Series 66: Regulations Mastery Exam #2

An investment adviser representative has recently passed her Series 7 and Series 66 exams. Which of the following statements can she make to potential clients regarding these registrations?

"I am now registered with FINRA and the State" It cannot be stated that "registration" means that the SEC, FINRA or the State Administrator approves of the adviser, or endorses, recommends, or certifies the adviser. It can be stated that the adviser is "registered" - in this case, the IAR is registered in the State, and as a Series 7 representative, this individual is federally licensed as a representative. The federal Series 7 license is given by FINRA, which is an SRO (self-regulatory organization) operating under SEC oversight.

An agent is permitted to say which of the following?

"To be registered in the State, I had to qualify by passing the Series 63 (or Series 66) examination" As a general rule, an agent cannot state that he or she is approved by the Administrator; he or she is simply registered in the State. However, it can be stated that the agent has passed the required qualification examination (the Series 63 or 66), since this is a true statement. Choice D is untrue - many, many persons have passed the Series 63 and Series 66 examinations - they may be hard tests, but not extremely difficult ones.

To be defined as a diversified management company, the maximum percentage of the portfolio's assets that can be invested in a single issuer is:

5% To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.

A written customer complaint is received by mail that the firm resolves to the customer's satisfaction. Which statement is TRUE regarding keeping this record?

A copy of the original complaint along with its resolution must be retained in the file of the agent by the broker-dealer SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways: The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; or Instead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original."

Under the Uniform Securities Act, which of the following persons with no place of business in a State is EXCLUDED from the definition of an "Investment Adviser"?

A trust that receives special compensation for rendering advice about securities Excluded from the definition of an investment adviser are: Investment Adviser representatives (agents) Depository Institutions (banks, savings and loans, trusts) Professionals (accountants, lawyers, teachers, engineers, whose performance of these services is wholly incidental to their professional practice) Broker-dealers Newsletters that give general investment advice Federal covered advisers Thus, the trust company (Choice D) is excluded from the definition of an investment adviser. Note that none of the other choices fits the definition of a Federal covered adviser, and that insurance companies that give advice (Choice C) are not afforded an exclusion.

Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices is (are) prohibited?

Agents may not personally guarantee a customer's account against loss, regardless of the securities being exempt or non-exempt. Borrowing money or securities from a customer; or lending money or securities to a customer; is a prohibited practice.

Which of the following is NOT defined as a federal covered adviser?

An adviser to insurance companies registered in the State Federal covered advisers are not required to register in the State; they are required to register with the SEC (or are excluded from the Federal definition of an investment adviser and are neither required to register with the SEC nor the State). Federal covered investment advisers are defined under the Investment Advisers Act of 1940 (federal law). They are advisers managing $100,000,000 or more of assets; and advisers to investment companies. It is not a coincidence that the Investment Advisers Act of 1940 and the Investment Company Act of 1940 were written at the same time. One of the main intentions of the Investment Advisers Act of 1940 was to regulate advisers to investment companies and limit their compensation (for example, advisers to investment companies cannot be compensated based on gain or loss). Investment advisers to insurance companies are not defined as Federal covered advisers. This is the case because regulators were not worried about insurance companies being overcharged by their investment advisers, since insurance companies are very cost conscious. Finally, under State law, anyone excluded from the Federal definition of an investment adviser, is also excluded from the State definition. The "excluded" persons at not defined as investment advisers at either the Federal or State level and thus, no registration is required for these. Excluded from the Federal definition of an investment adviser under the Investment Advisers Act of 1940 are: banks; broker-dealers; professionals who give incidental investment advice such as lawyers, accountants, engineers, and teachers; publishers of general circulation financial publications; and persons who give advice solely about U.S. Government obligations. Note that this list of exclusions is the same as under State law, with the specific difference that the Investment Advisers Act of 1940 excludes advisers that only give advice about U.S. Government obligations, while State law does not mention this.

Which of the following investment advisers with no office in a State would be required to register in the State?

