Series 66- Unit 1
Which of the following are accredited investors? I.An individual whose net worth, excluding the value of her principal residence, is greater than $1 million. II.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. III.Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. IV.A newly registered open-end investment company with net assets of $600,000.
All. 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 two 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. Reference: 1.5.1 in the License Exam Manual
Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) The publisher of an investment advisory newsletter that plans issues based on market events. B) A bank that charged a fee for providing investment advice. C) A broker-dealer that managed clients' portfolios for a fee. D) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities.
B 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. Reference: 3.2.2 in the License Exam Manual
An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state: A) with at least 1/3 of its circulation in the state. B) under no circumstances. C) with at least ½ of its circulation in the state. D) with at least 2/3 of its circulation in the state.
B 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 two-thirds of its circulation outside the state during the past twelve months Reference: 2.13.1 in the License Exam Manual
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 required to register as a broker-dealer B)engaged in an agency cross transaction C) performed a matched order D) is guilty of selling away
D 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. Reference: 2.11.26.1 in the License Exam Manual
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 one 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) Register as an investment adviser representative in State B B) Becoming licensed as a broker-dealer C) Passing an oral or written examination D) Complying with the notice filing requirements of the state
A. 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. Reference: 3.7.1 in the License Exam Manual
All of the following must be specified in the state registration statement of a 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) a stop order from another state that affects the offering of the security within that state. D) the total amount of the security that will be offered in this state.
B 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. Reference: 2.9.1 in the License Exam Manual
The procedures to be followed by an investment adviser whose power was lost due to an earthquake would be found in A) the firm's succession plan B) the firm's business continuity plan C) the advice given by the local FEMA (Federal Emergency Management Agency) representative D) the firm's emergency planning manual
B NASAA has a Model Rule dealing with business continuity in the event of natural or other disasters that affect the ability of an investment adviser to protect customers and allow the firm to minimize disruptions to its business. Reference: 3.24 in the License Exam Manual
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) directing a securities transaction to an affiliated broker-dealer B) purchasing shares from an advisory client, originally acquired as a result of the adviser's previous "buy" recommendation C) the trade was being executed by an officer or partner of the firm D) engaging in an agency cross transaction
B There are two principals in every securities trade; the buyer and the seller. In this case, buying shares directly from the client who owns them, regardless of how they were originally acquired, places the IA in the position of being one 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. Reference: 3.12.3 in the License Exam Manual
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 brochure must be delivered at least 48 hours prior to entering into the contract. 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 IAR failed to obtain the signed receipt.
C The problem here is that the client has five 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 five business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed. Reference: 3.10.3.2 in the License Exam Manual
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 but not the financial planner. C) that ABC register as an investment adviser because it sells securities. D) that the financial planner register as an adviser but not the broker-dealer.
D 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. Reference: 3.2.1.1.1 in the License Exam Manual
Under the Securities Exchange Act of 1934, the authority of the SEC to investigate violations of rules extends over:I. the state securities statutes. II. the federal securities acts and rules of the SEC. III. the SROs.
II, III The SEC may investigate any situation it believes may have violated federal securities laws, its own rules, and rules of the SROs (i.e., exchanges, FINRA, MSRB). The SEC does not enforce state securities statutes or state or federal banking laws. Reference: 1.8 in the License Exam Manual
Federal covered securities, as defined under the Uniform Securities Act I.must be registered with the SEC before they can be offered in the state II.must be registered in the state before they can be offered within the state III.include shares of an investment company registered with the SEC under the Investment Company Act of 1940
III only It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are not required to be separately registered in each state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings. Reference: 2.6.2 in the License Exam Manual
As defined in the Investment Advisers Act of 1940, the term "person associated with an investment adviser" would include all of the following EXCEPT A) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications B) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account. C) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions. D) a silent partner in an advisory firm organized as a general partnership
an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications The term "person associated with an investment adviser" means any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except that persons associated with an investment adviser whose functions are clerical or ministerial shall not be included in the meaning of the term. Graphic design would be considered a clerical function. Reference: 3.1.1.5 in the License Exam Manual
According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level? A)2%. B) 5%. C)12%. D) 10%.
5% An interested person is any person (including two or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer. Such persons are required to file reports of beneficial ownership on Schedule 13D with the issuer, the exchanges (if a listed security), and the SEC within ten days of exceeding the 5% level. Reference: 1.6.4.1 in the License Exam Manual
XYZ Corporation has been in business for more than 20 years. They need additional capital for expansion, and they determine that an initial a public offering in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering? A) Registering by coordination. B) Providing notice filing to those states in which shares are to be issued. C Registering by notification. D) Registering by qualification.
A Because this offering is being made in more than one state, SEC registration is necessary. The state registration method would be coordination, which is the simultaneous registration of a security with both the SEC and the states. Reference: 2.7.2 in the License Exam Manual
All of the following statements relating to the USA's provisions dealing with the registration of securities are correct EXCEPT: A) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA. B) the NSMIA preempted the state registration of certain securities known as federal covered securities. C) any registrant may use qualification, even if it has filed a concurrent registration with the SEC. D) a corporation registering a new issue with the SEC and wishing to sell in the state may register by coordination.
A The NSMIA did take the registration powers away from the states for certain securities, defined in the law as federal covered securities. However, the states still have the right to require notice filings in order to, among other things, determine the appropriate fee to charge the registrant. Coordination is the usual method when registering with the SEC and the state at the same time. While not the expected practice, any security may register using qualification, even if it has an SEC registration in process. Reference: 2.7.1 in the License Exam Manual
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(n): A) Sale.
