Uniform Securities Act Missed Questions

Which term is NOT defined under the Uniform Securities Act? A Broker-dealer B Registered representative C Investment Adviser D Investment Adviser Representative

Registered representative The Uniform Securities Act defines a "broker-dealer," it defines an "agent" of a broker-dealer (which is a registered representative, but this is the federal name, not the State name); it defines an "investment adviser;" and it defines an "investment adviser representative" (the agent of an investment adviser). Note the inconsistency here!

Transactions that violate the Uniform Securities Act are voidable at the option of the:

Purchaser Transactions that violate the Act are voidable by the purchaser. The seller is obligated under civil liabilities to pay the investor the original cost of the securities plus 6% interest. Review

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"An investment in a common enterprise for profit, with management provided by a third party" is the definition for a(n):

Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site:

"The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and "Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion."

Under the Uniform Securities Act, which methods of storage are permitted to retain required records? I Microfilm II Microfiche III Digital Storage IV Computer Tapes

1,2,3,4

Which statements are TRUE about the use of testimonials in advertising? I Testimonials are permitted in broker-dealer advertising II Testimonials are prohibited in broker-dealer advertising III Testimonials are permitted in investment adviser advertising IV Testimonials are prohibited in investment adviser advertising

1,4

Which statement is TRUE about registering a marketing officer of an Investment Adviser as an Investment Adviser Representative (IAR) with the State?

The marketing officer of an Investment Adviser will be automatically registered when the Investment Adviser registration is filed in the State

Under the Uniform Securities Act, an investment adviser may share in the profits of a client's account:

Under no circumstances

In relation to NASAA's Statement on Records Retention for Registered Investment Advisers, an RIA:

must retain both personal and business e-mails

In most States, an agent may be associated at one time with no more than:

1 broker-dealer Most States do not allow dual registration - an agent may only be associated with 1 broker-dealer at any time. However, it is permitted, in all instances, for an agent to be registered with a number of broker-dealers that are under "common control." For example, Prudential may have a separate mutual funds broker-dealer and a separate general securities broker-dealer. Agents of Prudential can be associated with both broker-dealers without violating State law. Finally, a few State Administrators permit multiple registrations with different broker-dealers. If this is the case, the agent must disclose all registrations to each of the broker-dealers with whom he or she is associated.

Under the Uniform Securities Act, which persons are EXCLUDED from the definition of an investment adviser? A person who gives advice about: I U.S. Government bonds II Agency bonds III Municipal bonds IV Corporate bonds

1+2 A person who gives investment advice relating solely to U.S. Government securities (including Agency securities), is excluded from Federal registration under the Investment Advisers Act of 1940. Any person excluded from registration with the SEC under the Investment Advisers Act of 1940 is a "federal covered adviser" and cannot be required to register in the State.

Which of the following are ALWAYS reasons why an agent would be denied registration in a state? I The agent was convicted of a drug felony 7 years ago II The agent was convicted of a securities misdemeanor 8 years ago III The agent was convicted of drunk driving 5 years ago IV The agent is the subject of a securities litigation that has not yet settled

1+2 Registration as an agent will be denied if that person has been convicted of any misdemeanor involving securities or monies; or any felony; within the past 10 years. Thus, conviction on a drug felony 7 years ago will cause denial of registration; as will conviction of a securities misdemeanor 8 years ago. A drunk driving conviction is a misdemeanor in some States; and a felony in others. The law requires denial of registration for persons convicted of any felony within the past 10 years - but whether a drunk driving conviction is a felony or misdemeanor depends on that State. Pending litigation that is not settled is not a cause for denial of registration.

Which statements are TRUE regarding joint accounts? I An order to buy or sell may be accepted from any single account owner II An order to buy or sell can only be accepted from all account owners jointly III An order to draw a check on the account can be made by any single account owner IV An order to draw a check from the account must be made by all of the account owners jointly

1+3 The rules for joint accounts are that orders can be entered by any single owner of the account (either to buy or sell); an order to draw a check can be made by any single owner; however any checks must be drawn to full account name - that is, they must be made payable to all of the owners of the account.

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

1+3 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.

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

1+4 There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.

Under the Uniform Securities Act, an offer or sale does NOT exist if the securities are: I being pledged as collateral for a loan II non-assessable and are given as a gift III exchanged for another type of security under a judicially approved reorganization

1,2,3 A sale is defined as a contract to dispose of a security for value. The pledge of securities is not a "sale;" the gift of non-assessable securities is not a "sale;" and an exchange of one security for another under a judicially approved corporate reorganization is not considered a "sale."

