series 66 checkpoints

Under the Uniform Securities Act, an agent may NOT make which of the following statements to a customer? A) This security is not registered with the Administrator. B) This security is registered with the state. C) This security is exempt from registration. D) This security is approved by the Administrator.

D) This security is approved by the Administrator. Explanation The state Administrator does not approve any security. U6LO2

Each of the following persons is able to issue securities EXCEPT A) a partnership B) a corporation C) a credit union D) an individual

D) an individual Explanation Individuals (natural persons) cannot issue securities. You can't sell stock in yourself. U4LO2

Under the Uniform Securities Act, which of the following would be considered an agent? A) An individual limiting his sales activity to selling federal covered securities while representing a broker-dealer B) A broker-dealer who buys and sells registered securities with the general public C) An individual who represents an issuer in an exempt transaction D) An individual who represents an issuer of a security issued by a Canadian province

A) An individual limiting his sales activity to selling federal covered securities while representing a broker-dealer Explanation An individual employed by a broker-dealer who sells securities to the public is an agent under the Uniform Securities Act. The USA defines an agent as, "any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." The law excludes those individuals from the definition of an agent who represent an issuer in exempt transactions, selling certain exempt securities (Canadian provincial securities are on that list), and transactions with issuers' employees when no commission is paid. There is virtually no case in which a salesperson representing a registered broker-dealer is not an agent. U3LO4

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals A) a bullish outlook B) a bearish outlook C) that a change in interest rates is coming D) a shortage of enough stock to go around

A) a bullish outlook Explanation Even though short interest represents the number of share sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock. U12LO6

An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state A) under no circumstances B) with at least ½ of its circulation in the state C) with at least ⅔ of its circulation in the state D) with at least ⅓ of its circulation in the state

A) under no circumstances Explanation An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than ⅔ of its circulation outside the state during the past 12 months. U5LO1

The Uniform Securities Act would consider which of the following insurance products to be a security? A) Modified endowment life insurance B) Variable life insurance C) Fixed annuity D) Mortgage life insurance

B) Variable life insurance Explanation The key is the word variable. Insurance products are excluded from the definition of a security unless the word variable is part of the description. So, variable life and variable annuities are securities—the rest are not. U4LO1

One characteristic found in equity securities issued by a corporation is A) cumulative dividends B) limited liability C) a history of keeping pace with inflation D) preemptive rights

B) limited liability Explanation Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends. U12LO1

As long as properly disclosed, a broker-dealer would be permitted to charge a fee for all of these EXCEPT A) issuing a stock certificate B) solicitation of proxies C) annual maintenance fees D) wiring funds to the client's bank

B) solicitation of proxies Explanation Broker-dealers are not permitted to charge for soliciting proxies—the issuer is responsible for reimbursing the broker-dealer for any of its expenses. All of the other charges are permitted if fully disclosed to clients. This is a case where you answer the question correctly because you know the other choices are permitted charges. U7LO1

All of the following must be specified in the state registration statement of the security except A) all other states where the security is currently registered or will be registered B) the total amount of the security that will be offered in each state C) the total amount of the security that will be offered in this state D) a stop order from any other state that affects the offering of the security within that state

B) the total amount of the security that will be offered in each state Explanation It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes the amount to be sold in this state must be disclosed. U4LO3

Ownership in a corporation is evidenced by holding share of the company's A) warrants B) common stock only C) common or preferred stock D) bonds with a first mortgage on the property

C) common or preferred stock Explanation If you have equity in a corporation, it means you have an ownership interest. Equity securities, common and preferred stock, represent ownership in a corporation. A mortgage bond is a debt security and a warrant gives the holder to acquire equity, but, in itself, is not equity. U12LO1

States may require investment advisers who are registered with the SEC to do each of the following EXCEPT A) file a consent to service of process B) file any documents with the state that are filed with the SEC C) pay state notice filing fees D) maintain net capital requirements

D) maintain net capital requirements Explanation The state may require federal covered advisers to pay notice filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC, but cannot determine net worth or net capital requirements for federal covered IAs. The Administrator can require minimum net worth for state registered advisers, but under the NSMIA, cannot do so for federal covered ones. U1LO5

Ditherton, Wiggleman, and Jones, LLC, is an investment adviser with $2 billion in AUM. In appreciation for the large volume of brokerage transactions directed their way, Alexander Wimpton and Sons, Members of the NYSE, offer to send Mr. Ditherton on an all expense trip to Zurich to attend a seminar covering the latest developments in global investing. Under Section 28(e) of the Securities Exchange Act of 1934, A) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar B) Mr. Ditherton could attend, but only if he paid the direct costs of the seminar and let Wimpton and Sons take care of the transportation costs C) Mr. Ditherton could attend because attendance at a business-related seminar such as this falls under the safe harbor provisions of Section 28(e) D) Mr. Ditherton could not attend because the safe harbor under Section 28(e) only applies to domestic events

A) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar Explanation Section 28(e) provides a safe harbor for soft dollar compensation from broker-dealers to investment advisers. Included is covering the registration fees of seminars related to the adviser's business. However, all transportation and personal expenses must be paid by the investment adviser. U7LO1

Because of failing economic conditions, KAPCO Advisers, an adviser with slightly less than $120 million in assets under management, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination? A) The IAR B) Both KAPCO and the IAR C) The IAR's new employer D) KAPCO Advisers

A) The IAR Explanation With more than $110 million in assets under management, KAPCO is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated. U2LO3

A properly licensed agent in Illinois, Missouri, and Iowa has a client who moves from Illinois to Michigan on July 1, 2014. On September 1 of that year, the agent sells him 100 shares of a nonexempt security in a nonexempt transaction. On October 1, 2015, the client discovers that the agent's firm never licensed him in Michigan and that the agent is subject to civil liability to the purchaser. The statute of limitations for this sale runs out on A) September 1, 2016 B) September 1, 2017 C) October 1, 2017 D) October 1, 2018