An adviser whose clients consist of 5 mutual funds and 8 individuals Unless they come under another exclusion or exemption, an investment adviser must register in the State where it is physically located; and in any State where it solicits advisory business. However, if the adviser has no office in the State and its only customers are institutions (such as mutual funds), then it does not have to register in that State; and if the adviser has no office in the State, and it effects business with 5 or fewer clients in the State, it does not have to register under the "de minimis" exemption.When counting clients under the "de minimis" exemption, clients that are officers of the adviser itself, are excluded. So in Choices B, C, and D, the number of mutual fund clients is irrelevant. If the adviser has more than 5 clients in the State, it would have to register. Choice B has 8 individual clients, 5 of whom are officers of the adviser, so there really are only 3 individual clients here. Choice C, with 8 individual clients, is the one that must register.

What constitutes "taking custody" under the NASAA rule for investment advisers?

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

Violations of the Investment Advisers Act of 1940 are punishable by: I Fine of $5,000 II Fine of $10,000 III 3 years in jail IV 5 years in jail

II and IV Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail. (Note that this differs from Uniform State Law, which imposes fines of $5,000 and jail for up to 3 years for violations.)

An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE?

Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer.

All of the following are considered manipulative and prohibited practices EXCEPT:

Arbitrage Buying a security on one exchange and simultaneously selling it on another exchange for profit is a common trading technique known as "arbitrage" and is perfectly legal. Trading a customer account for the purpose of generating commissions to the agent is commonly known as "churning" and is a prohibited practice. Buying a security on one exchange and simultaneously selling it on another exchange to create the appearance of trading activity is a manipulative and prohibited practice known as "wash trading" (also known as "painting the tape").

Under the Uniform Securities Act, which of the following practices by an investment adviser is permitted?

Being compensated based upon the total value of funds being managed It is permitted for an investment adviser to be compensated based upon the total value of all assets under management (e.g., an annual fee of ½% of asset value, averaged over the year). Sharing in the capital gains of an account under management would be prohibited. Other prohibited practices are: assigning the advisory contract to another investment adviser without the customer's prior consent changing the management of an investment adviser formed as a partnership without notifying each customer promptly; and taking custody of customer funds without giving prior notice to the Administrator.

An investment adviser may NOT be compensated with which of the following?

Bid-Ask spreads earned when position trades are executed Investment advisers can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations, asset allocation and trade execution - so all services are "wrapped" into a flat annual fee. Investment advisers can receive "soft dollar" compensation. In return for directing full commission trades to an executing broker, the executing broker gives the adviser research, recommendations, trading algorithms, and similar items of value. The SEC permits these "soft dollar" items to be given by the broker-dealer to the adviser as long as they ultimately benefit the adviser's investors. Investment advisers cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract. Bid-ask spreads are earned by securities dealers that buy securities into their inventory and sell securities out of their inventory. These are called "position trades" because the broker-dealer is taking positions in its inventory account. Broker-dealers earn these; investment advisers are prohibited from receiving these.

All of the following are exempt securities under the Uniform Securities Act EXCEPT:

Surety bonds U.S. Government bonds, U.S. Government agency bonds, and municipal bonds are exempt securities. Surety bonds are not securities. The Administrator can require, as a condition of registration for broker-dealers and investment advisers, that they post a surety bond with the State. Usually set at $10,000, this surety bond amount is held by the State, and would be forfeited to the State if the registrant violates any provisions of the Uniform Securities Act.

A client who is 80 years old comes into the agent's office and tells the agent that he must undergo a gall bladder operation. The client is worried about the amount of time that will be spent in the hospital to recover, and at his advanced age, is also worried about the chances of complications and possible death. The client has physical stock certificates in his home safe and asks the agent for assistance. The agent should:

Drive the 80 year old customer to his house, have the client retrieve the securities and put them into a lock box at a local bank under the client's name The physical certificates cannot be taken by the representative, since then the firm would be deemed to be taking custody of the securities and would have to comply with all of the custody rules (safekeeping by a qualified independent custodian; quarterly account statements must be sent to customers; independent annual audit of the custodian, etc.). It would be acceptable for the representative to drive the customer to his home; have the customer retrieve the securities; and then drive the customer to a bank where the customer places them in a safe deposit box. In this scenario, the adviser is never taking custody. Choice D is also OK, but Choice C is the better answer.