A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company"

1,2,3 Equity indexed annuities (EIAs) are an insurance product that falls somewhere between a fixed annuity and a variable annuity. They give a return linked to a well-known index, such as the Standard and Poor's 500 Index, but the return is typically capped to a maximum interest rate per year. Thus, if the cap is 10% and the S&P 500 Index grows by 15%, the customer only gets a 10% return for that year. Thus, Choice I is a misleading statement. Technically the salesperson does not earn a commission, but he or she does earn a very steep sales charge, so Choice II is misleading. There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement. Choice IV is true - the contracts have a minimum guaranteed rate of return (like around 4%) that is guaranteed by the insurance company. Of course, if the insurance company fails (which rarely happens, but it has happened), then the guarantee is worthless.

Which of the following are unethical practices by an investment adviser under the NASAA Statement of Policy? I An adviser exercising discretion under verbal authority from a customer given 5 business days ago II An adviser placing an order to sell a position that is dropping rapidly in price without discretionary authority III An adviser selling all of a security position when the customer authorized the sale of only part of the position IV An adviser selecting the best time to sell a position when the customer authorized the sale

2,3 A representative can exercise discretion over the time or price of a securities transaction without needing a discretionary authority from the customer. A representative cannot exercise discretion over the size of a trade or the security to be traded without discretionary authority from the customer, making Choice II unethical. Verbal discretion may be accepted from a customer under NASAA rules for up to 10 business days, at which point a written power of attorney must be obtained from the customer - so Choice I is permitted. Deliberately failing to follow the customer's instructions is also unethical - making Choice III unethical.

Which of the following are generally required to be included in the State registration application of a broker-dealer or investment adviser? I Consent to service of process II Business history of applicant III Fingerprints of the officers IV Books and records of the broker-dealer used by the applicant

1,2,3 State registration applications for a broker-dealer or investment adviser must include:The applicant's form and place of organization;The applicant's proposed method of business;The qualifications and business history of the applicant and each of its officers or partners;Any injunction, administrative order or conviction of a misdemeanor involving a security or any aspect of the securities business and any conviction of a felony;The applicant's financial condition and history; andAny information to be furnished to a client (the "brochure") if the applicant is an investment adviser. Also note that the initial application must be accompanied by a consent to service of process, which appoints the Administrator as attorney for the applicant. Any lawsuits filed in court against a broker-dealer or investment adviser will result in a subpoena sent to the Administrator; who will then forward it to the registrant (broker-dealer or investment adviser) that is being sued. As part of the registration application, fingerprints are required by most states (Choice III). However, if the applicant already has fingerprints on file with FINRA as part of a U-4 filing, then the State will not require an additional fingerprint filing. Note that there is no requirement for filing of the books and records of the broker-dealer as part of the application, making Choice IV incorrect. (Note, however, that the Administrator has the power to inspect books and records of a BD or IA at will.)

The Administrator, in regards to the registration of securities, may: I impound the proceeds from the sale of the securities until the issuer receives a specified dollar amount II require the filing of original copies of confirmed subscription agreements III require the delivery of a prospectus IV require that the issuer file quarterly reports of sales of the issue

1,2,3,4 Regarding registration of securities in a State, the Administrator is empowered to impound the proceeds of the sale of the securities until a specified dollar amount is sold (this is typical for so-called "all or none" underwritings, where, if the entire issue is not sold, the deal is canceled). The Administrator can require the filing of original copies of confirmed subscription agreements (these are completed by customers who wish to "subscribe" to the new offering of securities); and can require that a disclosure document (prospectus) be provided to customers. Finally, the Administrator can require that the issuer file quarterly progress reports regarding the sale of the issue.

A broker-dealer that has a place of business in State A would be required to register in State A if it: I sold securities to customers in State A II made an offer to sell securities to customers in State A III effects securities transactions solely with institutional investors in State A IV effects securities transactions solely with issuers in State A

1,2,3,4 This one comes down to 1 simple fact. Because the broker-dealer has a place of business in State A, it must register in State A. End of story.

The State Administrator, as a condition of registration in the State as an investment adviser, can require which of the following: I An oral examination by the officer of the advisory firm II Publication of an opening announcement in a local newspaper III Posting of a surety bond IV Filing of advertising

1,2,3,4, The State Administrator can require written or oral exams as a condition of registration; can require an opening announcement published in a local newspaper; can require the posting of a surety bond; and can require the filing of advertising (unless the security or transaction is exempt).

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

1,4 Post-registration requirements cover such things as maintaining books and records; making required filings with the Administrator; giving reports to customers; and filing advertising and sales literature with the State. These are requirements for both broker-dealers and investment advisers. This portion of the Uniform Securities Act does not apply to their agents, however.

