66 midterm
Which of the following persons is required to register with the SEC as a federal covered adviser?
A) A publisher that gives incidental investment advice only B) An adviser that gives advice to registered investment companies only C) An adviser who gives advice only related to U.S. government securities D) An adviser that manages assets of $90 million or more Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million. U1LO5
Which of the following pairs of assets provides the greatest level of diversification?
A) Assets 3 and 4, with a correlation coefficient of 0.0 B) Assets 7 and 8, with a correlation coefficient of +0.37 C) Assets 5 and 6, with a correlation coefficient of -0.42 D) Assets 1 and 2, with a correlation coefficient of -0.78 The greatest level of diversification will occur when the correlation coefficient is closest to -1.0. Therefore, Assets 1 and 2 offer the greatest level of diversification.
Which of the following corporate actions would have an effect on the company's working capital?
A) Borrowing money from the bank on a 90-date note B) Declaring a 15% stock dividend C) Paying a utility bill D) Calling in a portion of a 20-year bond at par Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash.
The Uniform Securities Act permits amendments to a registration statement after its effective date so as to change which of the following?
A) Changes may not be made by amendment; filing of a new registration statement is required. B) The underwriter's discounts and commissions C) The number of shares to be offered D) The public offering price The Uniform Securities Act permits filing an amendment to an existing registration, increasing the number of shares to be offered and sold, if the public offering price and underwriter's discounts and commissions remain unchanged.
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940
A) I and II B) I, II, and IV C) I only D) I, II, and III Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.
ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and its only clients were insurance companies it had contact with fewer than 6 State N residents in any 12-month period its only solicitation of State N residents was through radio advertisements originating in State M but received in State N it occasionally engaged in firm commitment underwriting with issuers based in Nebraska
A) I and IV B) III and IV C) I and II D) II and III A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state.
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is a broker-dealer an insurance company an investment company a person receiving impersonal advice for which the annual fee is less than $500
A) I, II, and III B) I, II, III and, IV C) III and IV D) I and II There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year.
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents?
A) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation C) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation D) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price
An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following?
A) Registration is required only if an offer is directed, accepted, and paid for in that state. B) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. C) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities. D) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g., they have no place of business in the state and their only clients are institutions). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents.
The registration requirements of the Securities Act of 1933 would NOT apply to which of the following?
A) Stocks listed on the New York Stock Exchange B) Securities issued by foreign governments with whom the United States has diplomatic relations C) Stocks and bonds issued by insurance companies D) Fixed annuities and other fixed insurance contracts Although federal covered securities, such as those listed on the NYSE, and securities issued by insurance companies and foreign governments are exempt under the Uniform Securities Act, they are not exempt under the Securities Act of 1933. The registration requirements never apply to non-security products, such as fixed annuities.
Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security?
A) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. B) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. C) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. D) It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another.
An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments?
A) Treasury notes B) Common stock C) Direct participation programs (DPPs) D) Municipal bonds
A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should
A) accept the order because she received it in State A B) reject the order because she is not registered in State B C) accept the order because her broker-dealer is registered in all 50 states D) accept the order because it is unsolicited Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.
An investment adviser structured as a partnership lends money to a customer to buy recommended securities. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this activity is
A) acceptable, provided the loan is made under the provisions of Regulation T of the Federal Reserve B) unethical C) acceptable, provided the securities are used as collateral for the loan and the loan conforms to the provisions of Regulation T D) acceptable, provided the securities are used as collateral for the loan An investment adviser cannot lend money to a customer unless the loan is made through a regulated lender such as an affiliated broker-dealer or an affiliated bank.
Centripetal Investment Advisers (CIA) has it principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT
A) checks made out to CIA are deposited within 3 business days B) CIA's advisory contract calls for the automatic deduction of advisory fees C) CIA has a power of attorney granting authority to withdraw funds from the custodian D) checks made out to 3rd parties are forwarded within 3 business days When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.
When a corporation files for bankruptcy, heading the priority for payment would be
A) common stockholders B) taxing authorities C) holders of secured debt D) employees for their wages In the case of a corporation's liquidation, here is the order that is followed for paying off creditors and stockholders: 1) secured claims like mortgage bonds, equipment trust certificates, and collateral trust bonds; 2) unpaid wages; 3) taxes; 4) unsecured liabilities (debentures) and general creditors; 5) subordinated debt; 6) preferred stockholders; and 7) common stockholders.
Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if
A) customer permission was obtained prior to entering into the contract B) permission was obtained from the Administrator and custody was not prohibited by that state's rules C) the IA maintained adequate net worth or a surety bond D) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if the Administrator, by rule, prohibits custody; or in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers.
XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ's, the Administrator would be able to do all of the following EXCEPT
A) examine those records located in State U B) do so during normal business hours without prior notice C) ask the State C Administrator to perform the examination D) ask FINRA to perform the examination This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don't exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator.
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents includes prohibitions against certain practices designed to manipulate market prices of securities. An activity that would fall within the spectrum of the prohibitions would be
A) front running B) guaranteeing customers against loss C) wash trades D) churning customer accounts
Federal covered securities, as defined under the Uniform Securities Act,
A) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 B) must be registered in the state before they can be offered within the state C) would not include securities senior to a common stock listed on the NYSE D) must be registered with the SEC before they can be offered in the state
Anyone who represents an issuer in effecting transactions between the underwriter and the issuer
A) must be registered as an agent B) must be registered as an Administrator C) must be registered as an investment adviser D) is excluded from the definition of agent under the Uniform Securities Act
An investment adviser representative may share in the profits and losses of a customer's account
A) provided a written contract is executed between the investment adviser and the client B) as long as both the customer and the representative's employer give written consent C) if the investment adviser representative deducts the advisory fee charged the customer from any profits earned D) under no conditions Agents nor IAR's are allowed
Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. If one was an investor in Whippet Bus Lines, Inc., this would be an example of
A) regulatory risk B) market risk C) business risk D) country risk
An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm,
A) the broker-dealer must register as an investment adviser and the agent as an investment adviser representative B) the agent must register as an investment adviser because the research is being done after hours C) neither the agent nor his employing broker-dealer need register as an investment adviser D) the agent must register as an investment adviser representative The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is only receiving commissions when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction-based that it becomes special.
When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT
A) the effective date of the offering B) the amount of securities to be offered in the state C) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering D) all other states in which the security is to be registered
An agent discovers that he has sold a customer an unregistered, nonexempt security that she thought was exempt. The broker-dealer offers to buy it back on behalf of the agent. Under the Uniform Securities Act,
A) the offer also cannot include interest B) this is legal and is called rescission C) this cannot be done under any circumstances D) a customer rejecting the offer within 30 days forfeits the right to sue Provided the agent sold the security with no intent to defraud, rescission may be offered. Rescission is the return of the customer's money, plus interest, less any income received from the investment. The customer has 30 days to accept or reject the offer. After that, all rights of recovery are forfeited.
A broker-dealer (BD) registered in multiple states must meet the record retention requirements of
A) the state where the BD is incorporated B) the state with the most stringent requirement C) the SEC D) the state where the principal office of the BD is located One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation?
A.) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements B) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers C) Rent-free use of unused space in the broker-dealer's office D) Clearance and settlement services provided by the broker-dealer Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.
