Unit 1 Questions

The Administrator can bring a case against an agent and have the court require the agent to: A) resign from his current employment. B) move out of the state. C) retake an exam. D) pay back a client.

Ans. D) pay back a client. The Administrator may bring a case to court where the agent is found civilly liable. In that case, restitution may be ordered by the court. The Administrator does not have to go to court to require the agent to retake a qualification exam. Reference: 2.15.1.2 in the License Exam Manual

The Uniform Securities Act defines an Investment Adviser as

Anyone who is a partner, officer, director, or other employee or person associated with an IA other than clerical or ministerial personnel who 1) make recommendations or provide advice regarding securities, 2) manage accounts or portfolios of clients, 3) determine which recommendations or advice should be given, 4) solicits, offers, or negotiates for the sale of, or sells, advisory services, or 5) supervises any such persons. An individual or a firm may be registered as an investment adviser, but only an individual can be an investment adviser representative. Reference: 3.7.2 in the License Exam Manual

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT A) an investment company must have more than $100,000 capitalization to be offered to the public. B) an investment company's board of directors may be composed of up to 70% of the company's interested persons. C) a mutual fund may not use the term no-load if its 12b-1 fee exceeds .25% D) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company

Ans B) an investment company's board of directors may be composed of up to 70% of the company's interested persons. At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company. These are individuals who have no connection to the fund other than a position on the board (and maybe owning some shares of the fund as would any investor). Reference: 1.10.9 in the LEM

A banner on a broker-dealer's website is considered: A. static content B. entanglement C. adoption D. interactive content

Ans. A static content In most cases, a broker dealers website is static. This is, only the firm can make changes and those changes are infrequent. Certainly a banner ad on the website fits that description. Entanglement and adoption are terms applying to a securities professional making use of third-party information on social media. Reference: 2.4.8.1 in the License Exam Manual.

Under NASAA Model Custody Rule, an investment adviser would be considered to have custody of client assets if that adviser inadvertently receives: I. a check from a client made out to the IA and does not return the check within 24 hours II. a check from a client made out to a third party and does not forward the check within 3 business days III. stock certificates from a client and does not forward them within three business days. IV. stock certificates from a client and does not return them within 3 business days.

Ans. II and IV. Checks made out to third party must be FORWARDED to that party within 3 business days of receipt or the IA will be considered to be maintaining custody. In the case of certificates or checks made out to the IA, RETURN must be made within 3 business days of receipt in order to avoid custody issues; they are never forwarded.

Section 402 of the USA contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Included in that listing would be I. corporate debentures II. bonds issued by a Canadian province III. Bonds issued by the District of Columbia IV. securities issued by a credit union authorized to do business in that state.

Ans. II, III and IV. Bonds issued by states (under the USA, DC is considered a state) and Canadian provinces are exempt. Any security issued by a federally chartered redit union or one that is authorized to do business in the state is exempt. However, unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it a federal covered), a corporate debenture is not an exempt security. Don't make any assumptions on the exam.

Assignment

When an advisory firm is sold, its major asset are its contracts with clients. Legally that sale means the contracts have been assigned to the new buyer. This does not mean that the clients have to approve of the sale; the only have to approve of letting the new owner(s) manage their money. They can decide to take their money elsewhere. Assignment also includes any direct or indirect transfer or pledge of an investment advisory contract by the adviser or of a controlling block of the adviser's outstanding voting securities by a stockholder of the adviser. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the partners or from the admission of the adviser of one or more partners who, after admission, will be only a minority interest in the business while a change to a majority would be considered an assignment. However, a reorganization or similar activity that does not result in a change of actual control or management of an investment adviser is not an assignment.

Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) A bank that charged a fee for providing investment advice. B) The publisher of an investment advisory newsletter that plans issues based on market events. C) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities. D) A broker-dealer that managed clients' portfolios for a fee.

Ans. A) A bank that charged a fee for providing investment advice. A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided. Reference: 3.2.2 in the License Exam Manual

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. B) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of five years. C) Broker-dealers must maintain records of trade blotters for a minimum of three years. D) Broker-dealers must maintain records of electronic communications for a minimum of three years.

Ans. A) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of five years. Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Emails are treated as any other communication: three years for broker-dealers and five years for investment advisers. Reference: 3.8 in the License Exam Manual

Which of the following statements concerning an agency cross transaction for an advisory client is (are) TRUE? I. It is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. II. An advisory client must provide prior written consent for the adviser to be able to engage in agency cross transactions. III. An adviser must make prior written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. IV. An adviser may recommend the transaction to both parties to the transaction. A) I, II and III. B) I and IV. C) I only. D) I, II, III and IV.1

Ans. A) I, II and III. An agency cross transaction is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan. An adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. The adviser may not recommend the transaction to both parties. Reference: 3.15 in the License Exam Manual

Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are TRUE? I. Kapco's renewal was timely. II. Kapco's renewal was late. III. Patel's renewal was timely. IV. Patel's renewal was late. A) II and IV. B) I and III. C) I and IV. D) II and III.

Ans. A) II and IV. Regardless of when initial registration occurs, the renewal date for all professionals is December 31. Reference: 2.4.3 in the License Exam Manual

During the application process for registration as an agent, the Administrator may request information about the applicant's: I. financial condition II. citizenship III.record involving a non-securities misdemeanor conviction 5 years ago IV. proposed method of doing business A) II and IV. B) I and IV. C) II and III. D) I, II, III and IV.