Which of the following can be purchased on margin? I NASDAQ issues II Options III Futures IV OTCBB issues

I and III NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

Which of the following would be defined as either an "offer to sell" or a "sale" of a security? I The gift of an assessable security II The gift of a non-assessable security III The giving of a security as a bonus in consideration for the purchase of securities IV The pledge of securities, creating a security interest as collateral for a loan

I and III only The gift of an assessable security or the giving of a security as a "bonus" in consideration for buying another security are both defined as "offers to sell" under the Act. The gift of a non-assessable security is simply a gift - it is not an offer to sell. The pledge of securities for a loan is also not defined as an offer to sell.

Which of the following are "federal covered" advisers? I An investment adviser with $400,000,000 of assets under management II An investment adviser to an investment company with $400,000,000 of assets under management III An investment adviser to an investment company with $40,000,000 of assets under management

I, II, III Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. The smaller advisers are only required to be registered at the State level. Thus, the adviser with $40,000,000 of assets under management need only register with the SEC; and is exempt from registration in the State. The adviser to the investment companies (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State.

If an individual's registration has been revoked by the Administrator within the past 10 years due to a felony conviction resulting from a securities law violation, this individual is prohibited from being registered as a(n): I Agent for another broker-dealer II Principal of another broker-dealer III Representative for an investment adviser IV Principal of an investment adviser

I, II, III, IV If a person's registration has been revoked, that person is prohibited from associating with another broker-dealer or investment adviser in any capacity for at least 10 years following the revocation.

Which of the following records of an investment adviser that takes custody of customer funds are required to be retained under the provisions of the Investment Advisers Act of 1940? I Cash receipts and disbursements journal II Customer trade confirmations III Customer account statements IV Purchase and sales blotter

I, II, III, IV The records required to be retained by an investment adviser that takes custody include: Cash receipts and disbursements ledger and general ledger Securities received and delivered ledger Purchase and sales ledger (trade ledger) Securities record (a record of each aggregate security position held, broken down by each customer owning part of the position and the physical location of that position) Confirmation copies of all customer trades Customer account statements showing all purchases, sales, securities positions, and cash debits and credits to the account

If an investment adviser, for the first time, takes a $1,200 prepaid advisory fee, more than 6 months in advance of services rendered: I an audited balance sheet must be filed with the SEC along with Form ADV Part 1 II an audited balance sheet must be filed with the SEC along with Form ADV Part 2 III promptly IV within 90 days

II and III If an investment adviser takes a prepaid advisory fee of $1,200 or more, 6 months or more in advance of services rendered, the investment adviser is obligated to include an audited balance sheet in Part 2A of Form ADV. If this was not filed previously, then an amended Form ADV Part 2A with a balance sheet must be filed with the SEC promptly.

Administrators can require minimum Net Capital and Net Worth for registration of: I Agents II Broker-Dealers III Investment Advisers IV Issuers

II and III Under the Act, minimum Net Capital and Net Worth requirements can be set by the Administrator to register broker-dealers and investment advisers. There is no such requirement for agents or investment adviser representatives. Issuers do not register under the Act; only the non-exempt securities that they issue must be registered. Registration of non-exempt securities is covered in the following section.

The major differences between an open-end fund and a unit investment trust are: I A UIT imposes a management fee while an open-end fund does not II A UIT portfolio is fixed while an open-end fund portfolio changes III A UIT is defined as an investment company while an open-end fund is not IV A UIT has a board of trustees while a management company does not

II and IV A unit investment trust sponsor assembles a fixed portfolio, usually of bonds, transfers them into trust, and then sells them to investors in $1,000 units with a prospectus. Once the portfolio is assembled, it is fixed - there is no management and management fee. On the other hand, an open-end management company hires an investment adviser that buys and sells securities for the fund to meet the fund's investment objective. For this, a management fee is earned. A mutual fund is a management "company" that has a Board of Directors overseeing fund operations. A UIT, in contrast, has a Board of Trustees. Both a UIT and an open-end management (or investment) company are defined as types of investment companies under the 1940 Act.

Which of the following is prohibited in an advisory contract under NASAA rules?

Liquidated Damages Provision A "liquidated damages provision" in an advisory contract would state that if the customer suffers a loss, the adviser is responsible. This is no different than a prohibited guarantee against loss and thus is not permitted. Advisory contracts can permit the adviser to take custody (unless that State prohibits this); must have a non-assignment provision, which means that the contract cannot be assigned to another investment adviser without customer consent; and can give the adviser discretion over the customer's account.