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than:

10 business days following the end of the quarter in which the transaction was effected NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Which of the following information MUST be recorded on an executed order ticket? I Time of execution II Time of receipt III Account number IV Solicited or unsolicited

1234 Time of order receipt is recorded on the order ticket, as is time of order execution, assuming that the order was filled (which is the case here). Both of these are required to permit regulators to be able to detect "front running" violations. They are also needed to resolve customer complaints about possible execution errors. The account name and/or number must be on the order ticket. Finally, it must be recorded whether the trade was solicited or unsolicited.

If an adviser is suspicious about a customer's account activity and believes that there may be illegal activity, then the adviser: I must file a CTR report with FinCEN II must file an SAR report with FinCEN III in 15 days IV in 30 days

2,4 If an adviser is suspicious about a customer opening an account, then a "Suspicious Activities Report" must be filed with FinCEN (Financial Crimes Enforcement Network - part of the Department of Treasury) within 30 days. The customer cannot be told that the report is being filed.

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?

30 Days 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!)

Under NASAA rules, Investment Advisers must retain copies of all advertising for:

5 years in an easily accessible place with the first 2 years' records kept in the principal office of the adviser NASAA requires all IA records (with the exception of permanent records covered following) to be retained for 5 years in an easily accessible place with the first 2 years' records kept in the principal office of the adviser. However, certain "permanent" records must be kept for the life of the firm - these include the partnership agreement if the RIA is a partnership; articles of incorporation if the RIA is a corporation; and any minutes to partnership or Board of Directors meetings. These must be retained at the principal office of the adviser and be preserved for at least 3 years after termination of the enterprise.

The anti-fraud provisions of the Uniform Securities Act would NOT apply to the sale in the State of: A fixed annuities by an insurance company B variable annuities by an insurance company C municipal bonds by a broker-dealer D corporate bonds by a broker-dealer

A Anti-fraud questions are simple - the anti-fraud rules apply to everyone and everything! However, the Uniform Securities Act only applies to fraud involved in the sale of securities. It does not apply to fraud involved in the sale of a pure insurance product - then that State's insurance laws apply. A fixed annuity is an insurance product and is not a security. In contrast, a variable annuity is defined as a security, since the underlying separate account funding the contract is invested in mutual funds. Finally, even though municipal bonds are an exempt security, fraud in the sale of any security, whether exempt or not, is covered under the Uniform Securities Act.

Which of the following is NOT defined as a federal covered adviser? A An adviser to insurance companies registered in the State B An adviser to investment companies registered with the Securities and Exchange Commission C An adviser that manages $100,000,000 or more of assets D An adviser that gives advice solely about U.S. Government securities

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

Which of the following would be defined as a broker-dealer in State A? A The municipal bond department of a bank located in State A B A person who gives advice about investing in securities in State A C A broker-dealer located in State B who has an existing active D An agent of a broker-dealer who effects trades in securities in State A

A broker-dealer located in State B who has an existing active customer who moves to State A Banks are excluded from the definition of a broker-dealer, making Choice A incorrect. Choice B defines an investment adviser; not a broker-dealer. Choice D defines an agent of a broker-dealer; not the broker-dealer itself. Choice C gets at an interesting point. Because the customer has moved and is now located in another State (State A), and the customer is "active" -meaning the customer is trading securities, then the firm must be registered as a broker-dealer in State A (and the agent servicing the customer account must be registered in State A as well).

An agent of a broker-dealer is located in State A. The agent solicits a customer located in State B, but no sale of securities results from that contact. The agent recontacts the customer in State C, where the customer spends winters and a sale of securities results. Which State Administrators have jurisdiction?

ABC 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 broker-dealer and agent are located in State A, that Administrator has jurisdiction. Because the customer was initially contacted in State B, that Administrator has jurisdiction. Finally, the customer is recontacted in State C, where he or she spends winters (which is presumably longer than the "vacationing" exclusion) so the Administrator of State C has jurisdiction as well. Also note that it is possible that the "de minimis" exemption could be used in this example (a broker-dealer with no office in a State that solicits 5 or fewer clients in that State in 1 year), but this question does not address how many other clients this agent has in States B and C or how many solicitations this agent made in States B and C.

Under the Uniform Securities Act, "consent to service of process" means that the:

Administrator is authorized to receive suits on behalf of an agent or broker-dealer A "consent to service of process" in an initial registration application appoints the State Administrator as attorney for the registrant, authorizing the Administrator to receive any lawsuits on behalf of the registrant. If such occurs, then the Administrator will, in turn, notify the registrant that he or she (or "it" in the case of a corporation or partnership) is being sued.

