Mastery Notes
Which of the following persons, natural or corporate, fall under the definition of a broker-dealer under the Uniform Securities Act?
A corporation that sells interests in various oil and gas limited partnerships to qualified investors The USA's definition of broker-dealer includes any company that offers securities (oil and gas limited partnership interests are securities) to the public in a state. Issuers, credit unions, and agents are all excluded from the definition of broker-dealer.
Which of the following activities regarding the use of material facts is prohibited?
A material fact is deliberately omitted in a sales presentation because it was publicly disclosed 4 years ago. The fact that material information was publicly disclosed in the past does not release the agent from ensuring that it is disclosed to the client. The ultimate responsibility of disclosure belongs to the agent making a recommendation. She must make a determination regarding what information is material in order for an investor to make an informed decision. An agent may not reveal material, nonpublic information provided to him in confidence.
Flashpoint Securities, Inc., (FSI) is a registered broker-dealer with the state. If a violation of the Uniform Securities Act occurred, FSI would most likely NOT be held liable for failure to supervise which of the following?
A senior office of FSI whose brother-in-law was just convicted of securities fraud Broker-dealers are responsible for supervising the activities of all personnel, both registered and non-registered. In order for the financial planner to receive commissions on those securities trades, registration as an agent with FSI would be required. However, FSI cannot be held liable for the actions of a family member of one of its employees unless we are told that the employee was somehow involved.
Which of the following transactions would NOT be exempt from the sales literature and advertising filing requirements of the Uniform Securities Act?
An individual employed by a broker-dealer calls a client to encourage her to purchase U.S. Treasury bonds. NOT A broker-dealer sells bonds to an investment company. When an individual calls noninstitutional clients to purchase shares in publicly traded securities, the transaction does not qualify as exempt under the USA, even if the securities themselves are exempt. Sales to investment companies and unsolicited orders are exempt transactions, while fixed annuities are not securities. NOTE: YOU CHANGED YOUR ANSWER HERE. TRANSACTIOSN WITH FINANCIAL INSTITUTIONS (LIKE INVESTMENT COMPANIES) ARE EXEMPT!!!!!! YOU WERE CONFUSED BY THE SOLICITING ASPECT HERE AND THOUGHT THAT A TRANSACTION HAD NOT YET TAKEN PLACE
Which of the following statements regarding an investment adviser is NOT correct?
An investment adviser whose only clients in this state are insurance companies located in the same city as her office is not an investment adviser under the Uniform Securities Act. The exemption for institutional clients exists only when the adviser does not have an office in the state. Once an investment adviser would be required to register in 15 or more states, the prohibition against registering with the SEC with less than $100 million in AUM is removed. An investment adviser with no office in the state who limits communications to five or fewer investors would fall under the de minimis exception and is not required to register. Federal covered advisers doing business in a state can be compelled to file copies of anything submitted to the SEC.
Kapco Advisers is a federal covered investment advisers with its principal office in New York City and several offices in New Jersey. Joe Segal, who lives in Manhattan, is an IAR with the firm and has the responsibility for serving those clients of Kapco who winter in Florida. In order to do so, Joe takes a hotel suite in Miami Beach for one week in December, in Boca Raton for one week in January, and in West Palm Beach for one week in February. While Mr. Segal is using these facilities to meet with existing clients, he does let them know that if they have any friends who might be interested in the firm's advisory services, they are welcome to make an appointment with him. Which of the following statements is correct regarding Mr. Segal's registration status under the Uniform Securities Act?
Because Joe may be meeting with individuals who are not existing clients and may be Florida residents, he must be registered in the state of Florida as an IAR. Once an IAR is using a temporary facility to meet with prospective clients, it is considered that there is a place of business in the state. Therefore, IAR must be registered. The de minimis rule does not apply here because he is holding himself out as offering advisory services in the State and the hotel room becomes a place of business. Because KAPCO is a federal covered IA, they don't register in the state although notice filing may be required.
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation?
Clearance and settlement services provided by the broker-dealer NOT Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers 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.
Recent regulatory efforts have been focused on cybersecurity and data protection. Which of the following statements is NOT correct?
Covered accounts include those carried in the name of a business. Business accounts are not considered covered accounts. All of the other statements are true.
Which of the following activities could result in an Administrator taking action against a broker-dealer registered in her state?
