STUDY STUDY STUDY

All of the following information must be included on a customer confirmation EXCEPT: A. whether the transaction was solicited or unsolicited B. whether a payment for order flow was made C. the customer name and account number D. the price of execution

The best answer is A. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The amount of commission charged and if a payment was made for order flow must be disclosed. Finally, the customer name, account number, size of the trade, and price of execution must all be on the confirmation.

All of the following are synonymous EXCEPT: A. salesman - agent B. broker - agent C. dealer - agent D. salesman - broker

The best answer is C. A dealer is a principal in a transaction. An agent is always a middleman, or broker, in a transaction. Agent, salesman, and broker can all be synonymous terms.

Which of the following is NOT EXCLUDED from the definition of an "investment adviser"? A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan

The best answer is C. Excluded from the definition of an investment adviser are: investment adviser representatives, broker-dealers, depository institutions (banks, trusts, savings and loans), professionals (lawyers, accountants, teachers, engineers) and newsletters that do not render advice based upon a specific client situation. Insurance companies and investment companies are not excluded from the definition (though they may be exempt from registration under certain circumstances).

All of the following individuals are EXCLUDED from the definition of an investment adviser EXCEPT a(n): A. lawyer B. engineer C. geologist D. accountant

The best answer is C. Specifically excluded from the definition of an investment adviser are the following professionals who only give advice about securities that is incidental to their regular practice and who do not charge separately for giving such advice: lawyers, accountants, teachers, and engineers. Note that geologists are not on this list (nor are doctors!).

Under the Uniform Securities Act, the registration of an agent may be denied, suspended or revoked if the: I application contains false statements; or omits required information II applicant has been arrested for a securities related matter III applicant has been charged by the Securities and Exchange Commission with a securities felony A. I only B. II and III only C. I and III only D. I, II, III

The best answer is A. An agent's registration application will be denied if it is incomplete or if it contains false statements. An agent's registration will be denied if the agent was convicted of a misdemeanor involving securities or monies; or any felony; within the past 10 years. The application will not be denied if the agent has been arrested on a securities matter (he could be innocent!); nor will it be denied if the applicant is charged by the SEC with a securities felony (again, he could be innocent). The key word here is conviction - for registration to be denied, one must be "convicted" of the offense, not just "accused" of the offense.

A Registered Investment Adviser who is also a registered representative manages a client's account, charging the client both commissions on trades and an advisory fee. Which statement is TRUE? A. This is not unethical as long as disclosure is made to the client B. This is unethical because a client cannot be charged both commissions and advisory fees at the same time C. This is not unethical because a client can be charged both commissions and advisory fees at the same time D. This is not unethical as long as the total charges are fair and reasonable

The best answer is A. An investment adviser that charges advisory fees to a client for recommending securities; and then charges commissions to that client on trades performed; would be engaging in an unethical practice if the adviser did NOT disclose the 2 sources of revenue. As long as disclosure is given to the customer (and the charges are fair), this is OK. The overriding theme here is that all charges to customers must be disclosed.

Which of the following is (are) non-issuer transactions? I Purchase of a NASDAQ listed security II Purchase of a mutual fund share III Purchase of a limited partnership interest from the sponsor IV Purchase of an initial public offering from an underwriter A. I only B. I and II C. III and IV D. I, II, III, IV

The best answer is A. An issuer transaction is one where the issuer is either on the sell-side or the buy-side of the transaction. A trade of a NASDAQ listed security is a regular secondary market transaction - this is a non-issuer transaction - making Choice A the correct answer. The issuance of a mutual fund share, or redemption of a mutual fund share, is an issuer transaction. The issuer is receiving the proceeds from the purchase of the fund shares; and is paying the proceeds from a redemption of the fund shares. The sponsor is the issuer of a limited partnership offering - thus buying a limited partnership interest from the sponsor is an issuer transaction. Finally, the purchase of an initial public offering from an underwriter is also an issuer transaction, since the underwriter forwards the net proceeds of the offering to the issuer.

All of the following are EXCLUDED from the definition of a broker-dealer under the Uniform Securities Act EXCEPT a firm with no place of business in the State that: A. has a few clients in the State with a de minimis exemption B. deals exclusively with issuers of securities C. deals exclusively with other broker-dealers D. deals exclusively with insurance companies

The best answer is A. Excluded from the definition of a broker-dealer under Uniform State Law are persons with no place of business in the State that effect transactions exclusively with issuers; other broker-dealers; depository institutions; insurance companies; investment companies; and pension trusts. These persons are not dealing with the general public. Note that if the broker-dealer has an office in the State and deals with any of these persons - it would be required to register in that State. Now for the picky part! The "de minimis" exemption for broker-dealers is only offered in a minority of States, and typically applies to out-of-state broker-dealers who only have 3 or fewer clients in that State. Thus. Choice A qualifies for the exemption and does not have to register because it is exempt from registration (as opposed to being excluded from the definition and therefore not being required to register). Thus, Choice A is defined as a broker-dealer, but it is one that is exempt from registration in that State. Yes, this must be known for the exam.

The effectiveness of a registration may be summarily postponed or suspended as long as the Administrator: I upon entry of the order promptly notifies each person specified II files a copy of the order in each State where the security has been offered III gives the reasons for the postponement or suspension IV within 5 days after the receipt of a written request from a person that is the subject of the order, sets the matter down for a hearing A. I and III only B. II and IV only C. I, III and IV D. I, II, III, IV

The best answer is A. The Administrator is empowered to summarily postpone or suspend the effectiveness of a registration statement filed in the State for a securities offering pending a final determination in an administrative proceeding (that means, a hearing). Upon entry of the order, the Administrator must promptly notify each person specified that the order has been entered and must give the reasons for the postponement or suspension. The Administrator must, within 15 days (not 5 days) after receipt of a written request from any person specified in the order, set down the matter for a hearing. If no hearing is requested and none is ordered by the Administrator, the order remains in effect until it is modified or vacated by the Administrator.

