Unit 8 - Series 65
Which of the following is not an accredited investor? A) An individual with a net worth, including the value of her primary residence, that is greater than $1 million B) An individual whose income was greater than $200,000 in each of the two most recent years with a reasonable expectation of reaching that level again this year C) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million D) A registered open-end investment company with net assets of $600,000
A) An individual with a net worth, including the value of her primary residence, that is greater than $1 million Explanation An accredited investor can take different forms: an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank, or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.
As referred to in the NSMIA, the term federal covered security would apply to which of the following? Preferred stock in the XYZ Corporation whose common stock is listed on the I. NYSE II. Common stock in ABCD, Inc., a stock traded on the OTC Link III. Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois IV. Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri A) I and IV B) I and II C) II and III D) III and IV
A) I and IV Explanation Any security equal or senior to one listed on the NYSE is a federal covered security. Municipal bonds are a federal covered security except in their state of issuance. Over the counter securities are not considered federal covered.
XYZ Brick Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the administrator is unnecessary because the issue is exempt. Should XYZ be served with a court order, the burden of proving its issue is exempt is on the A) company. B) CEO. C) court. D) administrator.
A) company. Explanation In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption (the company, not the CEO).
When making a sales presentation to a prospective client, an agent of a broker-dealer would not be exempt from the antifraud provisions of the Uniform Securities Act if the product being offered was a A) federal covered security. B) forex contract. C) futures contract. D) fixed annuity.
A) federal covered security. Explanation The antifraud provisions of the Uniform Securities Act apply whenever an offer or sale is made of a security. The only one of these choices that is a security is the federal covered security. Although federal covered securities are exempt from the registration requirements of the act, they are not exempt from the antifraud statutes.
When a security is being registered under coordination, all of the following are required except A) filing with the administrator a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. B) none of these are exceptions. C) a description of the proposed use of the proceeds of the underwriting. D) prompt filing with the administrator of any amendments filed with the SEC.
A) filing with the administrator a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. Explanation The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least two full business days before the effective date, not with the initial filing.
All of the following must be specified in the state registration statement of the security except A) the total amount of the security that will be offered in each state. B) a stop order from any other state that affects the offering of the security within that state. C) all other states where the security is currently registered or will be registered. D) the total amount of the security that will be offered in this state.
A) the total amount of the security that will be offered in each state. Explanation 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.
Which of the following statements made by an investment adviser would violate the antifraud provisions of the Uniform Securities Act? A) "We believe that fundamental analysis is the best way to select stocks for our clients." B) "Our fees are nonnegotiable" when Form ADV Part 2A clearly indicates otherwise. C) "We have over $40 billion in assets under management representing both institutional and retail clients." D) "We require any associated person determining general investment advice to be a CFA."
B) "Our fees are nonnegotiable" when Form ADV Part 2A clearly indicates otherwise. Explanation Stating an untruth would be considered fraud. If Form ADV Part 2 says that the fees are negotiable, you can't state that they are not. An adviser may certainly state which method of analysis he thinks is best. A firm can also set whatever standards it wishes, even though none are required by the regulatory bodies. As far as bragging about the amount of AUM, if you've got them, it is okay to flaunt them.
Each of the following persons is able to issue securities except A) a corporation. B) an individual. C) a credit union. D) a partnership.
B) an individual. Explanation Individuals (natural persons) cannot issue securities. You can't sell stock in yourself.
Which of the following can issue stock? A) The U.S. Treasury B) A state C) A corporation D) A city
C) A corporation Explanation Corporations issue stock. Federal and state governments, including municipalities, can issue debt securities but not equity securities. Even though the advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money.
Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction. B) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. C) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE. D) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm.
D) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. Explanation An issuer transaction is one in which the issuer receives the proceeds of the sale. When GEMCO sold those donated shares to the market maker, the proceeds were received by the issuer (GEMCO). When stockholders sell their shares, they are the ones who receive the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in.
The U.S. Supreme Court case resulting in the decision that an investment contract is a security is the A) Muller case. B) Steiner case. C) Golub case. D) Howey case.
D) Howey case. Explanation It was the Howey case in 1946 where the decision ruled that an investment contract meeting the four prongs is a security: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others.
Which of the following is an exempt security under the Uniform Securities Act? A) Common stock traded on the London Stock Exchange B) Shares of a U.S.-based insurance company not authorized to sell policies in that particular state C) Commercial paper maturing in 12 months D) Negotiable certificates of deposit with $100,000 denominations
D) Negotiable certificates of deposit with $100,000 denominations Explanation A negotiable certificate of deposit issued by a bank is an exempt security. Insurance company shares are nonexempt if the issuer is not authorized to do business in that particular state. Although debt securities issued by the United Kingdom are exempt, corporate securities issued by British companies are not. Commercial paper loses its exemption if the maturity is longer than 270 days.
The Uniform Securities Act would consider which of the following insurance products to be a security? A) Mortgage life insurance B) Modified endowment life insurance C) Fixed annuity D) Variable life insurance
D) Variable life insurance Explanation The key is the word variable. Insurance products are excluded from the definition of a security unless the word variable is part of the description. So variable life and variable annuities are securities; the rest are not.
Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for nonexempt securities only. B) fraudulent for exempt securities only. C) not fraudulent if there was willful intent to omit the information. D) fraudulent for both exempt and nonexempt securities.
D) fraudulent for both exempt and nonexempt securities. Explanation Material facts are facts that an investor relies on to make investment decisions. The willful omission of a material fact in the sale, purchase, or offer of a security is fraudulent. This applies whether the security offered is exempt or nonexempt.
A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) without restriction. B) if accompanied by an unmarked prospectus. C) if approved by a principal. D) under no circumstances.
D) under no circumstances. Explanation The prospectus is a legal document and may not be altered.
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. Which of the following qualify for an exemption from registration under the act? A) Commercial paper with no more than nine months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state C) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency D) Bonds that are obligations of the People's Republic of North Korea
B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state Explanation A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates. However, if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities applies only to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries that do not qualify.
Under the Uniform Securities Act, a private placement is considered an exempt transaction if A) no payment is made with any purchase. B) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. C) the sale is unsolicited. D) the security is rated in the top three grades by a recognized rating agency.
B) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. Explanation The transaction exemption available to private placements requires that no more than 10 offers be made in any 12-month period to noninstitutional (retail) purchasers. Whether individual or institutional, payment is made, but commissions may be paid only on institutional sales.
Following the publication of a tombstone advertisement relating to an issue undergoing registration with SEC, an agent of a broker-dealer receives a call from a client who expresses the desire to purchase 100 shares at the best available price. The agent is permitted to A) send in-house research. B) send published articles about the issuer. C) submit a pending order. D) send a preliminary prospectus.
D) send a preliminary prospectus. Explanation During the cooling-off period of an initial public offering, an agent may respond to an inquiry by providing the customer with a preliminary prospectus. No other advertising or research may be sent.