B) September 1, 2017 Explanation The statute of limitations for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 3 years after the sale on September 1, 2014. U5LO3

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as A) discretionary misrepresentation B) blanket recommendations C) churning D) matched orders

B) blanket recommendations Explanation When the same security is recommended to all or most of an IA's clients, the regulators considered this to be an unethical practice known as "blanket recommendations" because the same security will almost never be suitable for everyone. U7LO4

The duties and responsibilities of a fiduciary are spelled out in A) the Uniform Gift to Minors Act B) the Uniform Prudent Investors Act of 1994 C) the Investment Advisers Act of 1940 D) the Summary Plan Document of the DOL

B) the Uniform Prudent Investors Act of 1994 Explanation The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients. U7LO3

Which of the following phrases best describes a prudent investor? A) An investment adviser representative (IAR) handling a discretionary account B) The custodian for a minor under the Uniform Transfers to Minors Act C) A trustee who invests with reasonable care, skill, and caution D) A person in a fiduciary capacity who invests in a prudent manner

C) A trustee who invests with reasonable care, skill, and caution Explanation Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution. U7LO3

Under which of the following circumstances may an Administrator revoke a state registered investment adviser's registration? A) The adviser is no longer in business. B) The adviser cannot be located after a reasonable search by the Administrator. C) The adviser has been convicted of a nonsecurities-related felony. D) The adviser has been declared mentally incompetent by a court of jurisdiction.

C) The adviser has been convicted of a nonsecurities-related felony. Explanation If an adviser committed a felony or participated in unethical business practices, its registration will be revoked, not canceled. An adviser's registration may be canceled if the adviser is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing. U5LO2

One difference between common stock and preferred stock is that common stockholders A) own equity in the company B) receive dividends when declared by the board of directors C) have voting rights D) have a priority claim on earnings

C) have voting rights Explanation It is rare to find a preferred stock with voting rights and ever rarer to find a common stock without them. Both receive dividends when, and if, declared by the BOD and they are usually paid quarterly. Both are equity securities and preferred has the prior claim. U12LO1

One way in which the penalty for a civil infraction differs from that for a criminal one is that in the civil case, the guilty party cannot A) appeal the verdict B) receive a suspension C) receive a jail sentence D) be fined

C) receive a jail sentence Explanation Only in criminal cases is prison time an option. U5LO4

Under the Uniform Securities Act, violations of the act may result in criminal penalties of up to A) $10,000 B) $1,000 C) $50,000 D) $5,000

D) $5,000 Explanation Persons convicted of willful violations of the act or knowingly filing a fraudulent document under the act may be subject to imprisonment and/or fines for each violation. The maximum penalties are 3 years in jail and/or $5,000 in fines. The statute of limitations under the Uniform Securities Act is 5 years. U5LO4

The U.S. Supreme Court case resulting in the decision that an investment contract is a security is the A) Steiner case B) Muller case C) Golub case D) Howey case

D) Howey case Explanation It was the Howey case in 1946 where the decision ruled that an investment contract meeting the 4 prongs: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others, is a security. U4LO1

Proponents of which of the following technical theories assume that small investors are usually wrong? A) Breadth of market B) Short interest C) Volume of trading D) Odd lot

D) Odd lot Explanation Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong. U12LO6

During the application process for registration as an agent, the Administrator may request information about the applicant's A) financial condition as disclosed on the agent's most recent balance sheet B) record involving a non-securities misdemeanor conviction 5 years ago C) marital status D) citizenship

D) citizenship Explanation Individual registrants may be asked about their citizenship, but not their marital status. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers. U3LO5

Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for nonexempt securities only B) not fraudulent if there was willful intent to omit the information C) fraudulent for exempt securities only D) fraudulent for both exempt and nonexempt securities

D) fraudulent for both exempt and nonexempt securities Explanation Material facts are facts that an investor relies on to make investment decisions. The willful omission of a material fact in the sale, purchase, or offer of a security is fraudulent. This applies whether the security offered is exempt or nonexempt. U4LO4

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the:

straight preferred stock

As defined in the Uniform Securities Act, which of the following statements is TRUE regarding an agent? A) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. B) An agent may be an individual or a firm. C) If someone meets the definition of an agent, that person is exempt from registration requirements. D) An agent may be a broker-dealer.

A) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. Explanation The text in Section 401(b) of the Uniform Securities Act reads, "Agent means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition. U3LO3

The USA defines all of the following as securities EXCEPT A) commodity futures B) unlisted stock C) U.S. Treasury bills D) debentures

A) commodity futures Explanation The term security encompasses a wide range of investments. The best thing is to remember the 6 items that are not securities. Included in that list are commodity futures. U4LO1

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with clients who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is guilty of selling away B) engaged in an agency cross transaction C) performed a matched trade as permitted under the rules D) is required to register as a broker-dealer

A) is guilty of selling away Explanation When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization. U7LO5

Following the advice of its portfolio managers, the Rising Tide hedge fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use its furniture and facility at a discounted rate. Under the soft-dollar provisions of Section 28(e), A) this would not fall under the safe harbor B) as long as the discounted rate reflected the volume of business done by Rising Tide, this would be permitted C) this would not fall under the safe harbor provisions unless the employees were those who directed the transactions to Momentum Securities D) this would fall under the safe harbor

A) this would not fall under the safe harbor Explanation The use of furniture or office facilities is not included in the list of safe harbor items, regardless of the roles employees of the fund play. U7LO1

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? A) Broker-dealers, agents, and investment advisers B) Broker-dealers and investment advisers C) Only broker-dealers D) Only investment advisers

B) Broker-dealers and investment advisers Explanation Only broker-dealers and investment advisers are required to maintain financial records. There are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers. U3LO5

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $16 B) $12 C) $6 D) $8

C) $6 Explanation Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share. U12LO2

Under the USA, an agent may file for a review of an Administrator's revocation order within how many days of revocation? A) 90 days B) 30 days C) 60 days D) 270 days