Hypothecating a customer's securities in a margin account without written consent from the customer promptly after the initial transaction NOT Executing transactions in a customer's margin account before receiving the written margin account agreement The signed hypothecation agreement must be received by the broker-dealer promptly after the initial transaction in a margin account. Since the requirement is after, transactions can be made without having the margin agreements in hand. Charging reasonable fees is proper and, unlike investment advisers, broker-dealers do not have to notify the Administrator of their plan to maintain custody of customer assets.
Under the Uniform Securities Act, the definition of sale includes bona fide I. gifts of securities II. giving a security as a bonus with any purchase III. exercising a right to convert 1 security into another IV. preliminary agreements between issuers and underwriters
II and III Bona fide gifts of securities and preliminary agreements between issuers and underwriters are specifically excluded from the definition of sale. A security given as a bonus with any other purchase is considered to be part of the purchase and has therefore been sold. When a right to convert or purchase a security is exercised, it is considered to be a sale. Preliminary agreements are NOT a sale
The powers granted to the Administrator under the Uniform Securities Act permit the Administrator to vacate or modify a securities registration stop order if it appears that the public interest is such that the issue will I. be completely sold II. when the conditions that created the issuance of the order have changed III. if it is in the public interest IV. when registration has been granted by the SEC
II and III NOT III and IV A stop order is used by the Administrator to halt a securities registration. If the conditions that led him to issue the stop no longer exist and, as always, the decision is in the public interest, the stop order can be vacated (legalese for removed) or modified. SO NOT when registration has been granted by the SEC SO when conditions that created the issuance of the order have changed THEN the administrator can vacate or modify the stop order.
Registered agents employed with a broker-dealer registered in State A regularly mail sales material to 4 clients in State B. The State A broker-dealer need not register in State B until it has 5 or more I. clients in State B II. must be registered in State A III. must be registered in State B IV. must register in all states in which it receives any mail from clients
II and III The firm would be required to be registered in both State A and State B and is required to be registered only in the state to which it directs mail and not states from which mail is received. No de minimis exemption similar to the one for investment advisers is available for broker-dealers.
Which two of the following statements regarding customer accounts are correct? Margin account agreements must be signed before the first trade I. in the account. II. Margin account agreements must be signed promptly after the first trade in the account. III. The option account agreement must be returned by the client before the first trade in the account. IV. The option account agreement must be returned by the client within 15 days of the account being approved.
II and IV NOT I and III Don't ask why, but in both cases, trading can commence before the agreements are signed and returned. In the case of the margin account, promptly after is the time and for the options account, within 15 days. SO MARGIN AGREEMENT MUST BE SIGNED PROMPTLY AFTER THE FIRST TRADE IN THE ACCOUNT (SO TECHNICALLY YOU CAN TRANSACT BEFORE THE MARGIN ACCOUNT IS SIGNED) OPTION AGREEMENT MUST BE RETURNED BY THE CLIENT WITHIN 15 DAYS OF THE ACCOUNT BEING APPROVED. SO THE CLIENT CAN COMMENCE TRADING BEFORE THE FORM HAS BEEN SIGNED AND RETURNED TO THE
Which of the following practices are prohibited by NASAA's Statement of Policy on Dishonest or Unethical Business Practices by Broker-Dealers and Agents?
Indicating that your graduation from an elite business school will result in better investment performance than that of agents who graduated from nonelite schools An agent is prohibited from representing that his education, registration, or experience in any way guarantees better investment results. Providing a customer a reasonable price but not the best price is not prohibited. Trading frequently to meet a customer's objective is an allowable practice and does not necessarily indicate churning; look for the word excessive to indicate churning. As long as the 12b-1 charge is no higher than .25%, the fund can be called no load.
Company A, a blue chip with a AAA rating, has a wholly owned subsidiary, Company B. Because Company B is a relatively new operation, it has not yet developed a strong credit history. Needing to borrow additional funds for long-term capital investment, but wanting to keep interest costs to a minimum, what steps might Company B take?
Issue a bond guaranteed by Company A This would be an example of a guaranteed security. That is, the payment of principal and interest is guaranteed by an entity other than the issuer. Because the question says the need is long-term, issuing a bond is preferable to borrowing from a bank and nothing in the question or answer choice says anything about Company A co-signing on the loan. Because the question refers to borrowing, the only correct answer would be something involving a debt and common stock is equity, not debt.
Under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following would NOT be an unethical or prohibited action by an investment adviser?
Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets didn't put this but NOT Implying to clients that federal covered securities are exempt from state registration because of SEC approval Bonding is generally required only when an investment adviser has discretion over client accounts or maintains custody of customer funds or securities.
Which of the following statements regarding withdrawal of registration by broker-dealers is NOT true?
Once a broker-dealer withdraws its registration, it may not re-register in the future. A broker-dealer may not withdraw its registration if it is in a registration revocation process. Broker-dealers must give a withdrawal notice in writing, which becomes effective within 30 days. A broker-dealer in good standing is not prohibited from re-registering with a state at any point in the future if all the appropriate requirements are met, including the payment of a registration fee.
Long Range Planning (LRP) is a federal covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 I. clients in State A II. 12 clients in State B III. 6 clients in State C IV. 4 clients in State D Fred would have to register as an IAR in:
States A and D In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a federal (PACE) Series 63 Mastery Exam - 7 covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state covered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).
An agent representing a broker-dealer in State P has a retail customer who moves to State S from State P. The agent and the brokerdealer now have one customer in State S. To continue to do business with this customer, which of the following is TRUE?
The agent and broker-dealer must register in State S. (NOT just the broker dealer has to register, but both) The agent and broker-dealer must register in State S. Unlike investment advisers, there is no de minimis exemption for brokerdealers.
Which of the following statements does NOT describe registration requirements under the Uniform Securities Act?
The revocation of a broker-dealer's registration in a state has no effect on the registration of agents employed by that broker-dealer. The USA registration of an agent is contingent on his affiliation with a registered broker-dealer. Therefore, the revocation of a brokerdealer's license will also suspend an agent's registration until the agent re-affiliates with a different registered broker-dealer.
A broker-dealer has its principal office in State A and branches in States B, C and D. State A requires all broker-dealers registered in that state to maintain records for two years while states B and C have a three year retention requirement and State D's is four years. If the SEC requires that records be kept for three years, this broker-dealer maintain records for
Three Years A broker-dealer registered in several states must also be registered with the SEC. Under the NSMIA of 1996, the federal laws take precedence over those of any state. However, if the broker-dealer were only registered on the state level, then the obligation, just as it is for state registered advisers, is met by complying with the requirements of the state in which the principal office is located.
State securities Administrators can require
agents to post a surety bond if they have discretion over client funds and securities The state securities legislation cannot require surety bonds that exceed the amounts required under federal law. In addition, agents are not subject to minimum net worth or capital requirements. Broker-dealers are subject to net capital requirements. An agent may be required to maintain bonding coverage if he has discretionary authority over client assets. SO agents not subject to min capital or net worth requirements
A broker-dealer is a member of the underwriting syndicate for a new issue of common stock. From all indications, it appears that the offering will be oversubscribed. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices by Broker- Dealers and Agents, the broker-dealer should
allocate the shares of the issue to clients in a manner that is based on their indications of willingness to purchase the shares In any new issue, particularly one that might be "hot", the obligation of the member of the underwriting group is to make a bona fide public distribution. This can be done based on the indications of interest received prior to the effective date of the offering.
A broker-dealer has flexibility in terms of the capacity in which it can act in a securities transaction. When buying a security from a client, the trade confirmation would
disclose that the firm acted as a principal in the transaction Broker-dealers can act as brokers (agency capacity) or as dealers (principal capacity). When buying for (or selling from) the firm's inventory, the BD is acting in a principal capacity and that must be disclosed on the trade confirmation. Only when acting in an agency capacity is commission shown on the confirmation. There are situations where the markup would be shown, but not here because when the dealer buys from the client, a markdown is charged, not a markup. SO WHEN BROKER BUYS A SECURITY FROM A CLIENT, THE BROKER IS ACTING IN A PRINCIPAL (NOT AGENT CAPACITY)
It would be considered an unethical business practice for a broker-dealer to
fail to disclose the amount of commission that was charged on an exempt transaction involving an exempt security with selling U.S. Treasury securities to unsophisticated clients?
A person applying for an initial registration as an agent might be asked to provide all of the following EXCEPT
fingerprints (SO citizenship and mode of business are fair game) Unlike FINRA rules, the USA does not require fingerprints for new registrants.