A customer places an order to sell 500 shares of ABCD stock at the best price possible, so that the customer can use the funds from the settlement in 2 business days to pay for a new car purchase. The agent notices that the price of the stock is dropping rapidly and decides to sell 200 out of the 500 shares that day - since he believes that the price will rebound. The next day the price rises and the agent sells the remaining 300 shares. Which statement is TRUE regarding the agent's actions? A. The agent has violated the Uniform Securities Act because he or she exceeded the discretionary authority that was granted by the customer B. The agent has not violated the Uniform Securities Act because he or she executed the transactions in a manner that was consistent with the customer's best interests C. The agent has violated the Uniform Securities Act because any order placed by a customer must be executed in its entirety as soon as possible after the order is placed D. The agent has not violated the Uniform Securities Act because the order was executed at the best possible prices for the customer

The best answer is A. The customer ordered the sale of 500 shares "at the best price." Verbal discretion over price and/or time of execution is permitted as long as the order is executed that day. To accept discretion over price or time of execution from a customer for longer than 1 day requires written permission from the customer. Since no written permission was received from the customer, the 500 shares should have been sold the day the sell order was placed - in this case, the agent exceeded the discretionary authority granted by the customer. (However, since the customer did get a better execution, he or she might not complain! Then again, because the customer will not have all the sale proceeds to pay for the car in 2 business days as ordered, maybe he or she will complain!)

A Registered Investment Adviser (RIA) is formed as a partnership. The RIA intends to charge an incentive fee that is based on investment performance. Under NASAA rules, the RIA: A. must be able to show that the fee is fair and reasonable to the State Administrator B. is not permitted to have an incentive fee under any circumstances C. can charge an incentive fee as long as it is included in the partnership agreement D. must offer the customer a fee refund if the performance does not meet the benchmark

The best answer is A. This question is misleading because you probably know that investment advisers cannot charge performance or incentive fees. However they CAN do so if the customer is wealthy (defined as a customer with either $1,000,000 of assets or $2,100,000 net worth). Thus Choice B is wrong. Choice C is wrong because the fee arrangement must be disclosed in the advisory contract with the client; not in the partnership agreement. Choice D is wrong because there is no requirement that an incentive fee be refundable. Thus, we are left with Choice A as the best one offered (and it ain't great!). All fees must be fair and reasonable; charging unreasonable fees is an unethical practice. Finally, though not addressed in the question, NASAA requires that advisers that charge incentive fees provide a whole bunch of disclosures. The adviser must disclose in writing: - that the fee arrangement may create an incentive for the adviser to make investments that are riskier; - that the investment adviser will get compensation based on both unrealized appreciation and capital gains; - the basis for valuing any illiquid investments used in computing unrealized appreciation; - the periods that will be used to measure performance and their significance to the computation of the fee; and - the nature of an index used as a comparison of investment performance, the significance of the index and the reasons why the adviser believes the index is appropriate.

An Investment Adviser Representative (IAR) has been employed by a Registered Investment Adviser (RIA) for the past 12 years and has accumulated $18,000,000 of customer assets under management in accounts for 47 different customers. The IAR has experienced a personal economic decline and has been trading these customer accounts with ever-increasing frequency to generate the commissions necessary to meet his personal debt obligations. Which statements are TRUE? I The IAR has regulatory liability II The IAR has no regulatory liability III The RIA has regulatory liability IV The RIA has no regulatory liability A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. This representative is churning his customer accounts, which is an unethical business practice. Not only does the investment adviser representative have liability, but his employing firm has liability for failing to supervise this individual.

To protect against identity theft and theft of funds, client instructions received electronically must be: A. encrypted B. authenticated C. monitored D. refused

The best answer is B. 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.

Which statements are TRUE about sharing commissions? I An agent is permitted to share commissions with an agent at another broker-dealer that is under common control of the agent's broker-dealer II An agent is not permitted to share commissions with an agent at another broker-dealer that is under common control of the agent's broker-dealer III An agent is permitted to share commissions with an investment adviser representative at another investment adviser that is under common control of the agent's broker-dealer IV An agent is not permitted to share commissions with an investment adviser representative at another investment adviser that is under common control of the agent's broker-dealer A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Agents of broker-dealers may only share commissions with other registered agents who work at the same broker-dealer or who work at a broker-dealer that is owned or controlled by the same parent entity. An agent cannot share commissions with unregistered agents or with registered agents of other independently-owned broker-dealers. Regarding sharing of commissions with investment adviser representatives, because an IAR is a fiduciary, the IAR cannot earn commissions or share in commissions. Now, just to make things really confusing, an individual can wear 2 hats at the same time. An individual can work for both broker-dealer, acting as an agent earning commissions; and can also work for an investment adviser as an IAR, earning fees. And both the broker-dealer and investment adviser can be owned by the same parent entity or company. However, there is no "cross-over" between the two in how fees are charged.

An issuer has filed a registration statement in the State proposing to offer 500,000 shares in a combined primary and secondary distribution, consisting of 300,000 newly issued shares and another 200,000 shares being offered by the officers of the firm. Under Uniform State Law, the 200,000 shares being sold by selling shareholders are a(n): A. issuer distribution B. non-issuer distribution C. commingling of securities D. exempt transaction

The best answer is B. An issuer transaction is one where the proceeds of the offering go to the issuer - the primary distribution of 300,000 shares meets this definition. A "non-issuer" transaction is one where the proceeds of the offering go to someone other than the issuer. The secondary offering of 200,000 shares where the proceeds are going to selling shareholders (officers of the company) meets this definition.

