Series 66: Uniform Securities Act Quiz 4

The amount of commission charged to a customer to effect a securities transaction: I is not required to be disclosed prior to executing the transaction II must be disclosed prior to executing the transaction III is not required to be disclosed on the trade confirmation IV must be disclosed on the trade confirmation

I and IV There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.

Which of the following statements are TRUE? I Password-protected websites are defined as Advertising II Password-protected websites are defined as Sales Literature III Password protected websites can be required to be filed with the Administrator IV Password protected websites cannot be required to be filed with the Administrator

II and III Password protected websites are seen by a specific audience, so they are defined as sales literature. In contrast, a non-password-protected website is defined as advertising, because it is seen by the general public. The Administrator has the power to require filing of advertising and sales literature.

Which statement may be made by an agent about a new securities issue that is being registered by qualification?

"The security is being registered in the State" Making untrue or coercive statements is a violation of the Act. Stating that the security is registered with the State is true. Stating that "you are guaranteed;" "the Administrator approved;" or "the issue is selling out fast;" are all either untrue or coercive and are prohibited.

If an individual disagrees with a final order of the Administrator, he or she can make an appeal within how much time of the order?

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.

Administrators can require minimum Net Capital and Net Worth for:

Investment Advisers 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.

Regarding the Administrator's ability to inspect the books and records of a broker-dealer doing business in its State, which statement is TRUE?

The Administrator can conduct an inspection of a broker-dealer's books and records in any State and at any time The Administrator is empowered to inspect the books and records of an investment adviser or broker-dealer that is doing business in that State in any location (either inside or outside that State) and without giving prior notice. There is no requirement for a court order to do so.

Under what circumstances may an agent draw on a graph or chart in a mutual fund prospectus during a presentation to a customer?

Under no circumstances A prospectus is a legally prepared document that cannot be altered when it is presented to customers. The information as filed with the SEC must be presented in the same manner to customers. Marking up, highlighting, or summarizing a prospectus are all prohibited.

Under the Uniform Securities Act, all of the following are allowed forms of investment adviser compensation, provided it is disclosed to customers, EXCEPT:

a flat fee assessed only if the portfolio increases in value Fees based upon a percentage of assets under management and flat fees (including hourly and annual fees) are permitted as long as the details are fully disclosed to customers. Performance fees are prohibited.

A retired elderly customer lives off the earnings from his modest retirement account, in addition to small pension payments that he receives from his former employer. The customer's nephew, who works at an electronics company that trades sporadically in the Pink Sheets, tells him that the company is coming out with a great new product and the stock would be a good investment. The customer wants your advice about buying some shares of the electronics company. The BEST advice would be to tell the customer that because:

of the customer's advanced age and limited resources, this type of speculative investment is not appropriate While it may be the case that this stock will be a good investment, it is not appropriate for an elderly investor who relies on investments for income to live on.

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

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

A broker-dealer headquartered in Florida has a Net Capital requirement of $50,000. The firm has an office in Georgia, where the Net Capital requirement is $25,000 and an office in Tennessee where the Net Capital requirement is $35,000. Under Uniform State Law, the Net Capital requirement for this broker-dealer is:

$50,000 Net Capital is not an additive requirement - it is based on the broker-dealer's principal State where it operates.

A customer buys shares of a stock that had its initial public offering 5 years ago. Which statement is TRUE regarding prospectus delivery?

A prospectus is not required because the initial public offering happened 5 years ago Prospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement.

State registration of non-exempt securities is a requirement of the:

Blue Sky Laws 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).

An investment adviser that takes custody MUST send quarterly account statements to which of the following?

Customer mailing address An investment adviser that takes custody, under NASAA rules, must send quarterly account statements to customers, at the mailing address specified by the customer (an e-mail address is acceptable, as long as the adviser has proof of delivery of the e-mail).