Ans. A) II and IV. The Administrator asks all registrants about their proposed method of doing business. Individual registrants may be asked about their citizenship. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers. Reference: 2.4.1 in the License Exam Manual

Among the powers granted to the Administrator under the Uniform Securities Act (USA) is the power to I. audit the books of a federal covered adviser​ with clients in his state​ if he suspects fraudulent business behavior II. permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000 III. require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes IV. require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the ​investment ​adviser has a place of business in the state A) III and IV B) I and III C) I, II and III D) I, II, III and IV

Ans. A) III and IV Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC. IARs associated with federal covered advisers are only required to register in a state in which they​ (the IAR)​ have a place of business. Reference: 3.14 in the License Exam Manual

Ditherton, Wiggleman and Jones, LLC, is an investment adviser with $2 billion in AUM. In appreciation for the large volume of brokerage transactions directed their way, Alexander Wimpton and Sons, Members of the NYSE, offer to send Mr. Ditherton on an all expense trip to Zurich to attend a seminar covering the latest developments in global investing. Under Section 28(e) of the Securities Exchange Act of 1934, A) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar B) Mr. Ditherton could not attend because the safe harbor under Section 28(e) only applies to domestic events C) Mr. Ditherton could attend, but only if he paid the direct costs of the seminar and let Wimpton and Sons take care of the transportation costs D) Mr. Ditherton could attend because attendance at a business related seminar such as this falls under the safe harbor provisions of Section 28(e)

Ans. A) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar Section 28(e) provides a safe harbor for soft dollar compensation from broker-dealers to investment advisers. Included is covering the registration fees of seminars related to the adviser's business. However, all transportation and personal expenses must be paid by the investment adviser. Reference: 3.18 in the License Exam Manual

In which of the following situations is an agent committing a prohibited practice? A) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority. B) Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account. C) Buying a security on behalf of a customer and then reselling it before the customer has paid for it. D) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity.

Ans. A) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority. Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades. Reference: 2.11.5 in the License Exam Manual

You are an IAR. One of your clients is a C level officer with a publicly traded corporation. When needing to relieve yourself, you are shown to the executive washroom. While cleaning up, you notice a report, stamped "Confidential" and a quick peek reveals that it is highly favorable to the company. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, you: A) cannot buy any of the stock for personal or client accounts. B) can accept unsolicited orders from clients and buy for your personal account only. C) should tell your client what you saw and ask permission to act on this information. D) contact the Administrator immediately.

Ans. A) cannot buy any of the stock for personal or client accounts. This is a case of "accidentally" acquiring material, inside, nonpublic information. Under no circumstance are you permitted to make any use of this until the report is made public. Trick - you may accept unsolicited customer orders (unless they were in the washroom with you), but you can't do anything for yourself. Reference: 3.17 in the License Exam Manual

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with clients who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is guilty of selling away B) performed a matched trade as permitted under the rules C) is required to register as a broker-dealer D) engaged in an agency cross transaction

Ans. A) is guilty of selling away When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealers books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization. Reference: 2.11.26.1 in the License Exam Manual

As long as properly disclosed, a broker-dealer would be permitted to charge a fee for all of these EXCEPT: A) solicitation of proxies B) annual maintenance fees C) issuing a stock certificate D) wiring funds to the client's bank

Ans. A) solicitation of proxies Broker-dealers are not permitted to charge for soliciting proxies—the issuer is responsible for reimbursing the broker-dealer for any of its expenses. All of the other charges are permitted if fully disclosed to clients. Reference: 2.11.11 in the License Exam Manual

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege B) there is no violation as long as the customer signs a waiver agreeing to these terms. C) there is a violation because the IAR failed to obtain the signed receipt. D) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract.

Ans. A) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege The problem here is that the client has five days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within five business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed. Reference: 3.10.3.2 in the License Exam Manual

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of his broker-dealer employer? A)The transactions are authorized in writing by the broker-dealer before execution of the transactions. B)The securities are exempt under the Uniform Securities Act. C) The agent will receive no compensation. D) The customer is a member of the agent's immediate family.

Ans. A)The transactions are authorized in writing by the broker-dealer before execution of the transactions. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered contrary to the standards imposed for an agent to effect securities transactions not recorded on the regular books or records of the broker-dealer which the agent represents, unless the transactions are authorized in writing by the broker-dealer before execution of the transaction. Reference: 2.11.26.1 in the License Exam Manual

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT: A. principal on equity issues. B. dividends on equity securities. C. principal repayment at maturity on debt securities. D. interest on debt securities.

Ans. A. Principal on equity issues. Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee. Reference 2.11.14

The head of research for your firm has just prepared a very positive report on DEF Industries, INC. THe report will be placed on the firms website later today and copies mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this "strong buy" recommendation. As an investment adviser representative, you would: A. be permitted to contact your clients with this recommendation right now. B. be permitted to contact your clients with this recommendation tomorrow. C. not be permitted to contact your clients until it was ascertained that the report was general public knowledge D. be required to send your clients to the firm's website before making an y comments regarding this security.

Ans. A. be permitted to contact your clients with this recommendation right now. A firms internal research is not considered inside information. Clients my be contacted as soon as the IAR has access to the report. What is prohibited would be for the IAR to purchase this stock personally, prior to release of the report, and then contact clients.

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? i. The client must initially have $1 million under management or a net worth of $2.1 million. ii. Compensation paid in this way must be for gains reduced by losses. iii. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. A. i, ii, and iii B. i and ii C. i only D. ii and iii

Ans. A. i, ii, and iii The NASAA Model Rule permits performance-based fees if the client has at least $1 million in assets under management or a net worth of $2.1 million provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state covered Advisers must make additional disclosures, including the incentive to take additional risk. Reference 3.14 in the License Exam Manual

An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the "pay-to-play" prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than: A) $250 per election cycle for a candidate that IAR was ineligible to vote for B) $350 per election cycle for a candidate that IAR was eligible to vote for C) $500 per election cycle for a candidate that IAR was eligible to vote for D) $350 per election cycle for a candidate that IAR was ineligible to vote for

Ans. B) $350 per election cycle for a candidate that IAR was eligible to vote for There is a de minimis level that is considered an exception from the pay to play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle. Reference: 3.21.1 in the License Exam Manual

Gibraltar Investment Advisers opened for business last week. Because of the clients brought over from previous affiliations of their IARs, they have started with $94 million under management for various individual and corporate clients. They also signed a contract to manage an additional $10 million for a wealthy individual. Gibraltar will begin managing that individual's portfolio at the beginning of the next calendar quarter. Which of the following best describes Gibraltar's investment adviser registration requirements? A) Gibraltar's only option is to register at the state level because it currently manages less than $100 million in client funds. B) Gibraltar would be eligible to register at the federal level. C) Gibraltar must register with the state(s) and then, within 90 days of the receipt of the additional $10 million, must register with the SEC. D) Gibraltar need not register as an investment adviser because it will manage funds for an institutional investor.