An individual sells the securities of a federal chartered bank. This individual will be EXCLUDED from the definition of an agent if the individual: A. is the employee of a broker-dealer B. is the employee of the bank C. only offers the securities to 5 or fewer investors D. only offers the securities in 5 or fewer states

The best answer is B. Employee of ISSUERS (not employees of broker-dealers) that sell specified exempt securities, are excluded from the definition of an agent. These include employees of the U.S. Government selling Treasury securities; employees of municipalities selling municipal securities; and employees of banks, savings institutions and trust companies, selling that depository institution's securities. For example, the employee of a bank selling that bank's CDs (which are defined as a security) is excluded. The offer of advisory services (and in most States, securities as well) to 5 or fewer investors in a State is an exemption from investment adviser (or broker-dealer) registration, not agent registration. Finally, Choice D tries to confuse you with a variation on this "de minimis" exemption. It is only available to investment advisers (and in many States to broker-dealers as well) with no office in a State, that have 5 or fewer clients in the State in a year. It does not apply if offers are made in 5 or fewer States.

Which of the following would constitute an "involuntary assignment" of an investment advisory contract under the Uniform Securities Act? I An investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer II An investment adviser formed as a partnership has a partner with a 25% interest resign III An investment adviser formed as a partnership has 1 partner leave and take the contract to a new advisory firm A. I only B. I and III C. II and III D. I, II, III

The best answer is B. If an investment advisory contract is assigned to someone else, the customer must sign a new contract with whoever takes control of that contract. If an investment adviser formed as a corporation sells all of its stock to an acquiring broker-dealer, then all of the investment adviser's contracts have legally been assumed by that broker-dealer. This is the same as an assignment. If a minority partner leaves an adviser formed as a partnership, this is not considered to be an assignment (note that if this was a majority partner leaving, then technically this would be an assignment). If a partner at an advisory firm leaves and takes the contract with him or her to a new firm, again this is an assignment of the contract to the new firm.

Which statements are TRUE about an adviser offering discounted rates? I An investment adviser is permitted to offer a discount from standard rates to selected categories of customers II An investment adviser is permitted to offer a discount from standard rates only if all customers are given the discount III The investment adviser can offer the discount as long as charges to all of the investment adviser's customers are fair and reasonable IV The investment adviser can offer the discount as long as the fact that discounts are offered is disclosed in the Form ADV Part 2A A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Investment advisers do not have to offer the same rates to all their customers - they are permitted to pursue additional business by offering defined groups a discounted rate. However they must offer these discounts to all customers that qualify for the terms of the discount - for example, the discounted fee might apply only to members of a local Rotary Club; or the discount might only apply to customers that invest at least $200,000 with the adviser. The adviser must disclose the existence and terms of the discounts in the Form ADV Part 2A ("the Brochure") that is given to clients.

Investment advisory contracts must include a: A. power of attorney B. no assignment clause C. consent to service of process D. duplicate copy for the client

The best answer is B. Investment advisory contracts must include a "no assignment clause" - that is, the contract cannot be assigned to another investment adviser unless the customer consents in writing.

An investment adviser has been formed and the firm and its representatives file their first registration with the State on July 1st. On June 30th of the following year, the firm files renewal registrations for itself and its representatives. Which statement is TRUE under the Uniform Securities Act? A. Since State registration is good for 1 year, the renewals were filed in a timely manner B. The firm's registration and its representatives' registrations lapsed after December 31st of the preceding year C. The firm's registration and its representatives' registrations are good until December 31st of the current year, at which point they must be renewed D. There is no requirement for annual registration renewals in the State

The best answer is B. Registration of broker-dealers, investment advisers, and their agents expires on December 31st of each year. This way, the States know that they will be getting those annual registration renewal checks at year end, year after year after year!! If the renewal check is not received by December 31st, registration lapses.

Under the Uniform Securities Act, which of the following is a non-exempt security? A. A warrant issued by a NYSE traded company B. A stock issued by an industrial corporation C. A bond issued by the Canadian Government D. A bond issued by a province of the Canadian Government

The best answer is B. Stock issued by industrial corporations is non-exempt. Under State law, senior securities (bonds and preferred stock) and "equal" securities (warrants or rights) of companies already listed on a recognized stock exchange are exempt. This is termed a blue chip exemption. Securities of Government issuers are also exempt (regardless of being a "province" of the Government).

Under the provisions of the Uniform Securities Act, all of the following securities can be offered in a State without registering the issue in that State EXCEPT: A. an exempt security B. a non-exempt security C. a federal covered security D. a security offered in an exempt transaction

The best answer is B. The Uniform Securities Act requires that any security offered in a State be registered in that State unless it is exempt from registration in the State; is offered in an exempt transaction in the State; or is a federal covered security (which is any major exchange listed company or any investment company security registered with the SEC).

A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of: A. being solicited to purchase the new issue B. entering into the contract to purchase the new issue C. completion of the purchase of the new issue D. settlement of the purchase of the new issue

The best answer is B. The rule for prospectuses is that they must be delivered at, or prior to, confirmation of sale. The generation of the confirm is the time that the customer is legally entering into the "contract" to buy the security, so this is the best answer. Settlement is the date (typically 3 business days after the confirm is generated) when the customer actually makes the payment for the purchase. This is when the transaction is legally "complete."