C) 60 days Explanation An agent may appeal a final order of the state Administrator but a written petition must be filed with the appropriate court within 60 days of the entry of the Administrator's order. U5LO2

Which of the following would be of least interest to a technical analyst? A) Advance/decline line B) Short interest ratio C) P/E ratio D) Trading volume

C) P/E ratio Explanation Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer; P/E ratios are of greater interest to fundamental analysts. U12LO6

ABC Advisers, Inc., a federal covered investment adviser is a wholly owned subsidiary of ABC Corporation, a holding company that also owns ABC Securities, a full-service broker-dealer that is a member of the New York Stock Exchange and FINRA. One of the clients of ABC Advisers calls his IAR to explain that he has just received a margin call in his ABC Securities account. Under these circumstances, it would NOT be prohibited for the IAR to use securities owned in the advisory account to obtain a loan for this client A) because the 2 firms are affiliated B) because ABC Advisers, Inc. is in the money lending business C) when the client has furnished ABC Advisers, Inc., with a proper discretionary trading authorization D) if the client agreed to repay the loan within 30 days

A) because the 2 firms are affiliated Explanation In most cases, the only money lenders on the exam will be banks and broker-dealers. If an advisory client receives a margin call from activity in his brokerage account, securities owned in the advisory account may be used by the affiliated broker-dealer to meet the margin deficiency. U7LO4

An analyst using the dividend growth model would take into account all of the following factors EXCEPT A) the current earnings per share B) the growth of the dividend C) the current dividend D) the investor's required rate of return

A) the current earnings per share Explanation The dividend growth model is a stock valuation model that deals with dividends and their growth, discounted to today. The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends. U12LO6

One of the major differences between identity theft and physical theft is that in the case of identity theft, A) the victim can usually correct the problem much more quickly than with physical theft B) it might not be discovered for some time C) unless hospitalization is required, law enforcement is generally unconcerned about identity theft D) the cost of the damages is generally much less

B) it might not be discovered for some time Explanation With identity theft, it might be months before you are aware that your identity has been stolen. This is unlike physical theft, where you are there at the time of the mugging or see the results when returning home to find your place has been burgled. Clearing up cases of identity theft can take a very long time, and the amount of money involved can be staggering. U7LO7

Although many advisers to private funds are exempt from registration, larger ones generally register with the SEC. SEC-registered investment advisers with at least $150 million in private fund assets under management use which form to report information about the private funds that they manage? A) Form 13F B) Form D C) Form ADV Part 1A D) Form PF

D) Form PF Explanation Logically enough, the letters, PF stand for private fund and that is the form used. The ADV Part 1A is used by any investment adviser registering with the SEC (or the states); it is not unique to private funds. Form 13F applies to any institutional investor with discretion over $100 million or more in certain equity securities. Those are on a list published by the SEC and are called, "13F securities". Form D is used under Rule 506 for private placements and has nothing to do with investment advisers. U1LO4

The term exempt reporting adviser refers to A) broker-dealers who are considered investment advisers solely because they offer wrap fee accounts B) advisers whose only clients are insurance companies C) advisers who are registered on the state level, but who file their Form ADVs through the IARD D) advisers that rely on either the venture capital fund adviser exemption or the private fund adviser exemption

D) advisers that rely on either the venture capital fund adviser exemption or the private fund adviser exemption Explanation Exempt reporting advisers (ERAs) are defined as investment advisers, but, because they either are private fund advisers or advise venture capital funds, they are exempt from registration on either the state or federal level. However, even though they are exempt from registration, they must file certain portions of Form ADV—hence the name exempt reporting advisers. U1LO4

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, she is subject to legal action for A) 5 years after the alleged violation B) 3 years after the alleged violation C) 10 years after the alleged violation D) the sooner of two years after discovery or three years after the violation

A) 5 years after the alleged violation Explanation This is a perfect example of how important it is to read the question very carefully. Notice that this is a criminal violation, not a civil one. Under the criminal provisions of the Uniform Securities Act, the statute of limitations is five years after the alleged violation. Do not confuse this five years with the maximum prison sentence of three years. Further, this is different from the statute of limitations for a civil case. That is the sooner of two years after discovery or three years after the infraction. Under federal law, the civil statute of limitations is slightly different. For federal civil cases, it is the sooner of one year after discovery or three years after the infraction. U5LO4

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) under no circumstances B) if accompanied by an unmarked prospectus C) without restriction D) if approved by a principal

A) under no circumstances Explanation The prospectus is a legal document and may not be altered. U4LO3

A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following EXCEPT A) other resources of the beneficiaries B) transaction costs C) general economic conditions D) needs for liquidity, regularity of income, and preservation or appreciation of capital

B) transaction costs Explanation Under the Uniform Prudent Investor Act, transaction costs are not a primary factor in a trustee's determination of which investments to choose for the trust. They may be a factor in determining where to execute the transactions. The key for the prudent investor is to use skill and caution examining all of the factors involved to meet the stated objectives. U7LO3

An investment adviser has devised a charting system and wishes to advertise this fact in order to obtain additional clients. To do so, the USA would require A) a display of past performance for at least the most recent 12-month period B) disclosure of the length of time the charting system has been used C) a statement as to the limitations of and difficulties involved in using this system D) a graph showing the results of back-testing the system

C) a statement as to the limitations of and difficulties involved in using this system Explanation Anytime an adviser wishes to promote any type of charting or graphing system, disclosure must include the system's limitations and a statement relating to the difficulties in its use. U6LO5

The dividend discount model is: A) primarily used by technical analysts B) based on the dividend payout ratio C) an analytical tool used to value a common stock using the present value of future dividends D) the inverse of the price/earnings ratio

C) an analytical tool used to value a common stock using the present value of future dividends Explanation There are two widely accepted forms of common stock price valuation using dividends—the dividend discount model and the dividend growth model. Neither would be used by technicians because they rely on fundamentals. U12LO6