Ans. B) Gibraltar would be eligible to register at the federal level. If an investment adviser anticipates having at least $100 million under management within its first 120 days, it is eligible to become a federal covered adviser by registering with the SEC. Even though Gibraltar will have AUM in excess of $100 million by the beginning of the next quarter, registration with the SEC is not mandatory until AUM reach $110 million. That the advisory will manage some institutional funds does not exempt the organization from investment adviser registration. Reference: 3.3.2.1.4 in the License Exam Manual

KAPCO Advisers, a registered investment adviser, recommends the purchase of 100 shares of GEMCO common stock to one of its advisory clients. The client accepts the recommendation and the sale is made from KAPCO's inventory. This transaction A. would be considered unethical B. can only be done through a registered broker-dealer C. requires both written disclosure to and the consent of the client prior to the completion of the transaction D. may be made without restriction as long as the markup on the GEMCO stock was fair and reasonable

Ans. C Industry rules require that investment advisers made disclosure when acting as principals (from inventory) or agents in a transaction with an advisory client. This disclosure must be made in writing—furthermore, client consent to acting in this capacity must be obtained prior to the completion of the transaction. Reference: 3.12.3.1 in the License Exam Manual

Which of the following statements are TRUE? I. When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. II. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. III. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. IV. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) III and IV. B) I and II. C) I and III. D) II and IV.

Ans. B) I and II. When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required. Reference: 3.7.3 in the License Exam Manual

Under the Securities Exchange Act of 1934, the authority of the SEC to investigate violations of rules extends over: I. the state securities statutes. II. the federal securities acts and rules of the SEC. III. the SROs. A) I and III. B) II and III. C) I and II. D) I, II and III.

Ans. B) II and III. The SEC may investigate any situation it believes may have violated federal securities laws, its own rules, and rules of the SROs (i.e., exchanges, FINRA, MSRB). The SEC does not enforce state securities statutes or state or federal banking laws. Reference: 1.8 in the License Exam Manual

With regard to the registration requirements of the Uniform Securities Act, which of the following statements are TRUE? I. Only the issuer itself can file a registration statement with the Administrator. II. An application for registration must indicate the amount of securities to be issued in the state. III. The Administrator may require registrants to file quarterly reports. A) I, II and III. B) II and III. C) I and II. D) I and III.

Ans. B) II and III. The USA requires that any application for registration include the amount of securities to be sold in that state. The Administrator has the power to request regular filings of reports, but no more frequently than quarterly. While the issuer is most commonly the registrant, application may also be made by selling stockholders and broker-dealers. Reference: 2.9.1 in the License Exam Manual

Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? A) Qualification B) Notice filing C) Coordination D) Application

Ans. B) Notice filing Under the NSMIA, the Administrator may request copies of the documents filed with the SEC by federal covered securities, but does not review them because of lack of jurisdiction. There is greater review of the information filed in a registration by coordination, but, since the primary responsibility falls upon the SEC, the states sometimes just spot check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator. Reference: 2.7.1 in the License Exam Manual

In which of the following instances would an investment adviser representative be exempt from the antifraud rules of the Uniform Securities Act? A) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. B) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. C) The IAR is also an agent of a broker-dealer and, in that capacity, makes a recommendation to a nonadvisory client. D) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name.

Ans. B) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. Because fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA. Reference: 2.6 in the License Exam Manual

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT that they: A) cannot be assigned without customer approval. B) cannot allow for prepaid advisory fees. C) must be in writing. D) can only allow fees to be performance related under certain limited circumstances.

Ans. B) cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2 million, where performance-based fees are permitted. Reference: 3.14 in the License Exam Manual

An agent can sell an unregistered security to one of the firm's retail customers under each of the following circumstances EXCEPT A) if the transaction is initiated at the request of the customer B) if the agent is not registered in the client's state C) if the security being purchased is an exempt security D) if the security being purchased is a warrant to purchase stock that is NYSE listed

Ans. B) if the agent is not registered in the client's state When engaging in securities transactions with retail clients, agents must always be registered in the state of residence of that client. As long as the agent is properly licensed, if the security being purchased is exempt or it is being purchased in an exempt transaction (such as an unsolicited trade), registration with the state is not required. Federal covered securities, such as those listed on the NYSE, are also exempt from registration. That exemption carries over to warrants and rights issued by that company. Reference: 2.8.2 in the License Exam Manual

According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level? A) 2%. B) 12%. C) 5%. D) 10%.

Ans. C) 5%. An interested person is any person (including 2 or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer. Such persons are required to file reports of beneficial ownership on Schedule 13D with the issuer, the exchanges (if a listed security), and the SEC within 10 days of exceeding the 5% level. Reference: 1.6.4.1 in the License Exam Manual

The Administrator of a state's securities department strongly believes that the registration statement for a security contains a substantial amount of misleading information and that investing in the security is likely to cause immediate and egregious harm to its investors. Under the following circumstances, the Administrator may: A) not summarily revoke or deny the registration statement until a hearing takes place. B) issue a stop order denying or revoking the registration statement. C) revoke or deny the registration statement and must schedule a hearing within 30 days of issuing the order. D) revoke the registration statement, denying the applicant a hearing for an unlimited amount of time.