An investment adviser is ready to open an account for a new customer. In the advisory contract, the adviser has included a clause that the customer has 48 hours to rescind the contract. The adviser gives the customer the brochure, takes payment from the customer, but forgets to have the customer sign the contract. Which statement is TRUE? A. Even though the customer did not sign the contract, he or she still has 48 hours to rescind the contract B. Even though the customer did not sign the contract, he or she has 5 business days to rescind the contract C. The contract is null and void D. The contract is binding and the customer cannot rescind the contract

The best answer is B. Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer was not given the brochure 48 hours prior to entering into the contract. By giving the adviser a check, the customer has "entered into a contract" to buy the advisory services. So this customer has 5 business days under NASAA rules to rescind the contract.

To register a successor firm with the State Administrator for the unexpired portion of the current license year, which statement is NOT true? A. The predecessor firm must have ceased business operations and can only conduct winding down transactions B. The successor firm must continue business operations through the end of that license year C. The successor firm must file a Form BD or ADV amendment with the Administrator D. The filing becomes effective on the date designated by the licensee

The best answer is B. Uniform State law does not require the filing of a new registration application for a successor firm. The successor firm files a registration amendment with the State, that takes its registration through the end of that year, without having to pay a new filing fee. The effective date of the successor firm's registration is the date indicated on the amendment. The "old" firm must have ceased business operations for the "new" firm to be registered in the State. Whether or not the successor firm continues in operation through the rest of that year is irrelevant.

ABC Corporation has its common stock listed on the New York Stock Exchange. Which of the following ABC issues is (are) EXEMPT from State registration? I ABC preferred stock II ABC Convertible debentures III Warrants to buy ABC common stock IV Limited partnership units where ABC is the general partner in the venture A. II only B. I and III C. I, II, III D. I, II, III, IV

The best answer is C. Under the "blue chip" exemption, if a corporation has its stock listed on a national securities exchange, then any securities offerings of that issuer are exempt from registration under State law. Thus, if ABC Corporation has its common stock listed on the New York Stock Exchange, then ABC preferred stock, ABC bonds, and ABC rights and warrants would all be exempt as well. Thus, Choices I, II, and III are true. Also note that under the National Securities Markets Improvement Act of 1996, these are now defined as federal covered securities, which are only registered with the SEC; the States cannot require registration for these issues. Choice IV is a very different animal. A partnership where ABC Corporation is a general partner is a different legal entity than ABC Corporation itself; and the securities sold by the partnership are not an issue of ABC Corp. - rather, they are an issue of that partnership. Thus, these limited partnership units are a non-exempt offering under this interpretation and must be registered (unless another exemption is available).

Which statement is TRUE about a state-registered investment adviser's recordkeeping obligations? A. Only advisers that maintain custody of client funds are required to retain books and records that can be inspected by the Administrator B. An investment adviser that has offices in multiple States must keep records in accordance with the requirements set by the Administrator of each State where an office is located C. Advisers are required to retain records for at least 5 years from the end of the fiscal year during which the last entry of record was made D. Electronic records are permitted as long as hard copies are kept in a separate secure location

The best answer is C. All advisers must retain the records set by the Administrator - not only advisers that take custody. An investment adviser with offices in multiple states only has to keep records in accordance with the State where the main office is located. Electronic records are permitted as long as they cannot be altered, are kept securely, and a duplicate copy (not necessarily a hard paper copy) is kept in a secure location. Advisers must retain records for 5 years under NASAA rules (note that this differs from SEC rules for broker-dealer records, most of which must be retained for 3 years).

Which of the following persons would be defined as an "agent" under the Uniform Securities Act? A. April Showers, an administrative assistant in the Treasurer's Department at Rainwear Industries, who sells Rainwear common stock to Rainwear employees under Rainwear's ESOP B. John Q. Public, a municipal employee that accepts tender offers from the public for new issues of general obligation bonds being sold by New York City C. Marvin Mercenary, the President of Capital Industries, who sells Capital Industries common stock to the public D. Ima Pigg, the Controller of PorkPie Products, who negotiates and sells a private placement of PorkPie stock to institutional investors

The best answer is C. An "agent" is an individual who represents a broker-dealer or issuer in effecting securities transactions. Under this definition, the President of Capital Industries offering common stock to the public is defined as an agent. The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified exempt securities. Thus, the employee of New York City offering its bonds is excluded from the definition. Also, the Act excludes from the definition of an "agent," any individual who represents an issuer offering securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans (ESOPs). The Act also EXCLUDES from the definition of an "agent," those individuals who represent issuers in "exempt transactions." These individuals do not have to be registered in the State. Generally, exempt transactions are trades that do not involve the public. Transactions with financial or institutional investors, as defined under the Act (including banks, financial institutions, trusts, insurance companies, investment companies, underwriters, and pension plans) are exempt because the investors are sophisticated, and are not deemed to require legislative protection.

A broker is not generating the commissions that she expected as month-end approaches. The broker contacts one of her clients who is a novice investor, explains the situation, and asks the customer to buy a NYSE-listed security at twice the regular commission rate. The broker and the customer sign an agreement to these terms and the broker executes the trade. The action by the broker is: A. permitted because it is documented in writing B. permitted because the security involved is exchange listed C. prohibited because the commission is excessive D. prohibited because the transaction is unsuitable

The best answer is C. Charging excessive commissions on transactions is unethical.