An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working 1 day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Comply with the notice filing requirements of the state B) Become licensed as a broker-dealer C) Pass an oral or written examination D) Register as an investment adviser representative in State B

D) Register as an investment adviser representative in State B Explanation Individuals managing client assets while employed by federal covered investment advisers must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator. U2LO3

Under the Uniform Securities Act, the definition of a broker-dealer includes A) an agent handling principal transactions with major institutional clients B) an authorized representative of the issuer who receives a commission C) a trust company when executing transactions in accounts in which it does not act in a fiduciary capacity D) a person in the business of making trades in his own account or for the accounts of others

D) a person in the business of making trades in his own account or for the accounts of others Explanation A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others. Agents and banks, including trust companies, are specifically excluded from the definition of broker-dealer. U3LO1

Each of the following persons would meet the definition of a person associated with an investment adviser who needs registration as an investment adviser representative except A) an agent of an affiliated broker-dealer who manages wrap fee programs B) a registered investment adviser's vice president of sales C) an employee who solicits potential clients to open advisory accounts D) a typist responsible for operating the desktop publishing system that prepares the investment adviser's weekly research bulletins

D) a typist responsible for operating the desktop publishing system that prepares the investment adviser's weekly research bulletins Explanation Individuals associated with registered investment advisers in strictly clerical or administrative positions are specifically excluded from the definition of an investment adviser representative . U2LO2

An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) a guaranteed security only guarantees payment of interest or dividends B) agents should always recommend securities that are familiar to the investor C) the agent is possibly committing fraud D) the agent is describing a guaranteed security

D) the agent is describing a guaranteed security Explanation A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable. U6LO3

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser B) An agent who offers incidental advice on securities and whose sole compensation is from commissions on transactions C) An employee whose only role is soliciting new investment advisory clients for the firm D) An individual who renders fee-based advice on precious metals

C) An employee whose only role is soliciting new investment advisory clients for the firm Explanation Soliciting for advisory clients on behalf of an investment adviser is considered 1 of the functions describing an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities and, therefore, a person advising on them is not considered an investment adviser representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required. U2LO1

An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case, A) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork B) the investment adviser firm should apply to the Administrator for an extension of time C) the IAR may exercise his discretion as authorized and sell the CANCO D) the IAR must wait for the signed paperwork to be received

C) the IAR may exercise his discretion as authorized and sell the CANCO Explanation Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used in a customer's account for the first 10 business days after the date of the first transaction. Following that 10 days, the rule requires written authorization to be on hand for any future discretionary trading. U7LO2

Under current law, which of the following would NOT be required to register as an investment adviser in a state? A) A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state B) A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein C) A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state D) A person whose home office is in the state and who manages less than $90 million in assets

A) A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state Explanation The exemption from registration for those who have no office in the state and only deal with issuers applies to broker-dealers, not to investment advisers.Persons having no place of business in a state are generally limited to having fewer than 6 retail (individual) residents of that state as clients within any 12 month period before being required to register, (the de minimis exemption). Unless an exception applies, investment advisers who have less than $100 million in AUM must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level. U1LO3

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $1,000 covering the next month B) $600 covering the next calendar quarter C) $500 covering the next six months D) $600 covering the entire contract year

D) $600 covering the entire contract year Explanation NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement. U6LO4

Which of the following can issue stock? A) A city B) A state C) The U.S. Treasury D) A corporation

D) A corporation Explanation Corporations issue stock. Federal and state governments, including municipalities can issue debt securities, but not equity securities. Even though the Savings Bonds advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money. U4LO2

Which of the following individuals does not come under the supervisory regimen of an investment adviser? A) An individual in the mailroom who has fewer than 6 retail advisory clients B) A CFA® preparing the firm's research reports C) A financial planner registered with the firm as an IAR, but maintaining a separate financial planning practice as an independent contractor D) The CPA engaged to perform the annual audit

D) The CPA engaged to perform the annual audit The annual audit must be performed by an independent accountant. Therefore, this CPA would have no advisory responsibilities requiring supervision. Independent contractors registered as IARs are supervised just as would be any other IAR. Research reports carry the name of both the firm and the preparer and need adequate supervision. If the mailroom person has clients (the number isn't relevant because there is obviously an office in the state), registration as an IAR is required. U1LO6

A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent A) a prohibited transaction B) a gift C) an offer D) a sale

D) a sale Explanation The USA states that, "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value." U5LO1

Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may A) state on its stationery that it is registered with the SEC B) state in a brochure that its registration is approved by the SEC C) tell a client its qualifications have been approved by the SEC D) place the abbreviation RIA after its name on their business card

A) state on its stationery that it is registered with the SEC Explanation It is illegal to imply in any way that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. However, a statement that the adviser is registered with the SEC is appropriate. An abbreviated title after a person's name must be used to recognize educational or professional (e.g.,CFP® or ChFC®) designations only. U6LO2

Under the Uniform Securities Act, an investment adviser is exempt from registration if he has no place of business in a state and his only clients are any of these EXCEPT A) other investment advisers B) broker-dealers C) individuals meeting the accredited investor standard D) investment companies

C) individuals meeting the accredited investor standard Provided his clients are institutional investors and the adviser has no place of business in a state, he is not required to register as an investment adviser. Other than the de minimis or snowbird exemptions, there are no other cases where an IA serving individuals would not have to register. U1LO3

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

C) must be in writing Explanation Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing. U6LO4

An individual registered as an agent with ABC broker-dealer has an independent financial planning practice. Hourly fees are charged for developing financial plans, and if the client wishes, he refers transactions to ABC broker-dealer and is paid commissions for products sold. The Investment Advisers Act of 1940 requires A) neither the financial planner nor ABC is required to register as an investment adviser. B) that ABC register as an investment adviser because it sells securities C) that the financial planner register as an adviser but not the broker-dealer D) that ABC register as an investment adviser but not the financial planner

