Part 1- Laws, Regulations and Guidelines, Including Prohibitions on Unethical Business Practices

A transactional exemption would be offered when a sale is made by A) an investment adviser B) a sheriff C) a broker-dealer D) an attorney as an incidental part of her legal practice

B...Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary and, if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don't do it; go for the straightforward choice.

Which of the following is responsible for administration of the Bank Secrecy Act? A) Securities and Exchange Commission B) Security Services C) The Financial Crimes Enforcement Network D) Department of Health and Human Services

C...Or FinCEN as it is more commonly printed.

MaryBeth Williamson is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) authorization. B) material information. C) qualification. D) registration.

d...Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here.

Under the Uniform Securities Act, an Administrator investigating violations A) may appoint an officer who has the power to subpoena records, administer oaths, or require production of documents and books B) must maintain the confidentiality of all records C) may subpoena records only with court approval D) may subpoena records but may not compel individuals to testify

A,,,Public or private investigations may be conducted by the Administrator to determine whether violations of the act are about to take place or have already occurred. These investigations may take place inside or outside the state. In conducting the investigation, the Administrator, or any officer designated by him, may subpoena records or compel testimony from individuals.

Disclosure to customers of an investment adviser's control relationships is required in agency transactions principal transactions exempt transactions A) I, II, and III B) I and II C) II only D) I and III

A....The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

The federal law dealing with privacy matters for financial institutions is A) Regulation S-P B) the ACA C) Regulation FD D) HIPAA

A...Regulation S-P deals with privacy of customer information for financial institutions. Regulation FD requires public companies to make full disclosure of material information to all investors at the same time. HIPAA deals with privacy regarding health matters, and the ACA is the Affordable Care Act—better known as Obamacare.

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct EXCEPT A) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods B) performance-based fees are generally prohibited C) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE D) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark

A...​Covered advisers are those under federal jurisdiction rather than state. ​ The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.​

Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal. A) I and III B) II and III C) I, II, and III D) I and II

B... A registered person may apply to withdraw the registration. The withdrawal is effective in 30 days, unless the person is under investigation in connection with pending disciplinary action or an investigation is instigated during the 30 days after filing the application to withdraw. If there is an investigation underway, the Administrator will determine when the withdrawal will become effective. The Administrator has one year from the effective date of withdrawal to begin disciplinary actions for violations of the act.

Disclosure to customers of an investment adviser's control relationships is required in 1agency transactions 2principal transactions 3exempt transactions A) I and II B) I, II, and III C) II only D) I and III

B...The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

FinCEN Form 112, the Currency Transaction Report, is filed with A) the Federal Bureau of Investigation (FBI) B) the Department of the Treasury C) the SEC D) the National Security Agency

B..Currency transactions in excess of $10,000 are reported electronically on FinCEN Form 112 to the Department of the Treasury.

What is the purpose of the Securities Exchange Act of 1934? A) It provides requirements relating to new issues. B) It provides standards among the states. C) It regulates the persons involved in the secondary market. D) It provides policies relating to unethical business practices.

C,,,The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) the state in which the principal office of the member is located B) the state with the most stringent financial requirements C) the SEC D) FINRA

C...It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

Included in the Uniform Securities Act's definition of broker-dealer would be A) individuals who are registered as agents. B) issuers of securities. C) savings institutions. D) a broker-dealer with a place of business in the state whose only clients are insurance companies.

D..When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an investment advisory contract? The formula used to determine the investment adviser's compensation A statement of the discretionary authority, if any, given to the investment adviser A statement that the investment adviser may assign the contract without the consent of the client A) I and II B) II and III C) I, II, and III D) I and III

A....Advisory contracts must contain the services to be provided; the term of the contract; the amount of the advisory fee or the formula used to compute it; the amount of fee to be refunded if the advisory fee is prepaid; whether the adviser has discretionary authority and to what extent; and a provision explaining that the consent of the client is required to assign the contract.

Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a customer B) a consumer C) a cohort D) a client

A...Regulation S-P uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) Only the third intern would have to register. B) The second and third interns would be required to register. C) Because they are not being compensated, none of the interns need to register. D) All of the interns would need to register.