Which of the following statements are TRUE about an offer of rescission? I The offer can only be made prior to the institution of a lawsuit alleging a securities violation II The offer can only be made after the institution of a lawsuit alleging a securities violation III An offer must be made to buy back the security at the original purchase price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security IV An offer must be made to buy back the security at the current market price and the customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that security

I and III If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to buy back the security at the original purchase price, plus the customer must be paid interest at the legal rate in the State (6%), less any dividend or interest income received from that security. Any offer of rescission must be accepted within 30 days of the offer.

If a sole proprietor wishes to register with the State as an Investment Adviser, which of the following documents are required? I Financial statement of the sole proprietor II Income statement of the sole proprietor III An auditor's opinion that the document filed is true and current IV An affirmation made by the sole proprietor that the document filed is true and current

I and IV A sole proprietorship is an unincorporated business that consists of 1 person. Sole proprietors can register in a State as a broker-dealer or as an investment adviser. Each applicant for initial registration that is a sole proprietor must file an original statement of financial condition (a balance sheet) with the Administrator, along with an oath or affirmation made by the sole proprietor that the financial statement is true and current. Note that there is no requirement for an income statement or for audited financial statements of the sole proprietor.

Which statements are TRUE about the retention of customer account records for broker-dealers under Uniform State Law? I Customer trade confirmations must be retained for 3 years II Customer trade confirmations must be retained for 6 years III Customer account statements must be retained for 3 years IV Customer account statements must be retained for 6 years

I and IV In the absence of a specific rule by the Administrator, Uniform State Law requires that records be kept in accordance with the requirements of the Securities Exchange Act of 1934. Under the '34 Act, customer confirmations must be retained for 3 years; but customer account records (statements of account) must be retained for 6 years.

Which statements are TRUE regarding the post-registration requirements of the Uniform Securities Act? I Investment advisers are subject to post-registration requirements II Investment advisers are not subject to post-registration requirements III Agents of investment advisers are subject to post-registration requirements IV Agents of investment advisers are not subject to post-registration requirements

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

Which statements are TRUE regarding joint accounts? I An order may be accepted from any single account owner II An order can only be accepted from all account owners jointly III A check from the account can be drawn to the name of any single account owner IV A check from the account can be drawn only to the name of all of the account owners

I and IV The rules for joint accounts are that orders can be entered by any single owner of the account (either to buy or sell); an order to draw a check can be made by any single owner; however any checks must be drawn to full account name - that is, they must be made payable to all of the owners of the account.

For initial registration as an agent in a State, which can be required? I Consent to Service of Process II Filing Fee III Registration Application IV Birth Certificate Copy

I, II, III In an initial registration with the State, a consent to service of process must be filed, in addition to the registration application (which can include fingerprints) and any filing fees designated by the Administrator. There is no requirement for a copy of one's birth certificate to be registered.

If an investment adviser is found liable for damages in a civil suit brought by a customer, the adviser is responsible for forfeiting: I any remuneration received from giving the investment advice II any loss due to the investment advice III interest on monies invested IV court costs and attorney's fees

I, II, III, IV Civil liability means that an adviser who violated the Act must repay the customer any advisory fees paid; refund of any losses incurred due to the investment advice; plus interest and attorneys' fees (net of any income received from the investments for the period held). In essence, civil liability means that the customer is refunded all of his or her monies.

An agent of a broker-dealer located in the State of New York, that has its sole office in New York, wishes to sell to a customer in New Jersey. Which statements are TRUE? I The agent must be registered in the State of New Jersey II The agent must be registered in the State of New York III The broker-dealer must be registered in the State of New Jersey IV The broker-dealer must be registered in the State of New York

I, II, III, IV If the agent wishes to sell to a customer in a neighboring State, both the broker-dealer and agent must be registered in that State, as well as in their "home" State unless an exemption is available.