A 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." Reference: 2.12.1.1 in the License Exam Manual
With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Broker-dealers must maintain records of electronic communications for a minimum of three years. B) Broker-dealers must maintain records of trade blotters for a minimum of three years. C) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. D) 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 five years.
C 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 three years after termination of the enterprise. Emails are treated as any other communication: three years for broker-dealers and five years for investment advisers. Reference: 3.8 in the License Exam Manual
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) maintain a bond for an amount based on the assets under management C)furnish a statement of the total dollar amounts of securities bought and sold each year to customers 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 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. Reference: 3.10 in the License Exam Manual
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 must wait for the signed paperwork to be received D) the IAR may exercise his discretion as authorized and sell the CANCO
D 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 for the initial transactions in a customer's account for the first 10 business days after the date of the first transaction. Reference: 3.17 in the License Exam Manual
Section 15 of The Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that:I. no contract may be terminated with more than 60 days notice in writing. II. the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis. III. unless a specific exemption applies, the fund may not engage in margin trading . IV. the contract must be in writing.
I &IV Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract. Reference: 1.10.9 in the License Exam Manual
Among the powers granted to the Administrator under the Uniform Securities Act (USA) is the power to I.audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior II.permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000 III.require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes IV.require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state
I, II, III Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business. Reference: 3.14 in the License Exam Manual
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. Securities issued by which of the following qualify for an exemption from registration under the Act?I. Life insurance companies authorized to conduct insurance sales in that state. II. Railroads whose rates are subject to regulation by a state or federal agency. III. Commercial paper with no more than 9 months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $25,000. IV. Bonds that are obligations of the People's Republic of North Korea.
I,II Any life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads are under the jurisdiction of other state or federal regulators and their equipment trust certificates carry an exemption from state securities registration. The commercial paper would qualify if the denomination was $50,000 instead of $25,000. 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 does not qualify. Reference: 2.8.1 in the License Exam Manual
Which of the following statements concerning an agency cross transaction for an advisory client is (are) TRUE? I.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. II.An advisory client must provide prior written consent for the adviser to be able to engage in agency cross transactions. III.An 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. IV.An adviser may recommend the transaction to both parties to the transaction.
I,II, III 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 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. The adviser may not recommend the transaction to both parties. Reference: 3.15 in the License Exam Manual
Under current law, who of the following would be required to register as an investment adviser in a state? I.A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein II.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 III.A person whose home office is in the state and who manages less than $90 million in assets IV.A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state
I,II, III Persons having no place of business in a state are generally limited to directing fewer than 6 offers to retail (individual) residents of that state within any 12 month period before being required to register. 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. 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. Reference: 3.4 in the License Exam Manual
The Securities Exchange Act of 1934 prohibits I.the SEC from suspending trading on any exchange without the prior approval of the President of the United States of America. II.a broker-dealer from exercising discretion in a client's account unless written discretionary authority is received prior to the first trade for the client III.so-called "bad actors" from taking advantage of the exemption offered under Rule 506 IV.SEC commissioners from buying or selling any securities, other than those issued by the U.S. government, in their personal accounts during their term of office A) I and II B) I and III C) III and IV D) II and IV
II & IV Under both state and federal law, it is prohibited for any broker-dealer or agent to exercise discretion in a client's account prior to receiving the discretionary account authorization in writing. The written discretionary power must be received prior to taking control of the account. SEC commissioners may not engage in any securities transactions during their term of office unless the security is one issued by the U.S. government. The SEC must notify the POTUS when suspending trading on an exchange and the "bad actors" provision is found in the Securities Act of 1933. Reference: 1.8 in the License Exam Manual
Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are:I. mutual funds are only allowed to maintain TIC accounts with other funds that are members of the same family of funds. II. no public offering may commence unless the fund has at least $100,000 in net assets. III. no registered investment company may own more than 3% of the voting shares of another registered investment company. IV. shares of the fund will not have any margin loan value until the 30th day after purchase.
II and III. The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Since the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940. Reference: 1.10.8 in the License Exam Manual
During the application process for registration as an agent, the Administrator may request information about the applicant's: I.financial condition II.citizenship III.record involving a non-securities misdemeanor conviction 5 years ago IV.proposed method of doing business
II, IV The Administrator asks all registrants about their proposed method of doing business. Individual registrants may be asked about their citizenship. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers. Reference: 2.4.1 in the License Exam Manual
With regard to the registration requirements of the Uniform Securities Act, which of the following statements are TRUE? I.Only the issuer itself can file a registration statement with the Administrator. II.An application for registration must indicate the amount of securities to be issued in the state. III.The Administrator may require registrants to file quarterly reports
II,III The USA requires that any application for registration include the amount of securities to be sold in that state. The Administrator has the power to request regular filings of reports, but no more frequently than quarterly. While the issuer is most commonly the registrant, application may also be made by selling stockholders and broker-dealers. Reference: 2.9.1 in the License Exam Manual
Which of the following statements regarding financial requirements that may be imposed by the Administrator are TRUE? I.Agents may be required to be bonded. II.Investment adviser representatives may have to meet certain net worth standards. III.Broker-dealers may have to meet certain net capital levels. IV.Investment advisers may post a bond instead of meeting certain net worth levels.
Individuals registered as agents may be required to be bonded, but these individuals, as well as those registered as investment adviser representatives, never have to meet net worth or net capital standards; those are for broker-dealers and investment advisers only. The USA does allow a broker-dealer or investment adviser to post a bond instead of demonstrating a certain net capital or net worth. Reference: 3.7.1.1 in the License Exam Manual
