decide to issue a rule requiring all agents to pay an annual registration fee of $250. This rule applies to everyone. Or, the Administra- tor may ind that a speciic agent has violated a provision of the law and orders a 30-day suspension.

This order applies only to that particular agent.