Which of the following securities are EXEMPT under the Uniform Securities Act? I Industrial Loan Association Issues II Insurance Company Issues III Federal Credit Union Issues IV Bank and Savings and Loan Issues

I, II, III, IV The Uniform Securities Act exempts Industrial Loan Association issues; Insurance Company issues; Federal Credit Union issues; and Bank and Savings and Loan issues (among others).

Which of the following are investment adviser conflicts of interest that MUST be disclosed to a client? I The adviser is a general partner in a limited partnership investment that he is recommending to his customers II The adviser is compensated by the broker-dealer to whom he directs the customers' portfolio trades III The adviser owns a stock that he is recommending to customers in his personal account IV The adviser will only take customers that have been referred to it by broker-dealers to whom he pays a referral fee

I, II, III, IV When it comes to conflicts of interest, disclosure is the key. All of the choices listed are investment adviser conflicts. The adviser being the general partner in a limited partnership that he is recommending to his customers is a conflict. Is the adviser recommending it because it is the best investment for the customer or because the investment adviser will get management fees for being the general partner? The adviser directing its customers' portfolio trades to a broker who will pay a fee to the adviser for those trades is another conflict. Is the adviser sending the trades to that broker because he gets the best trade executions or is he sending the trades to that broker for the referral fee? If an adviser owns a stock personally that he is recommending to a customer, is he doing this in order to drive up the price of the stock to have a gain on his personal portfolio or is he doing it because it is the best recommendation for the customer? Finally, an adviser that only takes customers that have been referred to it by a broker to whom he pays a referral fee is another conflict. Was the customer referred by the broker because it was best for the customer or did the broker do it just to get the adviser's referral fee?

Which statements are TRUE regarding investment advisory contracts under the Uniform Securities Act? I Assignment of the contract is not permitted unless the customer consents II If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment III If the investment adviser is a partnership, the death or withdrawal of a minority of the partners constitutes an assignment IV If the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time

I, II, and IV It is true that assignment of an investment advisory contract is not permitted unless the customer consents (after all, the customer hired a specific firm as the adviser for that firm's expertise; he does not want someone else to manage his funds unless he approves!). If the investment adviser is a partnership, the death or withdrawal of a majority of the partners constitutes an assignment. However, the death or withdrawal of a minority of the partners does not constitute an assignment. Finally, if the investment adviser is a partnership, the customer must be notified of any change in the membership of the partnership within a reasonable time.

Under the Uniform Securities Act, an application to register securities may be filed by the: I Broker-Dealer II Agent III Issuer IV Person on whose behalf the offering is to be made

I, III, and IV Applications to register a security in a State cannot be filed by agents. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).

If a customer of a broker-dealer fails to pay for a securities purchase by the 4th business day from trade date, the customer's account must be: I restricted II frozen III for 30 days IV for 90 days

II and IV The Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required "promptly," but no later than the 4th business day past trade date. If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.

An application made with the Administrator for initial or renewal registration is considered to be "complete" when required: I fees are sent to the Administrator II fees are received by the Administrator III documents are sent to the Administrator IV documents are received by the Administrator

II and IV The State will define a registration application as "complete" when the proper documents and payment are received (not sent). Remember, they want their money!!!

Which TWO of the following are tests for whether registration as an investment adviser is required under the Uniform Securities Act? I Whether the investment adviser has an office in that state II Whether the investment adviser is an individual III Whether the investment adviser accepts a fee for rendering advice IV Whether the investment adviser gives advice relating to the advisability of investing in securities

III and IV An investment adviser with no office in a State, who has more than 5 customers in that State, must register - so having an office in a State does not determine whether that firm must register in the State as an investment adviser. An investment adviser can be any legal "person" which can be an individual, corporation, partnership, etc. - so whether the adviser is an individual has no bearing on registration in a State. The important determinants as to whether a person is defined as an investment adviser in a State are: Is this person giving advice about securities in the State? and Is this person being paid for rendering such advice?