A Federal Covered Adviser discovers a material error in its Form ADV. When must Form ADV be amended with the State to correct the error? A. Never B. Within 5 business days C. Within 30 calendar days D. On the SEC filing anniversary

The best answer is C. Form ADV is filed through the IARD Investment Adviser Registration Depository) system run by FINRA - this is used by both Federal Covered and State-registered advisers. In IARD, the adviser details whether this is a Federal or State registration and IARD reports to the correct regulator. In addition, for Federal Covered Advisers, the adviser details which States get "notice" filings. When a Form ADV is filed or updated by a Federal covered adviser, this is reported to the SEC, and at the same time, this is also reported to the designated States that get notice filings. The annual updating amendment to Form ADV must be filed within 90 calendar days of the adviser's fiscal year end - note that this is the same rule for both NASAA (State registered advisers) and the SEC (Federal Covered Advisers). For material changes that occur during the year, an "other than annual amendment" must be filed via IARD. Here, the SEC states that it must be filed "promptly" for Federal Covered Advisers, while NASAA requires that it be filed within 30 days of the change for State registered advisers and for notice filings made by Federal Covered Advisers. (Yes, it would be nice if NASAA and the SEC "got together" on their rule writing, but they don't!)

After being solicited by an agent of ABC Brokerage, a customer bought 1,000 shares of XYZZ stock (an OTCBB issue) at $15 per share. The stock rapidly declined to $8 per share, and the customer sold the shares. Six months later, the customer received a written offer of rescission from the broker-dealer, stating that the stock had not been registered in the State where the customer lives. Which statement is TRUE about the customer accepting the offer? A. The buyer cannot accept the offer of rescission because he no longer owns the stock B. The offer must be accepted verbally within 30 days of receipt C. The offer must be accepted in writing within 30 days of receipt D. The offer cannot be accepted unless the Administrator holds a hearing within 15 days of receipt

The best answer is C. If an offer of rescission is made to the buyer, then the seller must either accept in writing in 30 days or the offer is void. The seller is offering to refund any loss to the buyer and would only do this if the offer of the securities to the buyer violated State law. Note that the buyer of the securities is not required to still own the securities to accept the offer. Remember that the buyer experienced a loss, and the buyer can sue the seller if the securities were not legally offered in the State. If the buyer accepts the rescission offer, then the buyer will give up the right to sue the seller.

Which statements are TRUE about an issue that is registered in a State by Coordination? I The statutory cooling off period under the Securities Act of 1933 is 10 days II The statutory cooling off period under the Securities Act of 1933 is 20 days III The statutory cooling off period under the Uniform Securities Act is 10 days IV The statutory cooling off period under the Uniform Securities Act is 20 days A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. In order for Registration by Coordination to be effective in a State, the registration statement used for the SEC filing must have been filed with the State 10 business days prior to the proposed sale date. In contrast, the Securities Act of 1933 requires that the registration statement be filed with the SEC at least 20 days prior to the proposed sale date.

A father and son are both agents of a broker-dealer, working out of a branch office in State A. The son receives a phone call from an old friend that has recently moved to State B, who wants to open an investment account. The son is not registered in State B, but the father is registered in State B as an agent. The son asks his father if he would be the "broker-of-record" on the account; but all commissions earned on the account would be paid by the father to the son, from the father's personal checking account. Under Uniform State Law, this arrangement is: A. permitted because related persons can share in customer accounts B. permitted because only 1 member of a non-resident family is required to be registered in a State as an agent C. prohibited unless the son registers as an agent in State B D. prohibited because agents are prohibited from paying commissions to other agents

The best answer is C. In order to recommend securities to a customer or effect trades for a customer, non-resident agents must be registered in each State where they solicit customers. Because this customer resides in State B, the son must register as an agent in State B. The son cannot use the father as the "front man" to be the "broker-of-record" on the account.

If an investment adviser is an individual, which of the following items would be included in the computation of adviser's net capital? A. Goodwill B. Automobile C. Accounts receivable D. Copyright

The best answer is C. Net capital is really the adviser's "liquid net worth." It is liquid assets minus all liabilities. For an adviser that is an individual, excluded from assets that count in net capital are any non-liquid assets, including deferred charges, goodwill, franchise rights, organizational expenses, patents, copyrights, home, home furnishings, automobiles and any other personal items that cannot be readily converted to cash. Basically, this means that the only assets that count in the computation for an individual adviser are cash, accounts receivable and marketable securities positions. Note, however, that if the adviser is a partnership or corporation, the computation is permitted to include automobiles and furnishings used in the adviser's business. Why State law permits this is anyone's guess, but this point should be known for the exam!

Which of the following statements about penalties under the Uniform Securities Act are TRUE? I Criminal liability may be offset by rescission II Civil liability may be offset by rescission III The statute of limitations on criminal actions is 5 years IV The statute of limitations on civil actions is 3 years A. I and III only B. II and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Only civil liability can be offset by rescission. Criminal liability cannot be offset by rescission. The statute of limitations on civil cases is 3 years (but no later than 2 years after discovery); for criminal cases it is 5 years.

Which statement is TRUE regarding the Administrator's ability to deny or revoke an exemption? A. An exemption from registration for a non-profit issuer may not be revoked by the Administrator B. The revocation order can cover a period of time prior to the date that the order was issued C. The order can be issued without giving prior notice to the affected parties D. If the order is appealed, the Administrator has the burden of proving that the exemption should have been revoked

The best answer is C. Since "affinity fraud" is a hot button topic for Administrators, they do have the right to reject the exemption of a not-for-profit issue such as a church bond, so Choice A is false. An exemption cannot be revoked retroactively, so Choice B is false. A revocation order can be issued without giving prior notice, so Choice C is true. Finally, if the Administrator's revocation order is appealed, the burden of proof to show that the exemption should be permitted is on the issuer - not the Administrator, making Choice D false.

An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A. fraudulent and misleading B. unethical because an advertisement cannot include the qualifications of the firm's principals C. permitted since it is true D. permitted only after the IARs pass their CFP exams

The best answer is C. Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading.