C) that the financial planner register as an adviser but not the broker-dealer Explanation The agent is receiving compensation for rendering advice. A broker-dealer is exempt from registering as an investment adviser unless it receives special compensation (typically a fee) for the advice. U1LO2

Under the USA, which of the following is considered a broker-dealer in a state? A) ABC broker-dealer with no place of business in the state who only does business with other broker-dealers in the state B) An agent effecting transactions for a broker-dealer C) First Federal Trust Company, specializing in underwriting new municipal issues D) XYZ broker-dealer with an office in the state whose only clients are insurance companies

D) XYZ broker-dealer with an office in the state whose only clients are insurance companies Explanation Any broker-dealer with an office in the state, regardless of the nature of its clients, is defined as a broker-dealer under the USA. If the firm did not have an office in the state and its only clients were institutions such as insurance companies, or other broker-dealers, it would be excluded from the definition. Banks or trust companies and agents are never broker-dealers. U3LO2

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) adjustable rate preferred stock B) convertible preferred stock C) common stock D) straight preferred stock

D) straight preferred stock Explanation Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates. U12LO2

Which of the following activities is most likely to be considered by the SEC as meeting the business standard element in the definition of an investment adviser? A) Advertising investment services to the public and providing them routinely B) Giving specific investment advice only on rare and isolated occasions C) Advertising investment services but receiving no separate compensation for the services D) Issuing reports on macroeconomic conditions

A) Advertising investment services to the public and providing them routinely Explanation Routinely providing investment services meets the business standard element, which the SEC described as giving advice such that it constitutes a business activity conducted with some regularity. In addition, offering services through advertising suggests that the adviser is publicly in the business of offering investment advice. Giving advice on the economy (macroeconomic conditions) is not equivalent to giving advice on specific investment recommendations, and therefore is not a covered activity under the Investment Advisers Act of 1940. U1LO1

Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) It contains a statement that the program will generally cost the client less than purchasing these services separately. B) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. C) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. D) It lists the services provided under the program, including the types of portfolio management services.

A) It contains a statement that the program will generally cost the client less than purchasing these services separately. Explanation The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. U6LO4

An investment adviser may borrow from all of the following clients EXCEPT A) a mortgage broker who helped the adviser negotiate mortgage terms for its office building B) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates C) a broker-dealer in conjunction with a margin account D) a savings and loan association that has offered to finance new computers for the adviser's office

A) a mortgage broker who helped the adviser negotiate mortgage terms for its office building Explanation Mortgage brokers are not in the business of lending money; they help parties negotiate terms of a loan, which is why they are called brokers. The bank, brokerage, and savings and loan association are in the normal business of lending. Advisers are limited to borrowing money from clients that are in the normal business of lending or entities that are affiliated with the IA. U7LO4

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT A) they can only allow fees to be performance related under certain limited circumstances B) they cannot allow for prepaid advisory fees C) they must be in writing D) they cannot be assigned without customer approval

B) they cannot allow for prepaid advisory fees Explanation Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2 million, where performance-based fees are permitted. U7LO1

Which of the following is NOT an accredited investor? A) A registered open-end investment company with net assets of $600,000. B) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. C) An individual with a net worth, including the value of her primary residence, that is greater than $1 million. D) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year.

C) An individual with a net worth, including the value of her primary residence, that is greater than $1 million. Explanation An accredited investor can take different forms: an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past 2 years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501. U4LO3

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted A) improperly; the order should have been placed on Thursday B) properly because the agent saved the client money C) properly because the agent used discretion as to price and time D) improperly; the order cannot be placed without prior written authorization allowing discretion

A) improperly; the order should have been placed on Thursday Explanation In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received. U7LO2

The residual right of common stockholders refers to their right to A) receive all announced dividends in accordance with the number of shares held B) vote in elections for the board of directors and in other important business decisions, such as changes to the charter C) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid D) examine the corporation's annual reports and other reports, and take legal action if irregularities are found

C) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid Explanation The residual right of common shareholders refers to their position in the event of bankruptcy. U12LO2

John was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. John would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will A) consider granting registration to John, but only if he receives heightened supervision B) consider John to be statutorily disqualified because in this state his crime is a felony C) disregard that conviction when determining John's qualifications for registration D) determine John's status on the basis of the extent to which his child support payments are being paid

C) disregard that conviction when determining John's qualifications for registration Explanation The conviction on John's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to John's application for registration in that state. U5LO2

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

D) When an investment adviser representative begins or terminates employment with a state-registered investment adviser, only the investment adviser must notify the Administrator. Explanation When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. Because IARs are never registered with the SEC, notice to the SEC is not required. U2LO3

Senior Wealth Advisers (SWA) is registered as an investment adviser in North and South Carolina with offices in Charlotte, North Carolina and Charleston, South Carolina. On occasion, 1 of their investment adviser representatives meets with clients who reside in North Augusta, South Carolina in a hotel room in Augusta, Georgia. The registration requirements of the Uniform Securities Act would A) require that the IAR register with the Georgia Administrator B) require that SWA register with the Georgia Administrator C) require that both SWA and the IAR register with the Georgia Administrator D) not require registration of either person with the Georgia Administrator

D) not require registration of either person with the Georgia Administrator The hotel room located in Georgia is being used only to meet with existing clients, so no registration in Georgia is necessary. If prospects were invited, registration of both persons would be required. What if only 1 or 2 prospects were invited? Wouldn't the de minimis exemption apply? No, because the moment a person who is not an existing client is involved, the hotel room becomes a place of business in the state and that eliminates use of the de minimis rule. U2LO2

Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) A bank that charged a fee for providing investment advice B) A broker-dealer that managed clients' portfolios for a fee C) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities D) The publisher of an investment advisory newsletter that plans issues based on market events

A) A bank that charged a fee for providing investment advice Explanation A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided. U1LO3

KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Claire has 10 clients who reside in Ohio; IAR Sean has 6 clients who live in Kentucky; and IAR Felicia has 3 clients who are Georgia residents. In addition, Felicia conducts a quarterly presentation at the Augusta, Georgia National Golf Club where she discusses current market developments. The seminar is restricted to club members only. Which of the following is CORRECT? A) Felicia must register in Georgia. B) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs. C) Claire must register in Ohio. D) Sean must register in Kentucky.