Under the Uniform Securities Act, which statements are TRUE about an agent's registration? I Once an agent is registered in one State, that agent is registered in all 50 States II Once an agent has filed a registration application in a State, it is effective within 10 days of application III Unless the State adopts another rule, registration expires on December 31st of each year IV If an agent terminates employment with a broker-dealer, the agent's registration is terminated

III and IV only Once an agent completes a registration application that is accepted by the State, the license does not become effective for 30 days, making Choice II incorrect. The license is only granted for that State; for example, to be licensed in 6 different States, 6 different applications must be submitted. In most states, the license expires on December 31st of each year - therefore an annual renewal is required. If the agent leaves a broker-dealer, the agent's license is revoked. To reactivate the license, the agent must associate with another registered broker-dealer.

Under the Uniform Securities Act, an unregistered agent would be permitted to sell: I ownership interests in real estate limited partnerships II fractional ownership interests in a mining company III certificates of deposit issued by a federally chartered bank IV shares of a federally chartered credit union

III only The question does not say whether this is an unregistered agent of a broker-dealer or of an issuer, but we presume that since this is a broker-dealer agent's exam, that this is where the question is directed. To sell a "security," the agent must be registered in the State. It makes no difference if the security is exempt or non-exempt. Choices I and II are non-exempt securities, while Choice IV is an exempt security. Even though shares of a federally chartered credit union are exempt from State registration, the agent selling them must still be registered. Choice III is NOT a security - it is a bank product. There is no licensing requirement to offer bank certificates of deposit, since their purchasers are protected by the banking laws.

The State Administrator has the power to do which of the following to a federal covered adviser?

Increase the number of audits that the Administrator makes of the adviser Because of federal supremacy, the State Administrator cannot require anything of a federal covered adviser that is already covered under the Investment Advisers Act of 1940. The State Administrator can, however, audit any adviser, federal covered or not, who does business in the State.

A broker-dealer located in New York makes an offer of securities to a customer whose principal residence is in New Jersey. The customer has temporarily moved to Ohio and has asked the post office in New Jersey to forward the mail to the customer's address in Ohio. Which State Administrator(s) has (have) jurisdiction over the offer?

New York only Because the broker-dealer is located in New York, that State Administrator has jurisdiction. Normally, if an offer is received in a State (New Jersey in this case), then New Jersey's Administrator would have jurisdiction. But the offer was never received in New Jersey because it was forwarded by the post office on to Ohio. Thus, an offer was never made in New Jersey and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in Ohio, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to Ohio and should not be subject to the law of Ohio on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

An offering of fractional interests in oil and gas programs would be registered in a state by:

Qualification The Uniform Securities Act specifically says under the definition of an "issuer" that fractional interests in oil and gas programs have "no issuer." This was done to ensure that these must go through Registration by Qualification before being offered in a State, since it is available to anyone, while the other 2 registration methods are only available to securities that have "issuers." What happened here is that there were many frauds selling these securities to investors, so State law is written to make sure that these offerings get the most stringent review before they can be sold in a State.

Which statement is FALSE about rules created by the Administrator?

Rules issued by the Administrator are not required to be published as a matter of public record Rules are written by the Administrator to interpret the provisions of the Uniform Securities Act. The basis for the issuance of the rule is to protect investors. The rules cannot contravene the Act's provisions. Administrative rules are a matter of public record - otherwise, how would anyone know what the rules are?

Which of the following is prohibited in a margin account?

Selling short securities that cannot be borrowed by settlement In a margin account, one does not pay in full; rather a percentage of the purchase price is deposited (the margin requirement); with the balance of the purchase amount lent to the customer by the broker-dealer. One can sell short securities in a margin account (that is the sale of borrowed shares). However, in order to do so, it must be determined that the securities to be sold short can be borrowed and delivered by settlement. If the securities cannot be borrowed and delivered by settlement, then a short sale would not be permitted. One can buy and then sell the same security on the same day in a margin account - this is called "day trading" and is permitted. Finally, one can deposit fully paid securities to a margin account, pledging them to the broker-dealer as collateral for a loan used to buy other securities.