The Administrator can deny a registration as an investment adviser representative if the individual: I is currently under suspension by FINRA II has been expelled by FINRA III was convicted of a disorderly conduct misdemeanor 8 years ago IV was convicted of theft 8 years ago A. I and III only B. II and IV only C. I, II and IV D. I, II, III, IV

The best answer is C. The Administrator is empowered to deny, suspend or revoke a registration if the applicant has filed a materially incomplete, false or misleading registration application; has willfully violated the Act's provisions; has been enjoined by court order from engaging in the securities business; is the subject of an order by the Administrator denying, suspending, or revoking registration as a broker-dealer, agent, investment adviser or investment adviser representative; has been convicted of a misdemeanor involving any aspect of the securities business; or any felony; (e.g., embezzlement, fraud, misappropriation of funds, theft, larceny) within the past 10 years; is the subject of a determination that the person has willfully violated the securities laws (after notice and an opportunity for a hearing is given) by an Administrator of another State or the SEC, within the past 10 years; has engaged in unethical or dishonest business practices; is insolvent, which is defined as the inability to meet obligations as they come due; is unqualified based on lack of experience, training and knowledge; has failed to pay required fees to the State within 30 days after being notified by the Administrator; and has failed to properly supervise employees. Note that the disorderly conduct misdemeanor does not come under the reasons for denial of registration - to be a reason for denial, the misdemeanor would have to involve monies or securities.

Under the provisions of the Prudent Investor Act, a Registered Investment Adviser should consider all of the following when investing and managing trust assets EXCEPT: A. General economic conditions B. Possible effect of inflation C. Trading patterns of plan beneficiaries D. Investment tax consequences

The best answer is C. The Prudent Investor Act states that the trustee should consider the following when making investment decisions relevant to the trust or its beneficiaries: - General economic conditions; - Possible effects of inflation or deflation; - Expected tax consequences of investment decisions or strategies; - The role that each investment plays within the overall trust portfolio; - The expected total return; - Other resources of the beneficiaries; - Needs for liquidity, regularity of income, and preservation or appreciation of capital; and - An asset's special value to one or more of the beneficiaries. The trading patterns of the plan beneficiaries have no bearing on this.

Under the Uniform Securities Act, all of the following persons are defined as investment adviser representatives EXCEPT the: A. President of the advisory firm B. Vice-President of administration of the advisory firm C. Head word processor of the advisory firm D. Head salesman of the advisory firm

The best answer is C. The Uniform Securities Act defines an investment adviser representative as a partner, officer, director, or other individual employed by an investment adviser who makes recommendations; renders advice; manages accounts; solicits the sale of advisory services; or supervises employees who perform any of these functions. Excluded is anyone who solely performs clerical or ministerial duties like a word processor.

A brokerage firm was founded 5 years ago by 3 partners - John, Joe and Mary. John and Joe supervise sales and trading; while Mary is responsible for the firm's back-office operations and financial reporting. The firm has been very successful and operates in all 50 States. John dies suddenly and Mary assumes his responsibilities. Which statement is TRUE? A. Mary is not required to register as an agent in each State because she was registered when the Form BD was filed B. Mary is not required to register as an agent in each State because the broker-dealer is federal covered C. Mary must register as an agent in each of the 50 States D. Mary is not required to register as an agent because she is only supervising sales and not actually selling securities herself

The best answer is C. This question gets at a "fine" point in the law. The partners that are named in a registration application in each State become automatically registered as agents (once they pass the appropriate exam, e.g., 63/65/66) - but these are only partners that have sales or trading responsibilities. While Mary is included in the registration application, because she does not deal with the investing public, she would have had her automatic registration "turned off" and was not required to take the 63/65/66 exam. (It would be nice if the question mentioned this, but it doesn't and this is typical of exam-type questions.) If she takes a sales supervision job, then she becomes an agent and now must be registered in each State and must pass the appropriate exam! So this is really a question about who must take the 63/65/66 exams! Also note that there is no such thing as a federal covered broker-dealer; there are only federal covered advisers and federal covered securities.

Under the provisions of the Uniform Securities Act, all of the following with no office in the State, are not required to register in a State as an investment adviser EXCEPT an adviser: A. that renders advice solely to banks B. managing more than $100,000,000 of assets C. that renders advice to no more than 15 clients within a 12 month period D. that renders advice to employee benefit plans with assets of at least $1,000,000

The best answer is C. 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. Under the National Securities Markets Improvement Act of 1996, the adviser with at least $100,000,000 of customer assets would be required to register with the SEC only; not with the State. In addition, an adviser with no office in the State, that has no more than 5 clients in 12 months in the State, is exempt. The adviser that has 15 clients in the State would be required to register in the State (though this adviser would be exempt from Federal registration with the SEC).

A customer contacts an agent of a broker-dealer, asking for an investment that has no risk. The agent recommends the purchase of Treasury notes or bonds, stating that these are "riskless" securities. Which statement is CORRECT regarding this recommendation? A. The agent has not violated the Uniform Securities Act because Treasury securities are free from risk of default of either payment of interest or principal B. The agent has not violated the Uniform Securities Act because Treasury securities are free from interest rate or market risk C. The agent has acted unethically because Treasury securities that are not a short term maturity have interest rate risk D. The agent has acted unethically because there are no securities that are completely free of risk

The best answer is C. While Treasury securities are considered to be "risk free" when it comes to risk of default (since the U.S. Government has the power to "print" the money to pay off its debt, if worse comes to worse), any fixed interest rate security with a long term expiration is subject to market or interest rate risk. This is the risk that as market interest rates rise, the price of fixed income securities must fall to bring their yield up to a level that is competitive with current market rates. It would be unethical not to disclose this risk to a customer.