The filing of a Currency Transaction Report (CTR) would be required when an individual
hands over $10,500 in cash and has the bank wire the money to an account in another bank NOT deposits a personal check in the amount of $11,000 purchases more than $10,000 of securities and makes payment with a personal check A CTR must be filed whenever there is a cash transaction of more than $10,000.
A registration statement for new issues of securities under the Uniform Securities Act is effective for more than 1 year after its effective date
if the issuer or broker-dealer offering the securities has an unsold allotment NOT: under no circumstances because the Uniform Securities Act provides that registration statements are effective for up to 1 year from the effective date A new issue's registration statement may remain valid for more than 1 year beyond its effective date IF there are unsold securities remaining in the issue that must be sold with a prospectus. SO the registration of securities can remain valid for LONGER than one year IF there are unsold securities remaining in the issue
An investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms. When advertising this system, the IA must
indicate that there are limitations and difficulties to using the system When advertising any type of charting or formula system, the ad must always mention the limitations and difficulties of using the system.
Under the Uniform Securities Act, a person who owns a business providing advice on commodity futures contracts as well as limiting its securities advice to those issued or guaranteed by the U.S. government is
not required to register as an investment adviser in the state This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser. NOTE: YOU CHANGED YOUR ANSWER HERE. YOU WERE CONFUSED BY THE WORDING OWNED A BUSINESS DESPITE THE FACT THAT YOU KNEW THAT COMMODITY FUTURES AREN'T SECURITIES AND TREASURY SECURITIES ARE FEDERALLY COVERED. FEDERALLY COVERED ADVISORS ARE NOT REQUIRED TO REGISTER IN THE STATE
In order to be in compliance with the Uniform Securities Act, an investment advisory contract must comply with all of the following EXCEPT
provide for annual renewal NOT specify the method of fee computation SO INVESTMENT ADVISERS DO HAVE TO SPECIFY THE METHOD OF FEE COMPENSATION. BUT THEY DO NOT HAVE TO PROVIDE FOR ANNUAL RENEWAL There is no specified term for advisory contracts in the USA.
Under the Uniform Securities Act, an individual is NOT an agent if he is employed by a broker-dealer and only
serves as a partner, officer, or director of the firm with exclusive responsibility for information technology The definition of an agent under the USA excludes any employee, partner, officer, or director of a broker-dealer who is not involved directly in the trade or sale of securities. All the others function as agents representing the broker-dealer. (even when accepting unsolicited orders for the broker dealer, the individual is still an agent
The Uniform Securities Act permits the Administrator to do all of the following EXCEPT
suspend an agent's registration without an opportunity for a hearing The Administrator has the power to conduct investigations and have subpoenas issued in other states. The Administrator cannot suspend or revoke an agent's registration without providing the agent with an opportunity for a hearing.
NASAA has created a model template to be used by broker-dealers to disclose the cost of services offered by them. Among the disclosures that broker-dealers must make to their customers are all of the following EXCEPT
the locations of the firm's' branch offices Although it certainly makes sense to let your clients know where your offices are, that doesn't involve any kind of expense to the client, so it is not part of the fee disclosure. Conflicts of interest must always be disclosed. A listing of the firm's fees and charges generally accompanies the new account forms, but may be disclosed separately if desired. Among those charges can be an account maintenance fee and a charge for having a stock certificate issued.
The Uniform Securities Act imposes certain recordkeeping requirements upon registered broker-dealers. Among the records that must be retained are all of these EXCEPT
unsolicited testimonials from customers (SO order tickets must be kept) A client who sends in a testimonial praising the firm on his own has not created a record that is necessary for the firm to maintain, unless the firm decides to use that letter.
An individual meets the Uniform Securities Act's definition of an agent in all of the following cases EXCEPT when acting on behalf of an issuer of a security in transactions with an underwriter when acting for a broker-dealer on behalf of a large institutional customer to find a buyer for a large block of stock to be sold on the NYSE when buying shares of a security listed on the Nasdaq Stock Market system for the portfolio of a client of the brokerdealer when receiving commissions for selling shares of his employer's stock to employees' retirement funds
when acting on behalf of an issuer of a security in transactions with an underwriter Any transaction between the issuer, or other person on whose behalf the offering is made, and an underwriter is included in the definition of exempt transaction. The Uniform Securities Act specifically states that an individual representing the issuer in an exempt transaction is excluded from the definition of an agent (SO remember that an individual representing the issuer in EXEMPT transactions is EXCLUDED from the definition of AGENT