An investment adviser has its principal office in State X. It also has offices in States Y and Z. The recordkeeping requirements of State Y are more stringent than those of State X and the recordkeeping rules of State Z are the most stringent of all. The investment adviser is required to maintain its records in accordance with the rules of:

State X 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.

An investment adviser representative lives in State W and works for a federal covered adviser that is headquartered in State W. The investment adviser also has customers in States X, Y and Z. The investment adviser representative has customers in States W, X and Y, but not in State Z. The investment adviser representative is required to register in:

States W, X, and Y only This Federal covered adviser is doing business in States W, X, Y and Z and would be required to file notice in each State where it deals with clients (there is no State registration because the IA is SEC-registered). The only exemption here is if the federal covered adviser has no office in the State and only deals with institutional customers or deals with 5 or fewer retail clients in a year. Regarding registration of the IAR in the State, because he is physically located in State W, he must register there (remember, there is state registration of IARs employed by Federal covered advisers). Because he is dealing with clients in States X and Y, he must be registered there as well. Even though the adviser has clients in State Z and would have filed notice there, this IAR does not have clients there and does not register there.

An investment adviser representative gives a new client who has agreed to buy advisory services the "brochure," but did not obtain the client's signature attesting to this fact at that time. In the brochure is a paragraph stating that the client has the "2 day right of rescission." Which statement is TRUE about this under NASAA rules?

The IA and IAR have failed to comply with NASAA rules because the customer must be given 5 business days after signing the contract to rescind without penalty Under NASAA Rules, the Form ADV Part 2A ("Brochure") and Part 2B ("Brochure Supplement") must be delivered to customers: no less than 48 hours prior to entering into either an oral or written advisory contract with a customer (a "2 day free look") - meaning the customer gets the Brochure and Supplement 48 hours prior to signing the contract; or alternativelythe customer can sign the contract and be given the Brochure and Supplement, and then has 5 business days to terminate without penalty. In this case, because the customer did not receive the brochure 48 hours to signing the advisory contract, the customer must be given 5 business days to rescind. (Note: This is the NASAA rule - the SEC rule under the Investment Advisers Act of 1940 is NOT the same - it simply requires delivery of the Brochure and Supplement, at or prior to, entering into any advisory contract.)

A Registered Investment Adviser charges a fee to customers based on a percentage of assets under management. The adviser invests customer funds solely in mutual funds that have a sales charge. Which statement is TRUE?

The adviser must disclose to the customer both the management fee and sales charge to the customer All fees associated with the management of a customer's portfolio must be disclosed to the customer by that customer's investment adviser.

An agent of a broker-dealer has been spending his spare time, at night and on weekends, on the Internet. The agent has been trading a thinly traded stock listed in the Pink Sheets, and has accounted for more than 50% of the trading volume in the stock. The agent has also been sending out e-mails to potential investors, recommending the stock. The agent has not informed his broker-dealer of these activities, since they only occur when the broker-dealer is closed. Which statement is TRUE regarding the applicability of the Uniform Securities Act to these activities?

The agent is defined as a statutory broker-dealer and must register in the State The agent is operating outside the scope of his authority as the employee of the broker-dealer and the broker-dealer is not aware of his activities. The agent should have notified his broker-dealer of these "work" activities and followed any instructions of the broker-dealer (which would not have permitted this). Because the agent is trading such a large volume of the stock, he or she would be considered to be a "statutory broker-dealer" under Uniform State Law and must register as such. Remember, a broker-dealer is a person that is in the business of trading securities for others or for its own account (this individual is trading for his own account as a business). Furthermore, an unregistered broker-dealer cannot solicit orders in the State - which this individual is doing by sending out e-mails recommending the stock. The State Administrator can issue a stop order against the individual in this case, but would not issue a stop order against the broker-dealer (since the broker-dealer is not the one trading these securities) - making Choice D incorrect.