An IAR who is registered only in State X conducts an investment seminar in State Y. An individual that attends the seminar likes what she hears and makes a $10,000 investment with the IA firm. This individual gets her first account statement and sees that her investment value is now $3,000. She is upset and contacts the Attorney General's office of State Y, who tells her to file a written complaint with the State X and State Y Securities Administrators. Which statement is TRUE? A. The Administrator of State Y cannot conduct an investigation of the complaint because the IAR is only registered in State X B. The Administrator of State X cannot conduct an investigation of the complaint because the IAR conducted the seminar in State Y C. Both the Administrators of State X and the Administrator of State Y can investigate the complaint D. Neither Administrator has the authority to investigate the complaint unless a court order is issued

The best answer is C. Under Uniform State Law, the Administrator has jurisdiction over an offer of securities or advisory services if an offer: - originates in the Administrator's State; is directed into the Administrator's State; or - is accepted in the Administrator's State. Basically, the "idea" behind State law is that there must be a "presence" in the State for that State Administrator to have jurisdiction. Because the investment adviser and investment adviser representative are located in State X, that Administrator has jurisdiction. Because the customer was initially contacted in State Y, that Administrator has jurisdiction.

An agent's license remains in effect: A. for 30 days B. for 2 years unless terminated earlier C. until canceled by the agent or revoked by the administrator D. for a period of time that may vary from State to State

The best answer is D. Agent, broker-dealer, investment adviser, and investment adviser representative registrations are good for time periods that vary from State to State, though most States have a 1 year renewal period. Registrations expire on December 31st of each year, unless the Administrator designates another date.

An individual is employed by a broker-dealer on a salary basis, solely to give information relating to trades of securities, such as last sale price and size. This individual: A. must be registered as an agent in the State B. must be registered as an investment adviser representative in the State C. must be registered as a broker-dealer in the State D. is not required to be registered in the State

The best answer is D. An agent is defined as an individual who represents a broker-dealer or issuer in effecting, or attempting to effect purchases or sales of securities. It excludes employees that do not solicit trades or who solely perform clerical functions. Thus, a person who solely gives out quotes to customers does not have to be registered as an agent in the State, since this is a clerical function.

An adviser with $106,000,000 of assets under management has its main offices in Illinois and branch offices in Wisconsin, Indiana, and Missouri. Which statement is TRUE regarding registration of the adviser? A. The adviser must register only in Illinois B. The adviser must register in Illinois, Wisconsin, Indiana, and Missouri C. The adviser must register with the SEC D. The adviser must register with the SEC or the States of Illinois, Wisconsin, Indiana, and Missouri

The best answer is D. Any adviser with $100,000,000 or more of assets under management is a "federal covered adviser" that is only required to register with the SEC. The State cannot require registration of a federal covered adviser; but it can require a "notice" filing in the State along with payment of a fee. However, the SEC has issued an interpretation that advisers with $100-$110 million of assets have the option of registering with the SEC or with the states. Since this adviser falls into the $100-$110 million range, it has the choice of either becoming a Federal Covered Adviser or of registering in each State where it does business.

A NASDAQ listed issuer plans on offering 5,000,000 new shares in an "add on" offering that will be sold by its underwriters in all 50 States. Which statements are TRUE? I The security must be registered in each State II A notice filing and filing fee are required in each State III A prospectus must be filed in each State IV A consent to service of process must be filed in each State A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Because this is an offering of a "federal covered" security (exchange listed or NASDAQ listed), the States cannot require a registration filing. The only registration filing is with the SEC. However, each State will still require a "notice" filing and payment of a filing fee; along with the filing of a consent to service of process.

Under the Uniform Securities Act, which of the following transactions are voidable by the buyer? I A customer was unknowingly sold stocks at prices higher than the current market at the time of the trade II Material facts were unknowingly omitted by the agent who sold the stock to the customer III A customer was unknowingly sold unsuitable securities A. I only B. I and II C. II and III D. I, II, III

The best answer is D. Civil liability under the Act allows that certain transactions are "null and void" and the seller must offer to buy back the securities at the original cost plus 6% interest. For civil liabilities to apply, there cannot be willful intent to defraud the customer. All of these transactions were performed "unknowingly," so they are all voidable.

If an investment adviser puts its records on microfiche or electronic storage media, all of the following statements are true EXCEPT: A. the paper or hard copy form, as those records are kept in their original form, must be preserved and maintained for 5 years B. the duplicate copy of the record may be immediately reproduced in the medium chosen and must be preserved and maintained for 5 years C. the original record and duplicate copy of the record in the chosen medium must be stored in separate locations for 5 years D. the duplicate copy must be preserved in a format that is alterable, rewritable and erasable

The best answer is D. Consider this to be a lesson in the NASAA recordkeeping rules. Hard copy paper records must be retained for 5 years. Duplicate copies can be retained electronically, but these records must be non-alterable, non-erasable and non-rewritable. Duplicate copies must be kept separately from original records.

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 A. I only B. I and III only C. II and IV only D. I, II, III, IV

The best answer is D. 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 records MUST be retained in a state-registered investment adviser's principal office? I Financial reports II Customer securities positions III Investment adviser's bank statements IV Records of customer purchases and sales orders A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. NASAA rules require that State-registered advisers keep, in their principal office, records of: - customer purchases and sales; and - customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.

Which of the following statements are TRUE about rules created by the Administrator? I Rules are not written as part of the Uniform Securities Act but carry the weight of law II Rules are issued by the Administrator to provide interpretation of the Uniform Securities Act III Rules issued by the Administrator cannot contravene the provisions of the Uniform Securities Act IV Rules issued by the Administrator are required to be published as a matter of public record A. I and II only B. III and IV only C. I, II, III only D. I, II, III, IV

The best answer is D. 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?