A) Felicia must register in Georgia. Explanation Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to club members only—they are still members of the general public). U2LO2

Each of the following would be excluded from the definition of agent EXCEPT A) a sales assistant who is authorized to take orders from existing clients only B) a partner in a broker-dealer whose only connection with the firm is her contribution of capital C) an individual who is the secretary of a broker-dealer's largest branch office D) the president of the state university who sits on the broker-dealer's board of directors

A) a sales assistant who is authorized to take orders from existing clients only Explanation It doesn't make any difference if the clients are new or existing—anyone accepting orders must be registered as an agent. Silent partners and outside directors are not included in the definition of agent. The size of the branch office is irrelevant; as long as the individual's function is limited to clerical activity, registration as an agent is not required. U3LO4

An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the "pay-to-play" prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than A) $500 per election cycle for a candidate that IAR was eligible to vote for B) $250 per election cycle for a candidate that IAR was ineligible to vote for C) $350 per election cycle for a candidate that IAR was eligible to vote for D) $350 per election cycle for a candidate that IAR was ineligible to vote for

C) $350 per election cycle for a candidate that IAR was eligible to vote for Explanation There is a de minimis level that is considered an exception from the pay-to-play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle. U7LO6

Which of the following statements made by an investment adviser would violate the anti-fraud provisions of the Uniform Securities Act? A) "We require any associated person determining general investment advice to be a CFA." B) "We believe that fundamental analysis is the best way to select stocks for our clients." C) "Our fees are nonnegotiable." (when Form ADV Part 2A clearly indicates otherwise) D) "We have over $40 billion in assets under management representing both institutional and retail clients."

C) "Our fees are nonnegotiable." (when Form ADV Part 2A clearly indicates otherwise) Explanation Stating an untruth would be considered fraud. If the Form ADV Part 2 says that the fees are negotiable, you can't state that they are not. An adviser may certainly state which method of analysis he thinks is best. A firm can also set whatever standards it wishes, even though none are required by the regulatory bodies. As far as bragging about the amount of AUM, if you've got them, it is okay to flaunt them. U4LO4

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) need not register as an agent of the issuer because the offering is limited to current employees of the issuer B) must register as an agent of the issuer C) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly D) may receive commissions, but not a salary, without registration

C) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly Explanation Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if sales-related compensation is paid. As a practical matter, the employee would be on straight salary. U3LO4

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of 5 years. B) Investment advisers must maintain records of electronic communications for a minimum of 5 years. from the end of the year in which the communication was made. C) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of 5 years. D) Investment adviser representatives have no recordkeeping responibiilties.

A) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of 5 years. Explanation Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. Emails are treated as any other communication: 5 years from the end of the year in which the record originated for investment advisers. U1LO5

Under the Investment Advisers Act of 1940, which of the following investment advisers is NOT exempt from federal registration? A) All of John's clients reside in his home state, and John offers no advice on any exchange-listed securities. He manages $50 million in assets and none of his clients are private funds. B) All of Paula's clients are private funds and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors. C) Marie maintains her only office in Paris, France, deals with fewer than 15 clients (none of whom is a registered investment company) in private funds advised by Marie, has AUM in the United States of less than $25 million, and does not hold herself out as an investment adviser in the United States. D) ABC Advisers, with offices in 4 states, deals exclusively with insurance companies.

B) All of Paula's clients are private funds and she has total assets under management of $200 million with less than $25 million of that belonging to foreign investors. Explanation The exemptions from the SEC registration requirement under the Advisers Act include advisers who render no advice on any exchange-listed security and whose clients are all in a single state and certain foreign advisers who do not hold themselves out as investment advisers and have fewer than 15 clients per year. In order to qualify for the private fund adviser exemption, total AUM must be less than $150 million. There is also an exemption for investment advisers, regardless of the number of states where offices are maintained, who limit their clientele to insurance companies. U1LO3

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state C) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency D) Bonds that are obligations of the People's Republic of North Korea

B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state Explanation A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify. U4LO3

Great Research & Analysis Brokers (GRAB) is an SEC registered broker-dealer with its principal office in State X. One of GRAB's clients vacations for 3 months during the winter in State Y. Under the registration requirements of the Uniform Securities Act, A) the presence of a single client in State Y requires GRAB to register in that state B) GRAB is not defined as a broker-dealer in State Y if it does not have a place of business in the state C) GRAB is not defined as a broker-dealer in State Y due to the de minimis exemption D) GRAB is permitted to accept only unsolicited orders from the client in order to be exempt

B) GRAB is not defined as a broker-dealer in State Y if it does not have a place of business in the state Explanation The "snowbird" exemption provides that if a broker-dealer does not have a place of business in a state and only deals with existing clients who are temporarily in a state, the firm is exempt from registration. That means the BD can engage in any business with the existing customer; it is not limited to exempt transactions such as unsolicited orders. There is no de minimis exemption for broker-dealers and agents. U3LO2

Gibraltar Investment Advisers opened for business last week. Because of the clients brought over from previous affiliations of their IARs, they have started with $94 million under management for various individual and corporate clients. They also signed a contract to manage an additional $10 million for a wealthy individual. Gibraltar will begin managing that individual's portfolio at the beginning of the next calendar quarter. Which of the following best describes Gibraltar's investment adviser registration requirements? A) Gibraltar's only option is to register at the state level because it currently manages less than $100 million in client funds. B) Gibraltar would be eligible to register at the federal level. C) Gibraltar need not register as an investment adviser because it will manage funds for an institutional investor. D) Gibraltar must register with the state(s) and then, within 90 days of the receipt of the additional $10 million, must register with the SEC.