An investment adviser has its principal office in State A. It also has offices in States B, C, and D. The net worth requirements of States C and D are more stringent than that required by State A and the net worth rules of State B are the most stringent of all. The investment adviser is required to maintain minimum net worth in accordance with the rules of:

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

Under the Investment Adviser Act of 1940, which statement is TRUE regarding an investment adviser who wishes to show past performance?

The adviser can show past performance as long as the adviser is not deliberately selective; and the adviser mentions the market conditions during the time period shown Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. Testimonials are prohibited in advertising. There is no requirement to show a minimum 10 year performance history when showing past performance in investment adviser advertising.

A customer invests $500,000 and opens a discretionary account with an agent specifying an investment objective of current income. The agent decides that it is best to diversify and spreads the monies between an income fund and a growth fund. Which statement is TRUE?

The agent acted inappropriately and fraudulently The customer specified an investment objective of current income, not growth and income. If the agent splits the funds between an income fund and a growth fund, the action is inappropriate and fraudulent.

An agent of a broker-dealer wants to become a part-time SCUBA instructor. Which statement is TRUE?

The agent must notify the broker-dealer in writing An agent of a broker-dealer or investment adviser must notify his employer in writing if he or she wishes to take outside work and must follow any instructions of the employer (for example, if the employer says no, then the agent can't take the outside work).

An investment adviser places large block trades for securities positions that are being purchased for its customers' accounts in order to lower its commission costs. The trades are often executed piecemeal, at different prices. The adviser, after being confirmed that the entire block has been filled, allocates the shares to its accounts. As a favor to its most valuable employees, the adviser allocates the shares purchased at the lowest prices to its employees' accounts; and then allocates the remaining shares to its customer accounts pro-rata. The adviser has disclosed its allocation method only to its employees. Which statement is TRUE?

The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers There really are 2 issues going on here. First, the adviser has not told its customers of its method of allocating shares (it has told its employees how the allocation method works, but that has no relevance). The customers must be informed of the allocation method - making choice B the best answer. The second issue is that the adviser is favoring his employees over his customers in the allocation - and this would be a prohibited practice (note, however, that this is not one of the choices offered).

To register as an Investment Adviser Representative in a state, which form is filed?

U-4 A standard registration form (Form U-4) is used for federal and state registration of agents and state registration of investment adviser representatives.

You are an agent registered in a State where you have a customer. The customer will be going to college in another State. May the agent still do business with the customer, even though the agent is not registered in the State where the student is going to college?

Yes, because the student is not considered to be a resident of the state where he or she is attending college College students are considered to be residents of the State where their home is; not the State where they are going to college. Furthermore, this is an existing customer of the agent - the agent is not soliciting new business in State B. The agent does not have to register in State B to do business with the student who is at college in State B because this is an existing customer who resides in State A, a State where the agent is registered.

In order for an agent to share in the gains and losses of a customer's account, all of the following statements are true EXCEPT the:

agent cannot invest any of his own funds into the account Agents are prohibited from sharing in the gains and losses of a customer's account unless there is a written agreement between the customer and the agent which has been approved by the broker-dealer; and the agreement specifies that sharing in gain and loss is proportionate to the capital contribution of each participant in the account.

Which statement is TRUE regarding the sharing of commissions between a state licensed individual and another person? The sharing of commissions is:

allowed between individuals as long as both are licensed at the same broker-dealer It is prohibited to share in any commission or other remuneration from the purchase or sale of a security with any person who is not licensed to sell securities. There is no prohibition on sharing commissions between two licensed individuals - as long as these individuals work for the same brokerage firm. If two licensed individuals work at different broker-dealers, commissions cannot be shared.

To protect against identity theft and theft of funds, client instructions received electronically must be:

authenticated To protect against identity theft and theft of funds, customer instructions received electronically must be authenticated, to make sure that the instruction actually came from that client.

All of the following are defined as "professionals" that are excluded from the definition of an investment adviser under the Uniform Securities Act EXCEPT:

geologists The Uniform Securities Act specifically excludes from registration as an investment adviser, lawyers, accountants, teachers and engineers who give advice about securities that is incidental to their regular profession; and who do not charge separately for such advice. Note that geologists are not on this list of excluded individuals.