Under the Uniform Securities Act, a consent to service of process is filed for each initial: I Agent registration II Broker-dealer registration III Investment adviser registration IV Securities registration A. I only B. II only C. II and III D. I, II, III, IV

The best answer is D. The "consent to service of process" appoints the Administrator as attorney for the registrant so that any legal papers can be properly served. It is required for all initial registrations with the Administrator.

In order for an Internet Communication of a Broker-Dealer Agent NOT to be considered to be an offering of securities in a State, which statement is FALSE? A. The communication must be limited to general information about products and services offered B. The communication must state that the broker-dealer or agent must be registered in that State to offer securities or to effect securities transactions C. If the communication is created by an agent, the affiliation of the agent with a broker-dealer or investment adviser must appear prominently D. The Administrator retains responsibility for reviewing and approving the content of any Internet Communication

The best answer is D. The Broker-Dealer (not the Administrator) must retain responsibility for reviewing and approving the content of any Internet Communication by its agents. The complete requirements for an Internet Communication by an agent to NOT be considered an offering of securities or services in the State where received are: - The Internet Communication must prominently disclose the affiliation of the BD Agent or IA Agent with the Broker-Dealer or Investment Adviser; - The Broker-Dealer or Investment Adviser retains responsibility for reviewing and approving the content of any Internet Communication by any Agent and authorizes the distribution of information on the particular products and services offered through the Internet Communication; and - The Agent cannot exceed the scope of authority granted by the Broker-Dealer or Investment Adviser in the Internet Communication.

An investment adviser representative works for a federal covered adviser. The IA is SEC registered and has filed notice in State A where it has an office. The IAR is registered in State A. The IAR has engaged in a pattern of trading in client accounts without having authorization to do so. Which statement is TRUE about the State Administrator's ability to take disciplinary action? A. The State Administrator cannot take disciplinary action against the investment adviser because it is federal covered, nor can it take disciplinary action against the investment adviser representative of the federal covered adviser B. The State Administrator cannot take disciplinary action against the investment adviser because it is federal covered, but the Administrator can take disciplinary action against the investment adviser representative C. The State Administrator can take disciplinary action against the federal covered investment adviser, but the Administrator cannot take disciplinary action against the investment adviser representative D. The State Administrator can take disciplinary action against the federal covered investment adviser, and it can take disciplinary action against the investment adviser representative of the federal covered adviser

The best answer is D. The NASAA Model Rule on Unethical Practices of IAs and IARs, makes it clear that each State Administrator has jurisdiction over investment advisers and their representatives, and also retains jurisdiction over federal covered advisers to the extent that the conduct is fraudulent or deceptive. Unauthorized trading in a customer account is fraudulent, so not only is the IAR subject to disciplinary action by the State Administrator, the federal covered advisory firm is subject to disciplinary action by the State Administrator as well. Also, though not covered in the question, the SEC can take action against the federal covered adviser for the violation.

Under the provisions of the Uniform Securities Act, NAFTA and GATS, the State Administrator has the power to designate all of the following non-issuer transactions as "exempt" EXCEPT: A. trades effected on the Toronto Stock Exchange B. trades effected on the American Stock Exchange C. trades effected on the Mexico Stock Exchange D. trades effected on the London Stock Exchange

The best answer is D. The Uniform Securities Act exempts secondary market trades of securities that occur on registered stock exchanges from State securities registration requirements (however, remember that the IPO of these issues was either registered in the State or a notice filing was made). Under the provisions of NAFTA (North American Free Trade Agreement between the U.S., Canada and Mexico) and GATS (General Agreement on Trade in Services), the Administrator is empowered to exempt trades that occur on stock exchanges in these other 2 countries. Currently, only trades on the Toronto Stock Exchange are exempted. The Administrator has no power to exempt trades that take place on the London stock exchange.

The Uniform Securities Act covers: I Registration of securities in each State II Registration of broker-dealers in each State III Registration of investment advisers in each State IV Registration of agents of broker-dealers and investment advisers in each State A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

The best answer is D. The Uniform Securities Act, as adopted in each State, covers the registration of broker-dealers and their agents; investment advisers and their agents; and securities that are sold in the State.

XYZ Advisers is a federal covered adviser with an office in State A. It has 400 clients in State A; 6 clients in State B; and 3 clients in State C. A customer in State C files a complaint with that State's Administrator alleging that XYZ adviser made misleading statements. Which State Administrator(s) has the authority to revoke XYZ Adviser's registration? A. State A only B. States A and B only C. States A, B and C D. None of the above

The best answer is D. The wording here is tricky! 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 against the adviser; but it has no registration that it can revoke! One must read these questions carefully!

An investment adviser representative of a Federal Covered adviser with no office in the state only has insurance companies as clients. Where must the adviser representative register? A. SEC B. State C. Both the SEC and the State D. Neither the SEC nor the State

The best answer is D. Since the adviser is federal covered, that firm is only required to register with the SEC. It must give a notice filing to any State where it has a physical presence or where it offers advisory services. As far as the investment adviser representative is concerned, there is no registration of IARs with the SEC. They are only registered in the State where they are physically located and in each State where they solicit advisory business. For the IAR to be able to register in the State, the IA must have completed a notice filing in the State. The facts that the IAR has no office in the State and only has insurance company clients are critical in this case because an exemption from State registration is given to investment advisers and their representatives who have no office in the State and whose only clients are institutional investors. Since the IAR has no office in the State and his or her only clients are institutions such as insurance companies, the general public is not being solicited and the IAR is exempt from registration.