Ans. B) issue a stop order denying or revoking the registration statement. The Administrator may issue a stop order denying or revoking the registration statement but no stop order may be entered (unless in a summary proceeding) without (1) appropriate prior notice to the applicant or registrant, the issuer, and the person on whose behalf the securities are to be or have been offered, (2) opportunity for hearing, and (3) written findings of fact and conclusions of law. Reference: 2.14.4.2 in the License Exam Manual

All of the following have legal standing as persons under the Uniform Securities Act EXCEPT: A)unincorporated organizations. B) minor children. C) trusts where the interests of the beneficiaries are evidenced by a security. D) joint stock companies.

Ans. B) minor children. The definition of a person under the act includes, among others, individuals, joint stock companies, unincorporated organizations, and trusts where the interests of the beneficiaries are evidenced by a security. Minor children are not persons under the act. Reference: 2.2 in the License Exam Manual

All of the following statements relating to the USA's provisions dealing with the registration of securities are correct EXCEPT: A) a corporation registering a new issue with the SEC and wishing to sell in the state may register by coordination. B) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA. C) any registrant may use qualification, even if it has filed a concurrent registration with the SEC. D) the NSMIA preempted the state registration of certain securities known as federal covered securities.

Ans. B) notice filings cannot be required of federal covered investment company securities as they are exempt from the registration requirements of the USA. The NSMIA did take the registration powers away from the states for certain securities, defined in the law as federal covered securities. However, the states still have the right to require notice filings in order to, among other things, determine the appropriate fee to charge the registrant. Coordination is the usual method when registering with the SEC and the state at the same time. While not the expected practice, any security may register using qualification, even if it has an SEC registration in process. Reference: 2.7.1 in the License Exam Manual

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A. if it is determined that an investment adviser is insolvent, the SEC may revoke the registration. B. Failure to adequately supervise a person associated with the adviser could be cause for the EC to revoke the firm's registration. C. Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrants fiscal year. D. An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings.

Ans. B. Failure to adequately supervise a person associated with the adviser could be cause for the EC to revoke the firm's registration. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is NOT a cause for revocation under the investment advisers act of 1940. But it is for a state registered investment adviser (its tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation. It is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

All of the following statements regarding investment advisers are NOT true EXCEPT? A. there are specific education requirements that all investment advisers must meet. B. The term scalping is the practice whereby an investment adviser, before the dissemination of a securities recommendation, trades on the anticipated short-run market activity that may result from the recommendations. C. An investment adviser's books and records must be maintained in an easily accessible place for 3 years under the act. D. Federal covered advisers may not maintain custody of funds and securities of clients residing in a state if custody is prohibited by the Administrator of that state.

Ans. B. The term scalping is the practice whereby an investment adviser, before the dissemination of a securities recommendation, trades on the anticipated short-run market activity that may result from the recommendations First of all, lets get rid of the negatives. By stating all are not true except, the question is looking for the true statement. The correct choice describes scalping, a prohibited practice. There are no educational requirements for investment advisers and books and records must be kept easily accessible for a period of 5 years, the first 2 years in an appropriate office (generally the principal office of the IA). State Administrators have no jurisdiction over federal covered advisers; if the state prohibits custody, that would only impact state registered IAs.

A transactional exemption would be available under the USA when an agent for a broker-dealer. A. sells a large block of an unregistered nonexempt security to an individual who meets the definition of an accredited investor. B. sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state. C. sells a retail client $10,000 of U.S. Treasury bonds D. Receives an unsolicited order from a client to purchase heating oil contracts

Ans. B. sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state. The sale of a security to an institution, such as an insurance company, is considered an exempt transaction. The fact that the company is not authorized to do business in the state only means that its securities would not be exemt, but that does not change the fact that this is a sale to an institution and is, therefore, exempt. The term accredited investor is meaningless here, only institutions qualify for exempt treatment, not rich people. The T-bonds are an exempt security, but the sale to a retail client is not an exempt transaction. Heating oil contracts are a commodity, not a security.

Which of the following statements relating to penalties under the USA is CORRECT? A) Any person aggrieved by an order of the Administrator may request an appeal of the order within 15 days which, in effect, functions as a stay of the order during the appeal period. B) A seller who notices that a sale was made in violation of the act may offer a right of rescission to the purchaser that must be accepted either 2 years after notice of the violation or 3 years after the sale, whichever comes sooner. C) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. D) Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act.

Ans. C) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. To be subject to time in prison, a sales agent must knowingly have violated the USA. A client who purchased a security in violation of the USA may recover the original purchase price plus costs involved in filing a lawsuit. In addition, the purchaser is entitled to interest at a rate stated by the Administrator, less any earnings already received on the investment. The right of rescission must be accepted or rejected within 30 days of receipt of the letter of rescission; it is the statute of limitations for claims that runs the 2- or 3-year period. An appeal will only stay an order when so directed by a court of competent jurisdiction. Reference: 2.15.1.2 in the License Exam Manual

Which of the following statements regarding financial requirements that may be imposed by the Administrator are TRUE? I. Agents may be required to be bonded. II. Investment adviser representatives may have to meet certain net worth standards. III. Broker-dealers may have to meet certain net capital levels. IV. Investment advisers may post a bond instead of meeting certain net worth levels. A) I, II, III and IV. B) III and IV. C) I, III and IV. D) I, II and III.