A...When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task.

Under federal law, the statute of limitations for civil liability is A) 2 years after the action B) 1 year after discovery or 3 years after the action, whichever is sooner C) 2 years after discovery or 3 years after the action, whichever is sooner D) 1 year after discovery of the action

B...In the federal regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action. Under the USA, it is the sooner of 2 years after discovery or 3 years after the action.

A fraudulent transaction was initiated by an agent in Indiana by contacting a client residing in Iowa. After evaluating the offer, the client agreed to purchase the recommended security while vacationing in Florida. Which Administrator(s) has (have) jurisdiction? The Indiana Administrator The Iowa Administrator The Florida Administrator A) II only B) I and II C) I, II, and III D) I only

C...Activities that originate in a state, are directed into a state, or are accepted in a state fall under the jurisdiction of the Administrator of each of those states.

Which of the following clients of a federal covered investment adviser are NOT exempt from the delivery requirements of the brochure rule? A) An open-end investment company with less than $25 million in assets B) A closed-end investment company traded on the New York Stock Exchange C) An employee benefit plan with assets of at least $5 million D) An individual investor purchasing the IA's newsletter with an annual subscription price of $410

C...The only exemptions from the IA brochure rule are registered investment companies (both open and closed-end) and impersonal advice costing less than $500 per year.

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if the minimum denomination is $50,000 the maximum maturity is 270 days it is rated in 1 of the 3 highest rating categories by a recognized rating agency it is in book entry form A) I and III B) II, III, and IV C) I, II, and III D) I and II

C...commercial paper may qualify as an exempt security if the minimum denomination is $50,000, has a maturity of not more than 270 days, and is rated in one of the three highest rating categories by a nationally recognized rating agency. It may or may not be in book entry form (electronic records with no paper certificate); that has nothing to do with an exemption from registration. How do we know this is referring to the exemption under the Uniform Securities Act instead of the Securities Act of 1933 which has no rating requirement? The first reason, and most important, is that this is the NASAA exam and, by default, unless stated otherwise, all questions refer to the USA and NASAA model rules. The second is the use of the term "agent." That is a registration designation found only in state law.

The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice relates solely to municipal issues relates solely to issues issued by or guaranteed by the U.S. Treasury is solely incidental to their professional practice as an aeronautical engineer is limited to fewer than 15 clients in any 12-month period, none of whom is a registered investment company A) I, II, and IV B) I, II, III, and IV C) III and IV D) II and III

D....Among the exclusions from the definition of "investment adviser" under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government-issued or guaranteed issues. Advice to fewer than 15 clients qualifies one for an exemption (not an exclusion from the definition) from registration, but only in the case of a foreign adviser with less than $25 million in AUM in the United States.

Which of the following situations violates the contractual requirements for investment advisory partnerships under the Uniform Securities Act? A) A partner with a 25% interest in an advisory firm dies and is replaced by a new member. The partnership continues business with its existing clients and informs them of the change in partnership composition within a reasonable period. B) A renewal of an investment advisory contract requires the written repetition that an adviser shall not be compensated on the basis of a share of capital gains, not assign a contract without consent, and notify clients of any change in membership of partnership. C) A partnership, without undergoing any change in membership, assigns its smallest accounts to another firm with written consent of the clients. D) A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm.

D....An investment advisory partnership must notify clients of any change in membership within a reasonable time. The death of a minority partner does not constitute assignment of contract. A partnership may assign contracts with written consent of clients. A contract renewal does require written repetition that an adviser shall not be compensated on the basis of a share of capital gains, not assign a contract without consent, and notify clients of any change in membership of partnership.

Differences between static and interactive content on social media include only static content can be reused by others only static content needs preapproval only static content can be changed by the person who originated it only interactive content can be commented on by others A) I and III B) I and IV C) II and III D) II and IV

D...Static content requires preapproval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static canbe changed only by its originator and interactive by the originator or others.