A 62-year old married customer has an individual account with the same broker at the same firm for the last 15 years. This customer suffers a stroke and is mentally incapacitated. Which statement is the BEST choice regarding actions that can be taken by the agent to manage the account?

The agent may follow instructions given in a written letter kept in the account file from the customer when the account was opened 15 years ago The best choice offered is to follow the written instructions that the customer gave 15 years ago. However, the question does not state whether this written instruction constitutes a properly executed durable power of attorney (a durable power of attorney continues if the person giving the power of attorney becomes incapacitated; a non-durable power of attorney ceases if the grantor is incapacitated). We can quibble with this, but the other choices are absolutely wrong. Since this is an individual account, and there is no mention of the spouse having a power of attorney, then instructions cannot be taken from the spouse. The agent cannot take action in the account either, unless a written power of attorney has been granted by the account owner.

A customer who has routinely traded securities through your firm has placed an order to buy a security that is only listed on the Malaysian Stock Exchange. To effect the transaction, your firm must use a correspondent broker-dealer located in Malaysia that charges large special handling fees to cover Malaysian securities transfer taxes. Which statement is TRUE?

The broker-dealer must notify the customer of the additional charges prior to executing the transaction It would be an unethical practice not to disclose any unusual costs or fees associated with a securities transaction to a customer. Disclosure of such fees must be made at, or prior to, placement of the order by the customer. There is no requirement that this disclosure be made in writing - verbal is sufficient.

FINRA suspends an associated person for a rule violation. Which statement is TRUE?

The individual will be suspended in each State in which he or she is registered under the Uniform Securities Act If FINRA suspends or expels an individual, CRD notifies each State in which the person is registered and those States suspend or expel that person as well.

An investment adviser has researched a privately held company and is extremely bullish on the company's prospects. She makes a personal investment of $100,000, for which the investment adviser received privately placed common stock with a Rule 144 restriction legend. One year later, the company goes public and the investment adviser, still being very bullish on the company, recommends the purchase of the IPO shares to her clients. Which statement is TRUE about this situation?

The investment adviser has created a conflict of interest that must be disclosed to clients who receive the recommendation The investment adviser will profit on her personal stock holding if the market price of the stock goes up (she can sell her 144 shares into the market in compliance with Rule 144, which registers them and removes the 144 resale restriction). By recommending that her customers buy the IPO, this could cause the market value of the stock to rise, giving her a profit on her personal holding. This is a conflict of interest and all material conflicts of interest must be disclosed to the customers of an investment adviser. The FINRA IPO rule prohibits securities industry "insiders" from buying common stock IPOs. The investment adviser is such an insider and cannot buy the IPO shares personally, but she can buy them for her clients (as long as they are not industry insiders). Note that the FINRA IPO rule does not apply to the original purchase of the restricted shares when the company was still private. It only applies to common stock offerings when a company goes public.

An investment adviser enters into an arrangement with a broker-dealer where the adviser, in return for directing trades to that broker-dealer, will receive payments for order flow. The payment, of one cent for each trade, is conditioned upon the adviser directing a minimum number of trades each month. Which statement is TRUE about this arrangement?

This action on the part of the adviser is permitted only if it is disclosed in the Form ADV Part 2A ("Brochure") given to clients An investment adviser is supposed to be impartial when deciding which brokerage firm does its portfolio trades - the overriding concern for the adviser is that it gets the best execution at a "fair" price (which is not necessarily the lowest price). A "payment for order flow" is a small payment made by a market making firm for each order sent to it. This is used by the market maker to attract order flow - and almost all market makers pay for order flow. This creates a conflict of interest for an adviser, because the adviser may choose an executing broker based on the payments it will get rather than on best execution. This conflict of interest must be disclosed in the Form ADV given to clients and most advisers that accept such payments apply them as a credit to their customer accounts, so they benefit the customer directly and not the adviser.