Ans. C) I, III and IV. Individuals registered as agents may be required to be bonded, but these individuals, as well as those registered as investment adviser representatives, never have to meet net worth or net capital standards; those are for broker-dealers and investment advisers only. The USA does allow a broker-dealer or investment adviser to post a bond instead of demonstrating a certain net capital or net worth. Reference: 2.3.2.4 in the License Exam Manual

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are: I. mutual funds are only allowed to maintain joint accounts with other funds that are members of the same "family" of funds. II. no public offering may commence unless the fund has at least $100,000 in net assets. III. no registered investment company may own more than 3% of the voting shares of another registered investment company. IV. shares of the fund will not have any margin loan value until the 30th day after purchase. A) II and IV. B) I and II. C) II and III. D) I and IV

Ans. C) II and III The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940. Reference: 1.10.6 in the License Exam Manual

Under which of the following conditions does NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permit an IA to divulge personal information about a specific client? I. When it will be used in a testimonial regarding the advisory services offered. II. When the IA has received a subpoena from a court of competent jurisdiction. III. When the client has given the IA specific permission to do so. IV. With the approval of the Administrator. A) II and IV. B)I and III. C) II and III. D) I and IV.

Ans. C) II and III. Investment advisers are generally prohibited from divulging any information about their clients unless required by law or the courts. However, if the client specifically approves, the IA may act within the limits stated by the client. Testimonials are never permitted for investment advisers. Reference: 3.17 in the License Exam Manual

The Securities Exchange Act of 1934 prohibits I. the SEC from suspending trading on any exchange without the prior approval of the President of the United States of America II. a broker-dealer from exercising discretion in a client's account unless written discretionary authority is received prior to the first trade for the client III. so-called "bad actors" from taking advantage of the exemption offered under Rule 506 ​IV. SEC commissioners from buying or selling any securities, other than those issued by the U.S. government, in their personal accounts during their term of office A) III and IV B) I and III C) II and IV D) I and II

Ans. C) II and IV Under both state and federal law, it is prohibited for any broker-dealer or agent to exercise discretion in a client's account prior to receiving the discretionary account authorization in writing. The written discretionary power must be received prior to taking control of the account. SEC commissioners may not engage in any securities transactions during their term of office unless the security is one issued by the U.S. government. The SEC must notify the POTUS when suspending trading on an exchange and the "bad actors" provision is found in the Securities Act of 1933. Reference: 1.8 in the License Exam Manual

Federal covered securities, as defined under the Uniform Securities Act: I. must be registered with the SEC before they can be offered in the state. II. must be registered in the state before they can be offered within the state. III. include shares of an investment company registered with the SEC under the Investment Company Act of 1940. A) I and III. B) I and II. C) III only. D) I only.

Ans. C) III only Included in the NSMIA's definition of federal covered security are those securities issued by investment companies that are registered with the SEC under the Investment Company Act of 1940. One of the purposes of the NSMIA was to separate state and federal registrations and that is why covered securities are exempt from registration on the state level. The term federal covered does not mean SEC registered. Although many covered securities are registered with the SEC, (those on the exchanges, for example), the term also includes government and municipal securities which are never SEC registered. Reference: 2.6.2 in the License Exam Manual

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when: A) Directing a securities transaction to an affiliated broker-dealer. B) The trade was being executed by an officer or partner of the firm. C) Purchasing shares from an advisory client, originally acquired as a result of the adviser's previous "buy" recommendation. D) Engaging in an agency cross transaction.

Ans. C) Purchasing shares from an advisory client, originally acquired as a result of the adviser's previous "buy" recommendation. There are two principals in every securities trade; the buyer and the seller. In this case, buying shares directly from the client who owns them, places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent - that's the reason for the term. Reference: 3.12.3 in the License Exam Manual

An individual with a place of business in State A manages client assets on behalf of a ​covered investment adviser. ​This individual wishes to expand his client base by working one day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Passing an oral or written examination B) Becoming licensed as a broker-dealer C) Register as an investment adviser representative in State B D) Complying with the notice filing requirements of the state

Ans. C) Register as an investment adviser representative in State B Individuals managing client assets while employed by federal covered investment advisers, must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state.​ It is the investment adviser who ​may be required to notice file with the Administrator. Reference: 3.7.1 in the License Exam Manual

An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of their clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts? A) The most favorable prices are allocated to the adviser's clients purchasing the largest quantities. B) The trade cannot be accepted and must be moved to the broker-dealer's errors account. C) The order is reallocated to the investment adviser's clients by using the average cost basis. D) A first in, first out (FIFO) method is used.

Ans. C) The order is reallocated to the investment adviser's clients by using the average cost basis. This is not an uncommon practice where an investment adviser has the ability to direct clients' orders to a specific broker-dealer. In many instances, the adviser will be purchasing (or selling) the same security for a number of different clients and, rather than turning in a large number of small orders, enters the trade as one large order. If, as in this case, the order is filled at different prices (particularly prevalent today with decimal pricing), then both state and federal rules require that an average price method be used. Reference: 3.19.3 in the License Exam Manual

If a new customer will not state investment objectives and will not provide a financial statement, the agent may: A) solicit orders for any security without restrictions. B) sell only stocks recommended by the broker-dealer. C) accept unsolicited orders until the customer's suitability is determined. D) sell only securities listed on a national exchange.

Ans. C) accept unsolicited orders until the customer's suitability is determined. The only type of transaction that may be executed for a customer of unknown financial status is one that is customer initiated-an unsolicited trade. Reference: 2.11.3 in the License Exam Manual

John Johnson was convicted five years ago of failure to pay child support, a misdemeanor in his home state. Mr. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will: A) consider Mr. Johnson to be statutorily disqualified since in this state his crime is a felony. B) determine Mr. Johnson's status on the basis of the extent to which his child support payments are being paid. C) disregard that conviction when determining Mr. Johnson's qualifications for registration. D) consider granting registration to Mr. Johnson, but only if he receives heightened supervision.