B) Gibraltar would be eligible to register at the federal level. Explanation If an investment adviser anticipates having at least $100 million under management within its first 120 days, it is eligible to become a federal covered adviser by registering with the SEC. Even though Gibraltar will have AUM in excess of $100 million by the beginning of the next quarter, registration with the SEC is not mandatory until AUM reach $110 million. That the advisory will manage some institutional funds does not exempt the organization from investment adviser registration. U1LO5

A broker-dealer is registered in State W, but its principal, and only place of business, is in State L. Which of the following statements regarding the ability of the Administrator to perform an onsite examination is CORRECT? A) Because the broker-dealer does not have a place of business in State W, it is impossible for the Administrator of that state to perform an onsite examination. B) The Administrators of both State L and State W may perform unannounced onsite examinations during normal business hours. C) Neither Administrator would be able to perform an onsite examination without giving 15 days written notice to the broker-dealer. D) Because the broker-dealer's principal office is located in State L, only that state's Administrator has the jurisdiction to perform an onsite examination.

B) The Administrators of both State L and State W may perform unannounced onsite examinations during normal business hours. Explanation As long as a broker-dealer is registered in a state, the Administrator of that state has the jurisdiction to perform an onsite, unannounced (surprise) examination (audit). In those cases where there is no place of business in the state, as in this question, the examination takes place at the principal office where the Administrator will view records pertaining to clients residing in State W. U5LO1

Which of the following would NOT be considered an investment adviser under Release IA-1092? A) A pension consultant who advises a defined contribution plan on alternative methods of funding the plan and the relative merits of a selected list of investment managers B) The president of an investment club who provides research and advice to the members of his club on a regular basis as an integral part of his duties C) A retired banker who solicits business and advises former clients on a monthly basis as to the specific investment merits of banking securities and receives compensation for his services D) An agent for an athlete who negotiates contracts for a baseball player, as well as advises the client on securities, but does not have discretionary authority over the athlete's securities account

B) The president of an investment club who provides research and advice to the members of his club on a regular basis as an integral part of his duties Explanation The president of the investment club does not meet all 3 of the required elements in the definition of an investment adviser as outlined in Release IA-1092. The investment club president is neither in the business of providing advice nor does he receive compensation for his services. Agents for athletes are considered investment advisers if they include investment recommendations as part of their services, whether or not they have discretion over the funds. U1LO2

Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that anyone simply clicking like on the company Facebook page would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are not true? A) The SEC Investment Adviser Marketing Rule permits testimonials, such as a like on the firm's Facebook page as long as certain disclosures are made B) This would not be considered a testimonial and therefore permitted under the regulations. C) Third-party use of the "like" feature on an investment adviser's social media site could be deemed a testimonial. D) "Likes" posted to the personal accounts of IARs are treated the same as those posted to the firm's account.

B) This would not be considered a testimonial and therefore permitted under the regulations. Explanation Please note that this question is looking for the statement that is not true—in other words, find the false statement. In 2021, the Investment Advisers Act of 1940 was amended by the SEC's new marketing rule. That rule permits testimonials (a like on a Facebook page is considered a testimonial) as long as certain disclosures are made. One of those disclosures is the receipt of any direct or indirect compensation. The 5% decrease in fees is considered a form of compensation and simply clicking "like" does not give any indication that compensation for the testimonial is being given to the client. A client could give a testimonial on the firm's website or Facebook page, but the full range of disclosures, including compensation, the fact that the person is a client, and any potential conflicts of interest, such as a family relationship with a principal of the firm, must be made. U6LO5

All of the following statements concerning an agency cross transaction for an advisory client are true EXCEPT A) it is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction B) an investment adviser may recommend the transaction to both parties to the transaction C) an advisory client must provide prior written consent for the adviser to be able to engage in agency cross transactions D) an investment adviser must make prior written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties

B) an investment adviser may recommend the transaction to both parties to the transaction Explanation The investment adviser handling an agency cross transaction may not recommend the transaction to both parties. An agency cross transaction is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan. An investment adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. U7LO6

You are an IAR. One of your clients is a C level officer with a publicly traded corporation. When needing to relieve yourself, you are shown to the executive washroom. While cleaning up, you notice a report, stamped "Confidential" and a quick peek reveals that it is highly favorable to the company. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, you A) can accept unsolicited orders from clients and buy for your personal account only B) cannot buy any of the stock for personal or client accounts C) contact the Administrator immediately D) should tell your client what you saw and ask permission to act on this information

B) cannot buy any of the stock for personal or client accounts Explanation This is a case of "accidentally" acquiring material, inside, nonpublic information. Under no circumstance are you permitted to make any use of this until the report is made public. However, you may accept unsolicited customer orders (unless they were in the washroom with you), but you can't do anything for yourself. U7LO5

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it A) its only place of business is outside of the United States, deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the United States B) has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management C) limited its clients to insurance companies only D) would be required to register in 15 or more states

B) has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management Explanation An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the United States, and their AUM in the United States is less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible, but not required to register with the SEC. U1LO5

The Uniform Securities Act provides for a number of cases where an investment adviser representative is not defined as such in a specific state. One of those cases is when A) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has six or fewer retail clients in State B. B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. C) the individual maintains an office in State B, but his only clients in that state are institutions. D) the individual represents a federal covered investment adviser and has two retail clients in a state in which she has no place of business.

B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. Explanation Those individuals representing a state-registered investment adviser (IA) can take advantage of the de minimis exemption. That is, if the individual has no place of business in a state and conducts business with no more than five retail clients in the state, registration is not required. Be sure you understand that "no more than five," "fewer than six," and "five or fewer" mean the same thing. Six or fewer is too many. The representative of the covered IA would not have to register; but that is not part of the USA, it is part of the federal law. There are never any exceptions for those with a place of business in the state. U2LO2

Which of the following statements relating to penalties under the USA is CORRECT? A) A seller who notices that a sale was made in violation of the act may offer a right of rescission to the purchaser that must be accepted either 2 years after notice of the violation or 3 years after the sale, whichever comes sooner. B) Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act. C) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. D) Any person aggrieved by an order of the Administrator may request an appeal of the order within 15 days which, in effect, functions as a stay of the order during the appeal period.

C) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. Explanation A client who purchased a security in violation of the USA may recover the original purchase price plus costs involved in filing 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. To be subject to time in prison, a sales agent must knowingly have violated the USA. The right of rescission must be accepted or rejected within 30 days of receipt of the letter of rescission; it is the statute of limitations for claims that runs the 2- or 3-year period. An appeal will only stay an order when so directed by a court of competent jurisdiction. U5LO3

Which of the following does NOT meet the compensation test for defining investment advisers under SEC Release 1A-1092? A) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice. B) Subscription payments are received by a publisher of a newsletter providing impersonal securities-related advice. C) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. D) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists.

C) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. Explanation Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent - she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation. U1LO2

An agent can sell an unregistered security to one of the firm's retail customers under each of the following circumstances EXCEPT A) if the transaction is initiated at the request of the customer B) if the security being purchased is an exempt security C) if the agent is not registered in the client's state D) if the security being purchased is a warrant to purchase stock that is NYSE listed

C) if the agent is not registered in the client's state Explanation When engaging in securities transactions with retail clients, agents must always be registered in the state of residence of that client. As long as the agent is properly licensed, if the security being purchased is exempt or it is being purchased in an exempt transaction (such as an unsolicited trade), registration of the security is not required. Federal covered securities, such as those listed on the NYSE, are also exempt from registration. That exemption carries over to warrants and rights issued by that company. U4LO3

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade was being executed by an officer or partner of the firm B) directing a securities transaction to an affiliated broker-dealer C) shares held in the account of an advisory client are purchased by the investment adviser D) engaging in an agency cross transaction

C) shares held in the account of an advisory client are purchased by the investment adviser Explanation There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent—that's the reason for the term. U6LO1

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) there is a violation because the IAR failed to obtain the signed receipt. B) there is no violation as long as the customer signs a waiver agreeing to these terms. C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege D) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract.

C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege Explanation The problem here is that the client has 5 days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed. U6LO4

Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. B) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction. C) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE. D) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm.

D) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. Explanation An issuer transaction is one in which the issuer receives the proceeds of the sale. When GEMCO sold those donated shares to the market maker, the proceeds were received by the issuer (GEMCO). When stockholders sell their shares, they are the ones who receive the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. U4LO2

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers deems all of the following as unethical practices for investment advisers EXCEPT A) charging advisory fees that are significantly higher than those charged by other advisers for similar services in that state B) recommending a security based on a rumor C) inability or unwillingness to disclose sources of additional fees received from those other than the customer in connection with providing advisory services to that client D) performing the initial trades in a new discretionary account with oral authorization

D) performing the initial trades in a new discretionary account with oral authorization Explanation NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permits an investment adviser to exercise discretion with oral authorization from the client, for a period of 10 business days after the initial discretionary trade in the account. Charging advisory fees that are significantly higher than those charged by other advisers for similar services, failing to disclose sources of compensation received by the adviser in connection with rendering advisory services, and recommending trades based on rumors are all unethical trade practices. U7LO4

Unless an exemption applies, under the Investment Advisers Act of 1940, an investment adviser is required to A) furnish an audited balance sheet each year to customers for whom the advisor maintains custody B) furnish a statement of the total dollar amounts of securities bought and sold each year to customers C) maintain a bond for an amount based on the assets under management D) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year

D) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year Explanation Unless an exemption applies (the client is an investment company or the adviser is providing impersonal advisory services costing less than $500 per year), SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers. U6LO4

When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is A) if the customer owns the underlying security on which the call option is sold B) the ability of the customer to make a one-time wire to a foreign bank account owned by a family member C) that the account is in the name of an institutional customer D) the ability of the customer to move funds out of the account on multiple occasions

D) the ability of the customer to move funds out of the account on multiple occasions Explanation A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here. U7LO7

Broker-dealers who use the internet to distribute information on available products and services are not deemed to be transacting business in this state for purposes of the Uniform Securities Act and are, therefore, exempt from registration, if A) the internet communication contains a legend in which it is clearly stated that the broker-dealer in question is exempt from state broker-dealer registration requirements B) the internet communication contains a mechanism, including and without limitation, technical firewalls or other implemented policies and procedures, designed reasonably to ensure that before any subsequent, direct communication with prospective customers or clients in this state, the client is first registered in this state or qualifies for an exemption or exclusion from such requirement C) the broker-dealer does not maintain a place of business in the state and uses encrypted passwords for access D) the internet communication does not involve either effecting or attempting to effect transactions in securities in this state over the internet, but is limited to the dissemination of general information on products and services being offered

D) the internet communication does not involve either effecting or attempting to effect transactions in securities in this state over the internet, but is limited to the dissemination of general information on products and services being offered Explanation The internet exemption applies to broker-dealers when the firm limits its communications to the dissemination of general information. U3LO2

An investment adviser is sued by a client. If the client is successful in the civil proceeding, under the Uniform Securities Act, the client may be awarded A) the money paid for the advice, any losses resulting from the advice, and all costs and attorney's fees B) any losses resulting from the advice plus interest, costs, and attorney's fees C) the money paid for the advice and all costs and attorney's fees D) the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice

D) the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice Explanation Securities professionals may be sued by their clients under civil law if they lose money and the securities professional has violated the Uniform Securities Act in connection with the loss. In the case of an investment adviser (or IAR) the client is entitled to recover the consideration (money) paid for such advice and any loss due to such advice, together with interest at the state's legal rate from the date of payment of the consideration plus costs and reasonable attorney's fees, less the amount of any income received from such advice. U5LO3