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

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

A customer has an individual account. Upon written request, the customer's account statements and confirmations may be sent to the: A Agent B Broker-dealer C State Administrator D. None of the above

D Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office, because then the customer would not know what was going on in the account.

An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What MUST the adviser do prior to placing an order to buy ABCD stock for the client's account?

Obtain verbal authority for that specific transaction If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.

All of the following are defenses against identity theft that must be used at a broker-dealer or investment adviser EXCEPT: A encryption of data B installation of anti-malware software C password protection for system entry D cyber insurance

D. Data encryption, installation of anti-virus and anti-malware programs, and the use of password-protection are all defenses against identity theft, where customer account data is stolen from broker-dealers or investment advisers. Cyber insurance to protect the firm against the cost of a data breach is a good thing to have, but is not a defense against a data breach.

A Federal Covered Adviser (FCA) located in State A advertises in State B. The Administrator of State B can:

Do nothing The basic idea behind the partitioning of investment adviser regulation between the SEC and the States was to eliminate duplicate regulation of investment advisers at both the Federal and State level. A Federal Covered Adviser is only subject to SEC regulation and cannot be required to register in a State and is not subject to State regulation. All the State can require is a "notice filing." Supervision of advertising for a Federal Covered Adviser is the responsibility of the SEC - not the State. The only jurisdiction retained by the State over a Federal Covered Adviser is if a fraud is committed. Note, however, that if the Administrator suspected that a deceit or fraud was being committed, it could investigate the Federal Covered Adviser in the State, and as part of the investigation, it could require the production of books and records, including advertising. However, the question makes no mention of a suspected fraud or deceit.

The Administrator may deny or revoke a securities registration by:

Order Administrators are permitted to enter orders denying or revoking registration.

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is:

Prohbited Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

An elderly client is visiting an Investment Adviser Representative (IAR) in the IA's office. He tells the IAR that he is going to have major surgery and is concerned about the safety of his stock certificates that he keeps at home in a small fireproof box. The Investment Adviser Representative wishes to help the client out. Which of the following should the IAR NOT do?

Drive the client to his house to retrieve the stock certificates and then take him to the Investment Adviser's bank and place the certificates in the Investment Adviser's safety deposit box, making sure to write down all of the certificate numbers and other pertinent information If the investment adviser were to put the certificates in its own safe deposit box, it would be taking custody, and all securities kept in custody must be kept by a qualified custodian - not by the IA. Taking the client to his bank, where he deposits the securities to his existing safe deposit box is OK. (Choice D). The client can rent his own safe deposit box at any bank - even the one used by the IA - so Choice A is OK. Calling the client's attorney for advice (Choice B) is fine as well.

Which investment advisory fee arrangement would MOST likely be viewed as unreasonable for a client with a small amount of assets under management?

Flat fee assessed for the year A flat fee arrangement is permitted, but this question is "digging deeper" and is actually looking at the way advisory fees are charged in the real world. Annual flat fees are typically paid by clients with very large accounts, because advisers will change their fee arrangement for very large customers from a percentage of assets under management to a flat fee. For example, a customer with $10,000,000 to invest, if charged a typical 1% annual management fee, would pay $100,000. This is a very large dollar amount, so the adviser might have a fee schedule of 1% of assets under management for amounts invested up to $2,500,000 and then the schedule shifts to an annual flat fee of $25,000 for amounts invested over $2,500,000. If the adviser were to charge the same $25,000 flat fee for all accounts rather than a percentage of assets under management for accounts under $2,500,000, then, for example, a small account of $100,000, would have a ridiculously large fee. Hourly fees take into account complexity of management - smaller accounts are simpler and get billed fewer hours, while larger accounts are more complex and get billed more hours - this is a reasonable arrangement. Finally, an assessment based on value is reasonable - smaller accounts get a smaller assessment, while larger accounts get a larger assessment.

he 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.

For initial registration as an agent in a State, all of the following are required EXCEPT: A Consent to Service of Process B Filing Fee C Registration Application D Government Issued Photo I.D.

Gov Issued Photo ID In an initial registration with the State, a consent to service of process must be filed, in addition to the registration application (which can include fingerprints) and any filing fees designated by the Administrator. There is no requirement for a Government issued photo ID to be registered.

Investment advisers are prohibited from: I Assigning a customer's contract without permission II Charging a retainer fee III Charging commissions on trades effected for the client IV Changing partnership management without notifying clients

I, III, and IV Investment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this is disclosed at the time the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.

Who administers the Uniform Securities Act?