Ans. C) disregard that conviction when determining Mr. Johnson's qualifications for registration. The conviction on Mr. Johnson's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to Mr. Johnson's application for registration in that state. Reference: 2.14.4.1 in the License Exam Manual

An individual, registered as an agent with ABC broker-dealer, has an independent financial planning practice. Hourly fees are charged for developing financial plans, and if the client wishes, he refers transactions to ABC broker-dealer and is paid commissions for products sold. The Investment Advisers Act of 1940 requires: A) that ABC register as an investment adviser but not the financial planner. B) that ABC register as an investment adviser because it sells securities. C) that the financial planner register as an adviser but not the broker-dealer. D) neither the financial planner nor ABC is required to register as an investment adviser.

Ans. C) that the financial planner register as an adviser but not the broker-dealer. The agent is receiving compensation for rendering advice. A broker-dealer is exempt from registering as an investment adviser unless it receives special compensation (typically a fee) for the advice. Reference: 3.2.1.1.1 in the License Exam Manual

USAAdvisers is registered in 10 midwestern states. Regarding financial requirements, USAAdvisers must meet those of A) the SEC B) each state in which it has a place of business C) the state in which its principal office is located D) the state with the most stringent financial requirements

Ans. C) the state in which its principal office is located Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located the other states have no further claim. Reference: 3.6.5 in the License Exam Manual

All of the following must be specified in the state registration statement of a security EXCEPT: A) the total amount of the security that will be offered in this state. B) all other states where the security is currently registered or will be registered. C) the total amount of the security that will be offered in each state. D) a stop order from another state that affects the offering of the security within that state.

Ans. C) the total amount of the security that will be offered in each state. It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes, the amount to be sold in this state must be disclosed. Reference: 2.9.1 in the License Exam Manual

An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state: A) with at least 1/3 of its circulation in the state. B) under no circumstances. C) with at least 2/3 of its circulation in the state. D) with at least ½ of its circulation in the state.

Ans. C) with at least 2/3 of its circulation in the state. An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than two-thirds of its circulation outside the state during the past twelve months. Reference: 2.13.1 in the License Exam Manual

Under the USA, which of the following would be include in the definition of an investment adviser representative? A. an employee, highly skilled in evaluating securities, who performs administrative of clerical functions for an investment adviser. B. an individual who renders fee-based advice on previous metals. C. A solicitor for an investment advisory firm who is compensated for the service rendered. D. An agent who offers incidental advice on securities whose sole compensation is from commissions on transactions.

Ans. C. A solicitor for an investment advisory firm who is compensated for the service rendered. A solicitor is considered an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities and, therefore, a person advising on them is not considered an investment adviser Representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required.

Which of the following statements regarding provisions of the Investment Advisers Act of 1940 is True? A. Big Gains Registered Investment Advisers must disclose its sources of information for specific recommendations they make to clients. B. An investment adviser must obtain client permission to accept a buyout offer for all of the advisers stock. C. Five Partners Advisers, Ltd., must inform all clients that one of the 5 partners has retired and been replaced by a new partner. D. Pledging a client's contract as collateral for a loan to the adviser would not be considered an assignment of the contrat.

Ans. C. Five Partners Advisers, Ltd., must inform all clients that one of the 5 partners has retired and been replaced by a new partner. Both state and federal law requires advisers operating as partnerships to notify their clients of changes in partners where it represents a minority interest in the firm. No adviser is required to disclose the sources for a particular recommendation. An advisory firm can be sold without client permission. However, if the transaction results in a change that would be deemed to be an assignment, the adviser must obtain the consent of the clients to maintain their contracts. The regulatory bodies consider a pledge of client's contracts to be an assignment.

Under the Uniform Securities Act, an agent is A. a broker-dealer who sells registered securities to the general public. B. an individual who represents an issuer of a security issued by a Canadian Province. C. an individual representing a broker dealer who sells federal covered securities. D. an individual who represents an issuer in an exempt transaction

Ans. C. an individual representing a broker dealer who sells federal covered securities. An individual employed by a broker dealer who sells securities to the public is an agent under the Uniform Securities Act. The USA defines an agent as "any individual other than a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities." The law excludes those individuals from the definition of an agent who represent an issuer in exempt transactions, selling certain exempt securities (Canadian provincial securities are on that list), and transactions with issuer;s employees when no commission is paid. There is virtually no case in which a salesperson representing a broker dealer is not an agent.

If an agent chooses to appeal an Administrators order, when must the agent file for review of the order with the appropriate court? A. immediately B. within 30 days after the entry of the order. C. within 60 days after the entry of the order D. within 180 days after the entry of the order.

Ans. C. within 60 days after the entry of the order Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it has: A) would be required to register in 15 or more states B) limited its clients to insurance companies only C) its only place of business is outside of the U.S., deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the U.S. D) $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management

Ans. D) $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the U.S., and their AUM in the U.S. is less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible, but not required to register with the SEC. Reference: 3.3.2 in the License Exam Manual

Which of the following parties is most likely to be considered an investment adviser under the Investment Advisers Act of 1940? A) An expert in fixed income securities whose only clients are individuals and whose only recommendations deal with securities issued or guaranteed by the U.S. Treasury. B) Dow Jones, Inc., publisher of "The Wall Street Journal". C) The trust department of Citibank, which handles billions of dollars in trust assets. D) A CPA who manages investment accounts for 50 clients and charges hourly fees for the service.

Ans. D) A CPA who manages investment accounts for 50 clients and charges hourly fees for the service. The Investment Advisers Act of 1940 excludes accountants providing investment advice from the definition of investment adviser only when the advice is given on an incidental basis and with no specific compensation. A publisher of periodicals of general circulation, whether or not the publication covers financial matters, is excluded from the definition, as is an adviser whose advice is exclusively limited to U.S. government securities. Banks are also excluded from the definition of investment adviser under the act. Reference: 3.2.2 in the License Exam Manual

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Securities issued by which of the following qualify for an exemption from registration under the Act? I. Life insurance companies authorized to conduct insurance sales in that state. II. Railroads whose rates are subject to regulation by a state or federal agency. III. Commercial paper with no more than 9 months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $25,000. IV. Bonds that are obligations of the People's Republic of North Korea. A) I, II, III and IV. B) II and III. C) I, II and III. D) I and II.