Which of the following accurately describes a cease and desist order as authorized by the Uniform Securities Act? A) A court-issued order requiring a business to stop an unfair practice B) An Administrator's order to refrain from a practice of business believed by that Administrator to be unethical C) An order from one brokerage firm to another to refrain from unfair business practices D) An Administrator's order to an issuer to suspend sale of its security as a result of improper disclosures in the registration statement

B....A cease and desist order is a directive from an administrative agency to immediately stop a particular action. The order can come from a federal, state, or judicial body; it is not exclusive to anyone. Administrators may issue cease and desist orders with or without a prior hearing. Brokerage houses cannot issue cease and desist orders to each other. An order issued by the Administrator to halt the sale of a security is known as a stop order, not a cease and desist order.

Under the Securities Act of 1933, which of the following securities is required to register with the SEC? A) Tupelo Mississippi Bridge revenue bonds B) 5-year Treasury notes C) GNMA pass-through certificates D) Debentures of First Newtown Bank Holding Corporation

D...Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA pass-through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.

If an agent chooses to appeal an Administrator's order, when must the agent file for review of the order with the appropriate court? A) Within 60 days after the entry of the order B) Immediately C) Within 30 days after the entry of the order D) Within 180 days after the entry of the order

A....Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

In general, a broker-dealer will disclose any changes to its fee schedule A) to the Administrator and then to the clients B) by notifying clients of the change in advance C) when requested by the client D) within 30 days following the change

B...Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.

Which of the following statements regarding an agent's registration is CORRECT? A) Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents. B) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator, and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. D) Agents may be licensed in a state even if their broker-dealer is not

B...The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act or a particular issuer.

Information required on an application for registration as an agent would include 1the form of business (corporation, partnership, LLC, etc.). 2felony convictions, whether securities related or not. 3a statement of financial condition. 4citizenship information. A) II and IV B) I and III C) I and II D) III and IV

A...Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information.

Securities issued by which of the following would be exempt from the registration requirements of the Uniform Securities Act? Nonprofit organization Exchange-listed security Federal savings and loan association Federal credit union A) I, II, III, and IV B) III and IV C) I and II D) I and IV

A...All of the issuers listed are exempt from the registration provisions of the Uniform Securities Act.

As defined in the Uniform Securities Act (USA), the term person would include a limited partnership a political subdivision an unincorporated association the executor of an estate for a deceased individual A) II and III B) I, II, III, and IV C) I, II, and III D) I and IV

B....All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent.

A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited B) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning C) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met D) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs

B....Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.

Under the USA, the term "security" refers to all of the following EXCEPT A) bonds B) commodity futures contract C) certificate of deposit for a security D) put, call, straddle, or option

B...Commodities and futures contracts on commodities are not securities. Just remember the short list of items that are not securities.

Under the Uniform Securities Act, the Administrator has the power to do all of the following EXCEPT A) investigate a complaint against a broker-dealer with no office in his state B) cite a witness in contempt for refusing to appear at a hearing C) issue a cease and desist order without a prior hearing D) issue a subpoena for the production of documents

B...Only a court can cite an individual to be in contempt of court. As long as the broker-dealer is doing business in the state, the Administrator can investigate complaints against the firm. A cease and desist order may be issued with or without a prior hearing.

The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? A sale was made of an unregistered nonexempt security. During a sales presentation, the agent misstated a material fact that resulted in the prospect deciding to make the purchase. The agent was included in the judgment along with the broker-dealer for a civil infraction. A) I and II B) II and III C) I, II, and III D) I and III

C...These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.

Which of the following does not meet the USA's definition of an exempt transaction? A) An unsolicited sale of an OTC Pink Market stock B) Transactions with an investment company registered under the Investment Company Act of 1940 C) An agent sells shares of an IPO listed on the NYSE to an individual customer D) Transactions by an executor of an estate

C...Transactions by a fiduciary, such as the executor of an estate, are included in the definition of an exempt transaction, as are transactions with certain institutional clients like investment companies and insurance companies. The OTC Pink Market is a medium for the trading of highly speculative, thinly capitalized issues. Because the order is unsolicited, the transaction is exempt. Sale of a new issue of stock to an individual client would not be an exempt transaction, regardless of where the stock is traded. It is important to distinguish between an exempt transaction and an exempt security.