NASAA NASAA is the North American Securities Administrators Association. Each State Administrator enforces the Uniform Securities Act - the State "Blue Sky Laws" that require registration of broker-dealers, their agents, non-federal covered advisers, and investment adviser representatives, in each State where they deal with the public. The Investment Advisers Act of 1940 is administered by the SEC. FINRA only regulates broker-dealers, not investment advisers. The MSRB (Municipal Securities Rulemaking Board) writes rules for the municipal market.

Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that is based on the:

NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for: The protection, backup, and recovery of books and records; Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; Office relocation in the event of temporary or permanent loss of a principal place of business; Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and Minimizing service disruptions and client harm that could result from a significant business disruption. Notice that the NASAA list is only a recommended minimum - it is up to the RIA to decide how much more extensive the list of covered items should be.

To use Registration by Coordination, an issuer must file a registration statement with the:

SEC Registration by Coordination of a securities issue in a State allows the Federal registration document required under the Securities Act of 1933 (the Prospectus filed with the Securities and Exchange Commission) to be the basis for registering the issue in that State. There is no provision in Uniform State Law that allows a registration statement filed in one State to be the basis for filing a registration in another State.

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

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

NASAA Model Rule 502 (c) applies to:

State registered advisers and Federal Covered advisers only to the extent that the conduct is fraudulent or deceptive NASAA Rule 502 (c) sets the rules for investment advisory contracts. As a NASAA rule, it only covers State-registered advisers. Federal covered advisers are subject the rules of the Investment Advisers Act of 1940, however the rule says that it applies to Federal covered advisers to the extent that the alleged conduct is fraudulent or deceptive. The rule requires that advisory contracts provide in writing: The services to be provided, the term of the contract, the fee formula, the amount of prepaid fee to be returned for early termination and any grant of discretionary power; That no direct or indirect assignment or transfer of the contract is permitted without consent of the client; That the investment adviser shall not be compensated based on capital gains (unless the client is wealthy, with either $1MM of assets under management or $2.1MM of net worth - this is set under the Investment Advisers Act of 1940); and That if the investment adviser is a partnership, the adviser will notify the client within a reasonable time of any change in the membership of the partnership. The rule also prohibits any provision that waives compliance with the rule or with the Investment Advisers Act of 1940; and prohibits an advisory contract that is contrary to Section 205 of the Investment Advisers Act of 1940 (Section 205 prohibits compensation based on gain or loss).

Which order is NOT required to be retained as a record by a broker-dealer?

Subscription order pursuant to a rights offering A subscription order arises from a rights offering, where a corporation is attempting to raise additional funds from its existing shareholders by offering them subscription rights to new shares at a discount from the current market price. These orders happen directly between the issuer and the shareholder, so there is no broker-dealer record of these. All orders placed by customers with a broker-dealer, whether executed, unexecuted or canceled, must be retained as a record by broker-dealers. The retention period for these is set under the Securities Exchange Act of 1934 at 3 years (and State Administrators must comply with the Federal rules for broker-dealers because of federal supremacy).

An Investment Adviser and an Investment Adviser Representative file for initial registration in a State on October 31st. When do the registrations lapse, unless they are renewed?

The Investment Adviser registration lapses on December 31st of that year and the Investment Adviser Representative's registration lapses on December 31st of that year All State registrations expire on December 31st - it makes no difference when the IA or IAR was first registered in the State.

During the past year, an agent of a registered broker-dealer has offered partnership units to wealthy investors in a private placement. The agent finds that he has been named in a civil lawsuit filed by one of the buyers of the private placement units, claiming that untrue statements were made by the agent in connection with the sale of the issue. Which of the following is a defense against the buyer's claim that is most likely to be upheld by a court of law?

The agent can claim that he took reasonable care to ensure that no untrue statements were made at, or before, the sale of the securities and that the agent did not, and could not, know of the untrue statement The agent is being accused of making untrue statements when selling a security to a customer. Making untrue statements of material fact or omitting statements of material fact when selling securities is fraudulent. However, if the agent can show that he took reasonable care to ensure that no untrue statements were made in connection with the sale of the security and that the agent did not, and could not, know of the untrue statement, then the court will reject the claim of the customer. This is the only defense of the 4 choices offered that addresses the customer's claim. The other defenses offered do not address the customer's claim (e.g., the suit is frivolous; the customer is wealthy and knew what he was doing, etc.)

An agent of a broker-dealer is registered in State A. The agent has a customer who lives in State A who will be going to college in State B. The agent is not registered in State B. Which statement is TRUE about the agent doing business with the student while he or she is in State B?