Ans. D) I and II. Any life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads are under the jurisdiction of other state or federal regulators and their equipment trust certificates carry an exemption from state securities registration. The commercial paper would qualify if the denomination was $50,000 instead of $25,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations; at the time of this writing, North Korea does not qualify. Reference: 2.8.1 in the License Exam Manual

Which of the following statements are TRUE? I. The Uniform Securities Act is not the actual law of any state or territory of the United States. II. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. III. The state securities Administrator has responsibility for the enforcement and administration of a state's securities law .A) II and III. B) I and II. C) I, II and III. D) I and III.

Ans. D) I and III. The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws. Reference: 2.1.2 in the License Exam Manual

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: I. no contract may be terminated with more than 60 days notice in writing. II. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. III. unless a specific exemption applies, the fund may not engage in margin trading. IV. the contract must be in writing. A) II and IV. B) I and III. C) II and III. D) I and IV.

Ans. D) I and IV. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract. Reference: 1.10.9 in the License Exam Manual

Under the Investment Advisers Act of 1940, advertising done by investment advisers prohibits: I. the use of testimonials. II. reference only to specific past recommendations. III. untrue statements. A) I and III. B) III only. C) I only. D) I, II and III.

Ans. D) I, II and III. SEC Rule 206(4), issued under the Investment Advisers Act, prohibits untrue statements of material fact; testimonials; reference only to specific past recommendations; references to charts, formulas, or devices used to forecast securities prices without setting forth the difficulties or limitations in their use; offerings of free services without the intent or ability to perform; and guarantees of future performance. Reference: 3.13 in the License Exam Manual

It is unlawful for an investment adviser: I. To share in the profits of an account in relation to the amount of time devoted to the account. II. To unilaterally transfer an account to another firm if the assets fall below a minimum level. III. To take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator. IV. To fail to disclose the departure of a general partner of an investment advisory partnership who only had a minority interest in the firm A) I and II. B) I, II and III. C) I and IV. D) I, II and IV.

Ans. D) I, II and IV. An investment adviser cannot share in the profits of an account based on time devoted and may not assign an account without the written permission of the client. An investment adviser organized as a partnership must disclose to clients when any partner, minority interest or not, departs from the firm. Reference: 3.17 in the License Exam Manual

XYZ Corporation has been in business for more than 20 years. They need additional capital for expansion, and they determine that an initial public offering in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering? A) Providing notice filing to those states in which shares are to be issued. B) Registering by qualification. C) Registering by application. D) Registering by coordination.

Ans. D) Registering by coordination. Because this offering is being made in more than one state, SEC registration is necessary. The state registration method would be coordination, which is the simultaneous registration of a security with both the SEC and the states. Reference: 2.7.2 in the License Exam Manual

A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent a(n): A) Offer. B) Prohibited transaction. C) Gift. D) Sale.

Ans. D) Sale. The USA states that "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value." Reference: 2.12.1.1 in the License Exam Manual

As defined in the Investment Advisers Act of 1940, the term "person associated with an investment adviser" would include all of the following EXCEPT A) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account. B) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions. C) a silent partner in an advisory firm organized as a general partnership D) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications

Ans. D) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications The term "person associated with an investment adviser" means any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser, except that persons associated with an investment adviser whose functions are clerical or ministerial shall not be included in the meaning of the term. Graphic design would be considered a clerical function. Note - the difference between an associated person and a supervised person? ?The supervised person includes all employees, even those who perform clerical functions and are not required to become registered. Reference: 3.1.1.5 in the License Exam Manual

An investment adviser (IA) is deemed to be maintaining custody under the USA when: A) client funds are kept by a broker-dealer affiliated with the investment adviser. B) the adviser maintains a net worth of not less than $35,000 or has a surety bond in an amount specified by the Administrator. C) the adviser has been granted discretion over the account. D) client securities are held at the investment adviser's principal office.

Ans. D) client securities are held at the investment adviser's principal office. Possession of a client's securities is considered custody. Although an IA must maintain a minimum net worth of $35,000 (or a surety bond) if custody is maintained, the mere fact that the IA has that level of net worth does not mean that custody is involved. The USA considers that funds and securities held at an affiliated broker-dealer are not under the custody of the IA. Reference: 3.11 in the License Exam Manual

Under the Investment Advisers Act of 1940, an investment adviser is required to A) maintain a bond for an amount based on the assets under management B) furnish a statement of the total dollar amounts of securities bought and sold each year to customers C) furnish an audited balance sheet each year to customers for whom the advisor maintains custody D) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year

Ans. D) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers. Reference: 3.10 in the License Exam Manual

An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case: A) the IAR must wait for the signed paperwork to be received B) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork C) the investment adviser firm should apply to the Administrator for an extension of time D) the IAR may exercise his discretion as authorized and sell the CANCO

Ans. D) the IAR may exercise his discretion as authorized and sell the CANCO Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used for the initial transactions in a customer's account for the first 10 business days after the date of the first transaction. Reference: 3.17 in the License Exam Manual

States may require investment advisers who are registered with the SEC to do each of the following EXCEPT A) pay state notice filing fees B) file any documents with the state that are filed with the SEC C) file a consent to service of process D)maintain net capital requirements

Ans. D)maintain net capital requirements The state may require federal covered advisers to pay notice filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC, but cannot determine net worth or net capital requirements for federal covered IAs. The Administrator can require minimum net worth for state registered advisers, but, under the NSMIA, cannot do so for federal covered ones. Reference: 3.6 in the License Exam Manual

Which of the following is defined as a security under the Uniform Securities Act: A. a guaranteed, lump-sum payment to a beneficiary under a modified endowment policy. B. Fixed, guaranteed payments made for life or for a specified period under an annuity contract C. Commodity futures contracts. D. An investment contract.