A new broker-dealer has filed a registration application in the State. One of the officers listed in the application suddenly dies and another officer is appointed. This is:

a material event that requires a prompt amendment filing with the Administrator The Uniform Securities Act requires that if the information contained in any document filed with the Administrator becomes inaccurate or incomplete in any material respect, the registrant shall file a correcting amendment "promptly." A change in the officers of the BD is a material event.

A registered securities agent solicits a customer to buy mutual fund shares. The customer buys 200 shares, sending a check made out to the fund's custodian bank to the agent. The agent does not record the trade on the books of the broker-dealer. Under the Uniform Securities Act, this action is:

a prohibited business practice Private securities transactions are a prohibited business practice under the Act. All trades effected by an agent must be recorded on the books of the broker-dealer.

Under the provisions of the Uniform Securities Act, all of the following persons with no office in the State are NOT required to register in a State as an investment adviser EXCEPT:

an adviser managing less than $100,000,000 of assets held by State residents Under the Uniform Securities Act, advisers with no office in the State, that render advice solely to banks, broker-dealers, investment companies, insurance companies, governmental agencies and employee benefit plans with at least $1,000,000 of assets are exempt from State registration. In addition, an adviser with no office in the State, that has no more than 5 clients in the State in the past 12 months, is exempt. The adviser with less than $100,000,000 of customer assets in the State would be required to register.

The National Securities Markets Improvement Act requires that broker-dealer net capital standards:

can be set by the State Administrator at the same level as that set under the Federal requirement NSMIA made clear that Federal law has supremacy over State law regarding net capital rules, custody rules, margin rules, financial responsibility rules and recordkeeping rules. Since the SEC sets net capital requirement for broker-dealers, the State Administrator cannot set a minimum net capital amount that is higher than the SEC requirement.

A client of an investment adviser representative has enjoyed excellent returns on his portfolio over the past 5 years. The client needs $25,000 of cash, but does not want to sell securities from his portfolio since it is performing so well. He asks the investment adviser representative for a loan, which the investment adviser representative gives. The investment adviser representative is guilty of a:

fiduciary violation Investment adviser representatives cannot borrow from, or lend money to, a customer. They have a fiduciary duty to the customer and cannot take an opposite position to that customer - both the customer's and the investment adviser representative's interests must be aligned.

A person who renders advice on fixed annuities for a fee; and who then sells the annuities, charging a commission:

is not required to register as a broker-dealer, investment adviser or agent Since a fixed annuity is not defined as a security (instead it is defined as an insurance product), State securities law does not apply! (However, State insurance laws do apply, but they are outside of the scope of this examination.) There is no requirement for this person to be registered as an investment adviser since no advice is being rendered on securities. There is no requirement for this person to register as a broker-dealer or agent, since no securities transactions are occurring. Please note that if this were a variable annuity, then it is defined as a security. To take a fee for recommending a variable annuity product, registration as an investment adviser would be required. To charge a commission when selling this product, registration as a broker-dealer would be required as well.

All of the following are tell-tale signs of promissory note fraud EXCEPT the:

notes are being offered by an investment professional that is familiar with the customer's financial situation Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest. However, there have been many instances of "promissory note fraud" where unlicensed individuals push bogus promissory notes that are sold as investments that offer above-market fixed interest rates and safeguarding of principal - and most of these are frauds. This is a major concern to State regulators. To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State. Finally, the tell-tale signs of fraud in promissory note offerings are: Statements that the notes are "guaranteed" or "insured" - especially by bogus foreign entities Promises of above-market rates of return (an above-market rate of return is not offered by a "low-risk" investment, but rather by a high-risk investment) Statements that the notes are "risk-free" (these are corporate issues that have risk of default) The labeling of a start-up company's notes as "prime" (since only established companies with a history of operations and earnings can be called "prime") Offers of promissory notes from a stranger who does not know the customer's financial situation

All of the following information would be found in a registration statement for a security that is going to be registered by qualification in a State EXCEPT:

projections of future earnings of issuer Consider this to be a learning question. Any registration statement for a securities offering includes: Current balance sheet and income statement; Business description; Use of proceeds of offering; Offering Terms; Legal Opinion; Accountant's Opinion. There are no projections in the registration statement.