Under IA-1092, an investment adviser makes advice his principal activity makes advice his regular activity is compensated directly for advice is compensated directly or indirectly for advice A) I and III B) II and III C) II and IV D) I and IV

C...Under the SEC's release, the rendering of advice does not have to be a person's principal activity. Rather, it must be a regular activity, and compensation may be received directly or indirectly.

Which of the following would be included in the Uniform Securities Act's definition of a "sale"? A) Conveying, for value, precious metals to a jewelry distributor B) Transfers, for value, of unit trusts to a nontaxable organization C) Donation of interests in rights, warrants, or options on a nonexempt security D) Sale of a large fixed annuity contract to a taxable institution

B...For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Each of the following would be exempt from the definition of an agent under the Uniform Securities Act EXCEPT A) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter B) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio D) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients

B...When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Instruct the client to send the certificate to the transfer agent because you cannot accept it. B) Accept the certificate and send the customer a receipt within 24 hours of the delivery. C) Accept the certificate and give the customer a receipt. D) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000.

C...When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers.

Which of the following would be considered an unethical business practice? A) Broker-dealers sending retail clients an email 30 days in advance of a change to fees B) Broker-dealers charging larger than ordinary commissions on certain transactions C) Agents correcting execution orders in their customer's accounts D) Agents exercising discretion in discretionary accounts

C...When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).

An interest in which of the following is a security under the Uniform Securities Act? Preorganization certificate Certificate of deposit for a security Oil and gas drilling program Cattle feeding program A) I only B) III only C) II and III D) I, II, III, and IV

D....The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.

Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? A Certified Financial Planner who prepares financial plans and whose only compensation is commissions An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients A broker-dealer with extensive business in the state A mutual fund company with offices and clients in the state

b...A Certified Financial Planner who prepares financial plans for commissions must register in the state as an investment adviser representative. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

Which of the following is NOT an issuer under the USA? A) A new company that offers shares to the public in an IPO B) A company whose shares trade on the New York Stock Exchange C) A broker-dealer trading securities as an agent for the account of others D) A corporation that proposes to issue securities but has not done so as of yet

A broker-dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the broker-dealer were offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not as yet done so is, for purposes of the act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding the distribution of reports prepared by 3rd parties that are not affiliated with the adviser is TRUE? A) An adviser may use a report prepared by someone else if the source of the report is disclosed. B) An adviser need not disclose the author of any outside 3rd-party report unless the client asks. C) An adviser is prohibited from basing recommendations on work that is wholly the product of someone else's efforts. D) An adviser is required to disclose any source of information used in making recommendations to clients.

A....An adviser is not prohibited from providing clients with reports prepared by others, but when this is done, the adviser must disclose the true source of the report. However, the disclosure requirement does not apply to the research an adviser uses in rendering investment advice.

Under the Securities Exchange Act of 1934, which of the following would NOT be considered associated with XYZ Corp., a broker-dealer? A) Robert, a client who owns 1,000 shares of XYZ's voting stock B) Paula, who is on XYZ's board of directors but who has no other connection with the firm C) Arvin, one of XYZ's agents D) Brian, an XYZ vice president

A....An associated person of a broker-dealer includes any partner, branch manager, officer, or director of a broker-dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker-dealer. Being a client of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something in the choice indicated that this ownership put Robert into a position of control.

An adviser has custody of a client's securities or funds if the adviser A) has authority to withdraw funds from a client's account for the benefit of the adviser for the payment of the quarterly advisory fees B) accepts prepayment of advisory fees or has discretion over a customer's account C) maintains the customer's funds and securities in a joint account with the registered investment adviser D) uses a broker-dealer to hold the customer's funds and securities and has limited trading authority over the account

A....Custody is the physical possession of the asset. Discretion is the authority to make decisions independent of the authorization of the account holder on a trade-by-trade basis. Authorization is in a blanket form in the existence of either a limited trading authority or full trading authority. Acceptance of prepayment of adviser's fees or discretionary authority does not constitute custody. The ability to withdraw funds for the purpose of paying quarterly advisory fees from a customer's accounts is deemed to be custody of the funds. A broker-dealer holding a customer's funds and securities would have custody, but the adviser who has trading authority over the account would only have discretion. If the funds and securities of the client are held with the funds and securities of the adviser in a joint account, the adviser would be involved in commingling (or theft), not custody.