Ans. D. An investment contract. Investment contracts are defined as a security under the Uniform Securities Act. In fact, the term is often used as a synonym for a security. A guaranteed, lump-sum payment to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities. It is much easier to remember what is not a security than what is. Not a security: 1. Interest in a retirement plan, (ie. IRA, Keogh) 2. Collectible 3. Commodities (precious metals, grains, futures contracts etc). 4. Condominiums used as personal residence 5. Currency

Under the USA, any partner, officer, or director of a registered investment adviser is an investment adviser representattive if a function of the position involves: I. offering advice concerning securities II. managing client accounts or portfolios III. determining securities recommendations for representatives to disseminate IV. supervising personnel engaged in advisory activities but not directly dealing with the public. A. I only B. I and II C. I, II, and III D. I, II, III and IV.

Ans. D. I, II, III and IV. The USA defines persons associated with an investment adviser as an investment adviser representative, including any partner, officer, or director who offers advice concerning securities. Persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities are investment adviser representatives.

Which of the following would be deemed to be an assignment of an investment advisory contract? I. All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc., II. The Lucky Seven Partnership is an investment adviser with 7 partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. III. Albert is an investment adviser. His client's accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan. A. I and II B. I and III C. II and III D. I, II and III

Ans. D. I, II, and III. It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment.

Registration is effect when ordered by the Administrator in the case of registration by A. Coordination B. Integration C. Notice filing D. Qualification

Ans. D. Qualification Registration by qualification is the only registration method where the Administrator sets the effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents by certain federal covered securities.

An investment adviser registered with the SEC could use the term investment counsel if: I. their principal business consists of rendering investment advice II. a substantial portion of their business involves investment supervisory services III. they maintain full investment discretion A. I and II B. I and III C. II and III D. I, II and III

Ans. I and II. These are the 2 requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition.

Which of the following transactions are exempt from registration under the USA? I. a trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders. II. an offer of a securities investment is directed to 10 individuals in the state during a 12 month consecutive period. III. a sale of securities by the trustee of the Lorgan Family Childrens Trusts IV. Agents for an entrepreneur offer pre-organization certificates to fewer than 10 investors in the state for a modest commission.

Ans. I and II. Transactions by fiduciaries, such as a trustee in a bankruptcy reorganization, are exempt from registration. But only a trustee in bankruptcy is afforded this exemption, not for a family trust. An offer of a securities investment to 10 or fewer individuals (called private placements is also exempt from registration. Offers of pre-organization certificates are not exempt when compensation is paid.

Under the USA, which of the following would be considered an exempt transaction? I. an existing client calls you to purchase 1,000 shares of a common stock that is not registered in this state. II. at the suggestion of the agent handling her account, a client purchases some US Treasury bonds for inclusion in her IRA. III. Shares of a bank's IPO are sold to an institutional client. IV. Shares of an insurance company's IPO are sold to an individual client.

Ans. I and III. A client calling to purchase stock is an unsolicited transaction, probably the most common of the exempt transactions. Any sale to an institutional client is an exempt transaction, whereas those to individuals, unless unsolicited, generally are not. Please note, even though the Treasury bonds are an exempt security, because of the transaction was solicited by an agent to an individual client, it is not an exempt transaction.

Under current law, who of the following would be required to register as an investment adviser in a state? I. A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein II. A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state III. A person whose home office is in the state and who manages less than $90 million in assets IV. A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state

Ans. I, II and III Persons having no place of business in a state are generally limited to directing fewer than 6 offers to retail (individual) residents of that state within any 12 month period before being required to register. Unless an exception applies, investment advisers who have less than $100 million in AUM must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level. **The exemption from registration for those who have no office in the state and only deal with issuers applies to broker-dealers, not to investment advisers.** Reference: 3.4 in the License Exam Manual

Who of the following are exempt from registration as an investment adviser under the Investment Advisers Act of 1940? I. An adviser whose clients consist soley of insurance companies. II. An adviser to 7 private funds with total assets under management in the U.S of $125 million III. An adviser whose only office is in Georgia who deals with only Georgia residents, none of whom is a private fund, and does not deal in securities listed on any national securities exchange. IV. An adviser in Florida with only 10 Florida clients who advertises in telephone and business directories and specializes in dealing in New York Stock Exchange issues.

Ans. I, II and III To qualify for the intrastate exemption, there is no numerical limitation, non of the clients can be private funds, and advertising on an intrastate basis is permitted. However, no advice may be given on securities traded on a national stock exchange. Under the federal law, an exemption from registration applies if the adviser's only clients are insurance companies. And, if an adviser's only clients are private funds (regardless of how many ) and AUM in the United States is less than $150 million, that adviser is exempt as well.

Which of the following are accredited investors? I. An individual with a net worth, excluding the value of her primary residence, is greater than $1 million. II. An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. III. Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. IV. A newly registered open-end investment company with net assets of $600,000.

Ans. I, II, III, and IV. An accredited investor can take different forms; an individual with a net worth, excluding the value of the primary residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501. Reference :1.5.1 in the License Exam Manual

An Administrator may summarily suspend a registration of an agent or an IAR pending final determination of proceedings under the USA. However, the Administrator may not enter a final order without: I. appropriate prior notice to the applicant as well as the employer or prospective employer of the applicant II. opportunity for a hearing. III. findings of fact and conclusions of law IV. prior written acknowledgement of the applicant.

Ans. I, II, and III. With the exception of those proceedings awaiting final determination, the Administrator must provide an appropriate prior notice to the applicant as well as the employer or prospective employer of the applicant and provide the opportunity for a hearing. In addition, the Administrator may only issue a final order after findings of fact and conclusions of law. An applicant is not required to provide written acknowledgement before an order is issued.