Under the Uniform Securities Act, a purchaser may void a securities transaction:

if the trade is contrary to the provisions of the Act A purchaser may void a securities transaction if the trade is contrary to the provisions of the Act. Civil liabilities apply and the purchaser must be paid the original cost of the security plus 6% interest and any attorney's costs by the seller.

A customer has placed an indication of interest to buy a non-exempt new issue security that is currently in the "quiet period." The customer has been delivered a preliminary prospectus. Once registration is effective, to be confirmed as purchasing the issue, the customer:

must receive a copy of the final prospectus During the "quiet period" when a new issue is in registration, the security cannot be sold or promoted. The customer can receive a copy of the preliminary prospectus, called the "red herring" since it has a disclaimer, in red, that the document is not promoting a sale of the issue. The red herring usually does not have the offering price, since this is determined just prior to the effective date of registration. Once registration is effective, and the issue has been priced, final prospectuses with the offering price are prepared. Any purchaser must be delivered the final prospectus, at, or prior to, confirmation of sale.

A private fund adviser with less than $150 million of assets under management:

must report to the SEC Private fund advisers (advisers to hedge funds) with $150 million or more of assets under management (AUM) must register with the SEC. If the private fund adviser has less than $150 million of AUM, it is an "exempt reporting adviser." It must still report to the SEC by filing parts of Form ADV annually, but does not have to register with the SEC by filing Form PF. The intent is to give the SEC (and the public) information about what hedge funds are doing.

Under the Uniform Securities Act, copies of order memoranda maintained by investment advisers must contain all of the following information EXCEPT:

name of market where trade was executed Order ticket information required for investment advisers is different than that required for broker-dealers. The IA writes an order and sends it to a broker-dealer or bank for execution. The IA must keep a record of the order as it was sent; the IA does not keep the record of the actual execution of the order - this is the responsibility of the executing broker-dealer. The record must contain the terms and conditions of the order; name of the person at the IA who recommended the transaction; name of the person who placed the order; date of order entry; name of account for which order was entered; name of broker-dealer or bank to which the order was sent for execution; and whether the order was discretionary.

A new client wishes to open an account with an agent of a broker-dealer, but refuses to divulge any information regarding investment objectives, income, net worth or other investment holdings. Under the provisions of the Uniform Securities Act, the agent should:

only accept unsolicited orders from the customer An account can be opened for a customer that does not wish to give suitability information, but only unsolicited trades can be accepted from that customer. No recommendations can be made to the customer, because the agent has no basis for making a recommendation.

The term "mutual fund" is the common name for a(n):

open-end management company A mutual fund continuously issues and redeems its common shares - so it is an "open-end" management company.

All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT a(n):

outside counsel for the management company An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.

Form PF is required to be filed with the SEC by:

private fund advisers Form PF is used to register "Private Fund" advisers with the SEC. These are advisers to hedge funds that have at least $150 million of assets under management.

An agent of a broker-dealer "A" has been terminated and is associating with broker-dealer "B." The terminated agent agrees to turn over his clients to another agent at broker-dealer "A" in return for half of the commissions generated by those clients over the following year. This arrangement is:

prohibited because during the life of the agreement, the agents will be working at different broker-dealers Splitting commissions is only permitted between registered individuals who work at the same broker-dealer. Since the terminated representative will be working at another broker-dealer during that year, splitting commissions is prohibited. Splitting commissions is not permitted between 2 registered individuals who work at different broker-dealers; it is not permitted between a registered individual and a non-registered individual (like a sales assistant) who work at the same broker-dealer; and it is not permitted between a registered individual and an individual that used to work at the firm and who has left that firm's employment and is no longer registered.

Jack Jones has been an IAR with a registered investment adviser for 10 years. He is leaving to start his own advisory business as a sole proprietor. He has hired an advertising firm to create a radio spot for his new firm. The account manager recommends that they use one of his largest clients - the managing partner of a prominent law firm in town - to give a testimonial about Jack. The lawyer agrees and records the following: "I have been a client of Jack Jones for the past 10 years. My investments with Jack have reliably produced superior returns and he has always acted ethically and with integrity." The use of this testimonial in a radio advertisement is:

prohibited under the provisions of the Investment Advisers Act of 1940 The Investment Advisers Act of 1940 prohibits the use of customer testimonials in advertising - with no ifs, ands or buts. Because of federal supremacy, this prohibition applies at the State level.