The agent can do business with the student in State B without having to register in State B College students are considered to be residents of the State where their home is; not the State where they are going to college. Furthermore, this is an existing customer of the agent - the agent is not soliciting new business in State B. The agent does not have to register in State B to do business with the student who is at college in State B because this is an existing customer who resides in State A, a State where the agent is registered. Also note that whether a transaction is solicited or not has nothing to do with the State registration requirement. Regarding the "de minimis" exemption, this is a uniform rule that applies only to IA and IAR registration - the Uniform Securities Act does not have this rule for BDs and their agents. (However, note that some States do have their own "de minimis" rules for BDs and agents, but this is a minority of States, so it is not tested on the exam.)

An agent receives physical certificates from a customer that the customer wishes to deposit to his brokerage account. Which statement is TRUE?

The agent must forward the certificates to the broker-dealer immediately Broker-dealers take custody of clients funds and securities as part of the business and must maintain minimum net capital in order to do so. (In contrast, investment advisers do not "routinely" take custody and must notify the Administrator if they intend to do so and must follow NASAA's custody rules for IAs.) If an agent receives securities from a client to be placed in custody of the broker-dealer, the certificates must be forwarded to the broker-dealer immediately.

Under the provisions of the Uniform Securities Act, if an investment adviser wishes to take custody of client funds, the RIA must: A take out a surety bond B have a minimum net worth of $2 million C also be registered as a broker-dealer D file a consent to service of process

The best answer is A. Under State law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement. However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000.

Which statement is TRUE about re-registration of broker-dealers in the State? A Broker-dealers are not required to re-register in the State B Broker-dealers must re-register in the State annually, based upon their fiscal year-end C Broker-dealers must re-register in the State annually at calendar year-end D Broker-dealers must re-register in the State bi-annually at calendar year end

The best answer is C. Annual registration renewal in each State is required for broker-dealers, investment advisers, and their agents. This occurs at December 31st of each year, so it is based on calendar year end - not a registrant's fiscal year end.

Which of the following would be defined as an investment adviser under the Uniform Securities Act? A U.S. Trust Corp. B Washington Savings and Loan Corp. C AIM Investment Advisers, a firm with $400,000,000,000 of assets under management D Greenwich Investment Counsel, a firm that offers research and asset allocation services to accredited investors

The best answer is D. Any deposit-taking institution is excluded from the definition of an investment adviser under the Uniform Securities Act (USA), making Choice A and Choice B incorrect. Federal covered advisers are also excluded from the definition of an investment adviser under USA. Since any adviser with $100,000,000 of assets or more under management is a Federal covered adviser, Choice C is incorrect as well. There is no exclusion from the definition of an investment adviser for advisers that only deal with accredited (wealthy) investors. Note, however, that there is an exemption available for investment advisers that have no business location in the State and that only deal with other advisers or with institutions. This exemption is not available to advisers that deal with wealthy individuals, however.

A broker-dealer that is offering a new issue in a State has obtained a legal opinion from its counsel that the issue is exempt from registration in that State. After the offering is completed, the State Administrator determines that the issue should have been registered. Which statement is TRUE regarding the broker-dealer's liability in this situation?

The broker-dealer has civil liability since it offered the securities in contravention of State law A broker-dealer cannot rely on a legal opinion to avoid civil liability. A legal opinion is just that - an opinion - it is not the law, as interpreted by a court. In this situation, both the broker-dealer (and the attorney that gave the erroneous legal opinion) can be held civilly liable. There would be no criminal liability here because the illegal action was not intentional (that is, it was not thought out in advance - "scienter" in Latin).

. SEC Rule 17a-3 (which NASAA follows) allows firms to keep complaint records in either of 2 ways:

The firm may keep a written record of each customer complaint and its resolution, including customer name, address, account number, date of receipt of complaint, name of associated person identified in the complaint and disposition of the complaint; or Instead of the record, the member may maintain a copy of each original complaint in a separate file of the associated person along with a record of the disposition of the complaint. So the SEC states that if complaint copies are retained, the firm must retain the "original." And in this example, since it was the firm's error that was corrected, send the customer the apology letter!

To register a successor firm with the State Administrator for the unexpired portion of the current license year, which statement is NOT true?

The successor firm must continue business operations through the end of that license year 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.

A hedge fund offers to provide a minimum level of trades to a broker-dealer in return for receiving below-market office space from the broker-dealer. Which statement is TRUE?

This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator This question is based on reality. In New York City and other "high rent" locations. Broker-dealers offer so-called "hedge fund hotels," where they offer hedge fund advisers nice office space that they own (on places like Park Avenue) at subsidized rents if the hedge fund agrees to direct its portfolio trades to that broker-dealer. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific. Because most hedge fund advisers are set up as partnerships, hedge funds are not subject to the mutual fund soft dollar rule which requires that the soft dollar benefit accrue to the shareholders. All of the "partners" in a hedge fund may get a benefit from the reduced expenses that the hedge fund will enjoy from the subsidized rent. However, the SEC (and also NASAA, because each State uses the same ADV Form) requires that the hedge fund disclose the practice of accepting soft dollars as a line item in the Form ADV and that it disclose that, in return for getting the rent subsidy, it may be paying a higher commission rate to that executing broker-dealer.