A person with no office in the State is solely engaged in the business of giving investment advice to insurance companies for compensation. Under the Uniform Securities Act, this person would be EXEMPT from the Act's:

registration provisions The Uniform Securities Act exempts advisers with no office in the State from registration if they only deal with institutions (such as an insurance company). However, everyone and everything is subject to the anti-fraud provisions of the Uniform Securities Act. Everyone and everything is subject to common law deceit provisions. Finally, the advertising and filing provisions of Uniform State law do not apply to exempt securities or to exempt transactions. They do apply to broker-dealers, investment advisers and their agents, regardless of whether they are registered or exempt from registration.

A broker-dealer has a website that is continuously updated. Under NASAA rules, the broker-dealer is:

required to retain both the current and superseded web pages Web pages are considered to be an item of advertising that a broker-dealer or investment adviser must retain as a record. If any updates are made to the website, the old version must be archived and be available for inspection or filing. The State usually requires such a filing in printed (not electronic) form - but either form can be requested by the State.

Under the Uniform Securities Act, all of the following are requirements for advisory contracts EXCEPT:

the investment adviser must notify the customer of its current standing as either a federal covered adviser or state registered adviser Investment advisory contracts, under State law, cannot base the fee on the performance in the account (unless the customer is wealthy). The fee can either be based on a percentage of assets under management; or can be a flat fee arrangement. Advisory contracts cannot be assigned to another adviser without prior customer consent. If an adviser is a partnership, any customer must be notified of changes in the composition of the partnership within a reasonable time after the change. There is no requirement for an adviser to disclose whether it is a federal covered or state registered adviser.

A State-Registered Investment Adviser finds that it has fallen below the minimum net worth requirements established by that State. A report must be made to the State Administrator that the RIA is not in compliance with the State's minimum net worth standards:

the next business day Under NASAA Model Rule 202(d)-1 "Every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition, including the following: A trial balance of all ledger accounts; A statement of all client funds or securities which are not segregated; A computation of the aggregate amount of client ledger debit balances; and A statement as to the number of client accounts.

State registration of a security registered by qualification becomes effective:

when the Administrator so determines Registration by Qualification is the most difficult method of registering securities in a State. It is used when an issuer is not registering securities with the SEC and is doing its first time registration in the State. The State knows nothing about the issuer, so it must "qualify" to register securities in the State and the registration is effective only when the Administrator so determines. In contrast, Registration by Coordination "coordinates" an SEC registration with the State registration and the State registration is effective when the SEC registration is effective. Finally, the last registration method - Registration by Filing - can be used by issuers that are either doing SEC filings or by issuers that have previously registered issues in the State. Registration by filing generally becomes effective 5 business days after the filing is completed.

The Administrator can be under the obligation to file a U-6 Form for all of the following EXCEPT:

written complaint received about an investment adviser representative from a whistleblower The U-6 Form is filed by regulators when they take disciplinary or legal action against a broker-dealer, agent, investment adviser or investment adviser representative. This information goes into the CRD (Central Registration Depository) or IARD (Investment Adviser Registration Depository) and is available for viewing by the general public and customers on BrokerCheck. One of the required U-6 reports is for written (not oral) customer complaints that allege a felony like theft or embezzlement. This goes into the BrokerCheck file and is made public, with a notation that this is an allegation and is not yet proven. If it is proven, then the resulting disciplinary action is reported on the U-6 and shown in BrokerCheck; if it is dismissed, then this is reported as well so that the allegation is removed from the agent's or IAR's BrokerCheck report.