Under the "Brochure Rule," existing customers of an investment adviser MUST:

receive a "Brochure" at least annually only if there are material changes New customers of the investment adviser must receive the "Brochure" at or prior to entering into an advisory contract. Existing customers must be sent an updated "Brochure" at least annually if there are material changes. As an alternative, the customer can be sent the "Summary of Material Changes" section of the current brochure along with the offer of the revised Brochure.

Blue Sky laws require the:

registration of securities offerings in each State State Blue Sky laws actually pre-date the Federal securities acts, and require registration of securities offered in each State (unless an exemption is available). In addition, Blue Sky laws require the registration of broker-dealers, investment advisers, and their agents in each State (unless an exemption is available).

If a complaint is received by a State Administrator alleging that a Federal covered adviser stole funds from a customer, the State Administrator can do all of the following EXCEPT:

revoke the registration of the adviser This is a federal covered adviser, so it is not registered with any State; rather, it is registered with the SEC and only the SEC can revoke its registration. Regarding each State, the adviser must notify the State if it is doing business in the State. If a complaint is filed with the Administrator of a State for a federal covered adviser, the State can still investigate and issue an order; and the State can coordinate an investigation with other State Administrators and the SEC.

All of the following are unethical practices by an investment adviser under the NASAA Statement of Policy EXCEPT an adviser:

selecting the best time to sell a position when the customer authorized the sale A representative can exercise discretion over the time or price of a securities transaction without needing a discretionary authority from the customer. A representative cannot exercise discretion over the size of a trade or the security to be traded without discretionary authority from the customer, making Choice B unethical. Verbal discretion may be accepted from a customer under NASAA rules for up to 10 business days, at which point a written power of attorney must be obtained from the customer - so Choice A is unethical. Deliberately failing to follow the customer's instructions is also unethical - making Choice C unethical.

An agent overhears non-public sensational information of a negative nature while riding in an elevator. The agent is permitted to:

tell the information to the broker-dealer's legal department The agent appears to have overheard "inside information." It is appropriate to tell the information to the firm's legal department. The information cannot be told to the firm's research or trading departments, since they might act (trade) on the inside information. The agent cannot trade on the information in his or her own account or in a customer account.

A registered investment adviser is contacted by a local newspaper reporter who requests personal information about one of the RIA's clients who has purportedly invested in "stocks in pornographic businesses" and wants to disclose this to the public. The RIA should:

tell the reporter that all client information is confidential This is common sense - information about a client's account is confidential. Disclosure about the account to others cannot be made unless the client consents. The only exception here is if a government enforcement body is making the inquiry, such as the FBI, IRS or SEC - and they can do this only by taking the appropriate legal steps.

On Monday, an investment adviser notices that the firm's net capital has fallen below the minimum requirement set by the State. The investment adviser MUST:

transmit notice to the Administrator on Tuesday and submit its financial statement on Wednesday If an investment adviser's net worth (or net capital) falls below the minimum level set by the State, notice must be given to the Administrator by the close of business the next day of such net worth deficiency. After transmitting such notice, the investment adviser must file, by the close of business on the next business day, a report of its financial condition, including a: trial balance of all ledger accounts; statement of all client funds, securities, or assets which are not segregated; computation of the aggregate amount of client ledger debit balances; and a statement as to the number of client accounts.

HYIPs are typically:

unregistered securities sold by unlicensed individuals High Yield Investment Programs (HYIPs) are unregistered investments sold by unlicensed individuals promising incredible returns, often of 1-2% per day, at little or no risk. Fraudsters use social media to promote HYIP websites, offering "lucrative" returns and "guaranteed profits" and encourage their followers to use a referral link to share the HYIP website with others, in return for a referral fee. These programs are a "hot button" item for NASAA and FINRA.

Appeals of decisions made by the State Administrator must be filed:

within 60 days If a person disagrees with a final order of the Administrator, he or she must petition the appropriate court within 60 days of the order.