Under the NASAA Statement of Policy, an agent of a broker-dealer that has discretionary authority would NOT be subject to the prohibition on excessive trading of a customer account as long as the:

account is a non-managed fee based account The risk in a discretionary account is that the broker will overtrade ("churn") the account just to earn extra commissions. If the account is a "fee only" account, then there is no incentive for the broker to churn. An annual flat fee that pays for all trades is such an account. Churning is a violation if trades are effected that are excessive in frequency or size based on the customer's investment objective, financial situation and financial needs. It makes no difference if the customer consents to each trade (he may be unsophisticated and not realize what he is doing); nor if the account is profitable; nor if the commissions are discounted.

Prudent Investor Act

adopted in most states, this Act takes the "old" prudent man rule and applies modern portfolio theory to investment management by fiduciaries. The Act stresses asset allocation, diversification, and assumption of risk commensurate with investment return. The manager is evaluated based on overall portfolio return, not the return on each individual asset.

Two companies, Company A and Company B, are involved in a securities offering. Company B is selling its stock. Company A's employees help sell the shares. Company A receives commissions from Company B and pays the commissions to its staff. Therefore, the employees of Company A are:

agents of a broker-dealer The best answer is A. Since Company A's employees are being compensated for selling the shares of Company B, Company A is defined as a "broker-dealer" and Company A's employees are agents of the broker-dealer. Both Company A and its employees would be required to register in the State. Also note that Company B would be defined as an "issuer" in this transaction, but this is not part of the question.

A registration application in a State filed by an Investment Adviser becomes effective:

at noon, the 30th day after the application is filed

Question:The provisions of the Uniform Securities Act apply to solicitation of the public to buy or sell securities or advisory services that are made:

by mail or telephone either inside or outside that State and received in that State Each State Administrator only has jurisdiction over solicitations or transactions involving securities or advisory services that are received in that Administrator's State. It makes no difference where the solicitation came from - it might have come from within that State or from outside that State.

A BD application is received by the State Administrator for a new broker-dealer subsidiary of a British securities firm. The application includes the disclosure that the parent firm was suspended from membership on the London Stock Exchange 4 years ago because of unauthorized trading by its Singapore branch. The State Administrator

can deny registration based on the suspension by the foreign regulator The Uniform Securities Act sets a 10 year statute of limitations for securities related violations as a cause for denial of registration. This is based on violations of U.S. law. It also includes a provision regarding violations of the law of a foreign jurisdiction. In this case, it sets a 5 year statute of limitations. (Why? - Who knows!) The wording includes willfully violating the law of a foreign jurisdiction governing any aspect of the securities or banking business within the past 5 years; or being the subject of an action by a foreign regulator in the past 5 years denying, revoking or suspending the right to engage in the securities business as a broker-dealer, investment adviser or agent.

The Administrator:

cannot issue stop orders retroactively but can vacate them retroactively As a general rule, the Administrator cannot issue an order stopping the sale of a security, or denying or revoking a registration, retroactively. However, if the Administrator were to issue a stop order because of something trivial, like not paying the required fee, then once the fee is paid, the stop order would be vacated, and this is done retroactively to the date of the original stop order.

An agent has a client with an individual account at a broker-dealer. The client has purchased an aggressive growth stock at the recommendation of the agent. The agent learns that the company will miss its earnings target by $1 per share. The client is out of town and cannot be reached. The agent should:

continue to hold the shares There is no mention of the spouse having trading authorization in the account; nor of the broker having discretion in the account; so the broker can do nothing except wait until he or she can reach the customer.

All of the following statements are true regarding rules and orders of the Administrator under the Uniform Securities Act EXCEPT:

different penalties apply for violations of rules and orders than for violations of the Act's provisions The penalties for violations of the Uniform Securities Act's provisions are the same as for violating a rule or order of an Administrator that is applying the Act. The Administrator may make a rule or order applying to the Act (e.g., the Administrator can modify the Act's provisions by making its own rules; and can enter suspension or revocation orders against registrants). The Administrator can enter an order suspending or revoking a registration, prior to providing a hearing. The only requirement is that an opportunity for a hearing be provided to the person who is the subject of the rule or order.