As defined in the Uniform Securities Act, the term "offer to sell" would include A) a gift of warrants. B) the sale of U.S. Treasury bills. C) a gift of nonassessable stock. D) the attempt to sell gold coins.

A....Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security. Although a gift of assessable stock is considered both a sale and an offer to sell, a gift of nonassessable stock is simply a gift. A sale of Treasury bonds is a sale, not an offer, and the attempt to sell gold coins is an offer to sell, but not of a security, and the USA is only concerned with an offer to sell a security.

When the USA refers to unsolicited orders, which of the following is TRUE? A) Unsolicited orders are defined as exempt transactions under the USA. B) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. D) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited.

A...A client has the right to buy or sell whatever she may desire. The issue becomes who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.

Under the Securities Act of 1933, the definition of prospectus includes an offer of a security made orally a tombstone advertisement for a new issue of common stock an offer of a security made in an email communication A) III only B) II and III C) I and III D) I, II, and III

A...A prospectus is a communication made in writing or by radio or television that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. An email meets the definition of a written communication.

Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented B) that the adviser has never been subject to disciplinary action or censure by the SEC C) that any transactions made on the adviser's own account are consistent with the advice given to clients D) the number of clients with whom the adviser does business

A...Advisers must disclose to clients any outside interest or potential conflicts of interest involved in its recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities, but not the absence of such actions. The adviser is not required to disclose its consistent transactions, but must make disclosure if its transactions are not consistent with the advice given.

Under the Uniform Securities Act, it is legal for an investment adviser representative to tell a client that A) a registered security may lawfully be sold in that state B) a registered security has been approved for sale in the state by the Administrator C) her qualifications have been found satisfactory by the Administrator D) an exempt security is not required to be registered because it is safer than a nonexempt security

A...An IAR may indicate that a security is registered or is exempt from registration; all the other statements are prohibited.

Under securities industry regulations, all of the following are prohibited when attempting to make a sale EXCEPT A) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so B) telling a client that he is trading commission free when, in actuality, your firm is acting as a principal and placing a markup on his trades C) an agreement by the agent to repurchase the security from the customer for the same price at a future date D) telling a client that her stock is a sure candidate for a takeover bid

A...An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a markup, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) State P. B) States P, D, and M. C) States P and O. D) States D and M.

A...As an IAR for a federal covered investment adviser, Stillman is required to register only in those states in which he (Stillman) has a place of business. Although Stillman has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? The brochure must be updated each time Part 1A of Form ADV is updated. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A) II and III B) I, II, and III C) I and II D) I and III

A...Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing B) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States C) this is permissible only if the broker-dealer is registered with the SEC D) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states

A...Canadian broker-dealers and their agents must be registered in any state in which they wish to do business with exisiting clients who are temporarily in the state. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client.

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would NOT cause a decrease in the reported net income? A) Cash dividends B) Corporate income tax rate C) Allowance for bad debts D) Year-end bonuses to employees

A...Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor so any increase, whether in the form of raises or bonuses, will decrease the net income.

Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Splitting commissions with a customer service representative who is not registered but works for the same firm B) An agent with discretionary authority enters a buy order for a security when its price is rising C) Recommending securities that result in major losses in the customer's account D) Telling a customer that the investment being recommended will be sold from the inventory of the broker-dealer and indicating on the trade confirmation that the firm acted in a principal capacity

A...Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transactional-based compensation.

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A) the solicitations are for impersonal advisory services B) the friend is a client of the adviser's firm C) the friend is an employee of the advisory firm D) There are no exceptions

A...Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

Which of the following transactions is NOT included in the definition of exempt transaction under Section 402(b) of the Uniform Securities Act? A) The sale of Treasury Bills to an individual client B) Transactions between issuers and underwriters C) Isolated nonissuer transactions D) Unsolicited nonissuer transactions effected through a broker-dealer

A...Even though the Treasury bill is an exempt security, the sale to an individual is NOT an exempt transaction. Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are exempt transactions under the provisions of the USA.