If a customer wishes to purchase an initial public offering of a non-exempt security, then the customer must receive a:

final prospectus at, or prior to, confirmation of sale In connection with the sale of any non-exempt new issue to a customer, the final prospectus must be delivered to the customer, at, or prior to, confirmation of sale. There are no exceptions! Review

Under the Uniform Securities Act, a broker-dealer that has no place of business in a state does NOT have to register if the firm:

has a few clients in a state with a broker-dealer "de minimis" rule in the preceding 12 months If a broker-dealer deals with the public, it must register in that State. If the firm has no place of business and deals solely with issuers or financial institutions, it does not have to register. Therefore, Choice A must register as a broker-dealer. Soliciting orders or effecting trades on a principal basis have no bearing on whether a firm must register as a broker-dealer. A broker-dealer is defined as a firm that engages in securities trades for its own account (principal or proprietary trading) or one that effects trades for others. Therefore Choices B and C must register as a broker-dealer. The "de minimis" rule for broker-dealers is available in a minority of States. A broker-dealer with no office in the State that only does a "few" trades" in the State in a year would be exempt from registration as long as the State had a broker-dealer "de minimis" rule. Therefore, Choice D is not required to register.

An investment adviser representative has found an illiquid stock that seems overpriced and has heard that the company will issue bad financial news in about a week. He tells all his clients that they should enter orders to sell the stock. The investment adviser representative:

has committed a violation of the Uniform Securities Act by inducing trading based on unverified information The IAR "heard" that the company will issue bad financial news and has told all his customers to sell the stock. This is trading based on hearsay or rumor and is an unethical practice. Note that Choice C, while a true statement, is not really relevant to the question. The IAR is not recommending an investment to all his clients - he or she is recommending that the clients speculate on the price of the stock dropping.

A registered representative recommends a stock that is not registered in the State that should have been registered in the State. The representative has told his clients that it is a good investment that should be profitable in the near term. The representative:

has not committed a felony or a fraudulent act because he did not know the security should have been registered Nowhere in the question does it state that the representative "knew" that the security should have been registered in the State. It appears that the recommendation of an unregistered non-exempt security to the clients in the State was unintentional, so the agent is only subject to civil liability. This means that the customer can get his or her money back with interest.

Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT:

investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

Under the NASAA Statement of Policy on unethical practices, all of the following investment advisers would be able to loan monies where securities are collateral for the loan EXCEPT an investment adviser that:

is a partnership that lends money to a customer under the provisions of Regulation T of the Federal Reserve Board An investment adviser is not permitted to lend money to a customer, unless the investment adviser does so through an affiliated "regulated lender." An affiliated broker-dealer is regulated under Regulation T and can lend money to a customer; as can an affiliated bank. An adviser can lend monies to its officers or employees because they are not customers.

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

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

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon:

modern portfolio theory The Prudent Investor Act, adopted in most States, is a modernization of the "prudent investor rule" restricting the investment authority of fiduciaries. Instead of setting forth a list of "approved" securities (a "legal list") for investment, the Prudent Investor Act allows fiduciaries to use modern portfolio theory for investment decision making. Thus, instead of just investing in securities that have minimal risk, the fiduciary can apply risk-return analysis to choose the "best" investments for the level of risk assumed. Investment performance is not measured on each individual investment, but rather by looking at the overall portfolio return.

A limited partnership unit was initially sold to an investor for $25,000. The unit is illiquid and there is no current market for the security. As part of the partnership agreement, the general partner has the right to assess the limited partners if the partnership suffers a cash shortfall. The investor wishes to give the partnership unit to a close friend as a birthday present. This action is:

permitted and is considered to be an offer of a security The offer of the gift of an assessable security is not a gift - the issuer has the right to assess the holder for more monies, if they are needed to run the business. This gift relieves the giver of a liability to pay; which is the same thing as the recipient of the "gift" - the buyer - actually paying for the security. Thus, a buyer paying for a security; or relieving the seller of a liability; is a "sale" of that security. In this case, the final contract sale has not occurred, since the investor "wishes" to give this gift, so this is an offer to sell.

Under NASAA rules, a customer must sign and return the margin agreement:

promptly after the initial transaction in the account NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!

The term "blue skying" a new issue refers to:

registering the issue in each State where the securities will be offered to customers

Painting the tape

the illegal practice of rapid-fire buying and selling of the same security to create trades on the tape without a change of ownership of the security. This activity often attracts other buyers who bid up the price; and the originators of the manipulation unload their shares at the artificially inflated price.

HYIPs are typically:

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

Registration of securities in a State by Coordination becomes effective

when the Federal registration becomes effective Registration of securities in a State by coordination becomes effective at the same time that the Federal registration becomes effective. However, the Administrator requires that the registration information be on file with the State for at least 10 business days prior to the State registration becoming effective.