Under the Uniform Securities Act, the recordkeeping requirements established by the Administrator for out-of-state investment advisers wishing to register in his state are subject to the limitations of A) the requirements set by the Administrator of the adviser's home state B) the requirements set by each individual state C) the Securities and Exchange Act of 1934 D) the Investment Advisers Act of 1940

A...For state-registered investment advisers, requirements set by the Administrator are subject to the limitations of the requirements set by the Administrator of the adviser's home state. Covered advisers don't register in any state, only with the SEC (and come under the SEC's requirements set forth in the Investment Advisers Act of 1940).

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and the issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment the Administrator of another state has revoked the issue's registration an officer of the registrant has been convicted of a securities-related crime the prospectus contains misstatements of nonmaterial information A) II and III B) I and II C) I and III D) II, III, and IV

A...If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

Which of the following would be a nonissuer transaction? XYZ Corporation sells 100,000 shares of previously issued common stock out of its treasury. GEMCO Mutual Fund sells 100,000 shares of XYZ Corporation common stock out of its portfolio. Curt sells 1,000 shares of Giggle common stock to Chuck in an isolated transaction. Dave reinvests his dividend into additional shares of GEMCO Mutual Fund. A) II and III B) I and IV C) III and IV D) I and II

A...In a nonissuer transaction, the proceeds of the sale go to someone other than the issuer. When a mutual fund liquidates a holding in its portfolio, the fund receives the proceeds, not the issuer. One individual selling his stock to another is the classic example of an isolated nonissuer transaction. A corporation selling stock out of its treasury receives the money from the sale, and dividend reinvestment purchases shares directly from the mutual fund.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction B) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation C) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution D) WSWM would be engaging in a prohibited practice

A...In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

Which of the following statements are TRUE? An agent may never be simultaneously employed by more than one broker-dealer. An agent must submit separate registrations for each broker-dealer with which he is registered. Certain states prohibit agents from dual or multiple registration. An agent who sells securities in several states must be registered with different broker-dealers in each state. A) II and III B) IV only C) I only D) II, III, and IV

A...In general, an agent will only be registered with a single broker-dealer. However, the USA does permit registration with more than one under certain conditions. An agent must submit separate registrations for each broker-dealer with which he is registered, and an agent may be prevented from multiple registration in those states that prohibit dual or multiple registrations.

Under the Uniform Securities Act, which of the following is NOT an exempt transaction? A) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer B) The sale of a non-Nasdaq over-the-counter stock to a closed-end investment company C) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid D) A sale of securities by the executor of an estate

A...In the case of a U.S. government security, the security is exempt, but the transaction is not. All the other choices are exempt transactions because they are either to an institutional investor, existing owners for no consideration, or by certain fiduciaries, such as an executor.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) when informed by the investment adviser that the representative's registration is effective B) when informed by the Administrator that the representative's registration is effective C) immediately D) within 48 hours

A...Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

Regarding the use of testimonials in advertising, all of the following are true except A) an investment adviser may use a testimonial, but only if it comes from someone who is not an existing client B) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial C) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm D) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial

A...Testimonials from exisiting clients are permitted for use by investment advisers. Certain disclosures are needed, such as the fact that the person giving the testimonial is a client and the extent of any compensation paid for the testimonial. Those who are not clients of the advisory firm give endorsements. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. One of the most common forms of testimonial is the public comment by a celebrity about an existing relationship with a financial firm, IA, or BD.

Under the National Securities Markets Improvement Act of 1996 (NSMIA), investment companies registered under the Investment Company Act of 1940 are required to register A) as securities at the federal level only B) as exempt securities, at neither state nor federal levels C) as securities at both state and federal levels D) as securities at the state level only

A...The NSMIA requires that the SEC, rather than individual states, assume responsibility for the registration and regulation of federal registered mutual funds and other investment companies. Thus, these federal registered investment companies are no longer required to register at the state level; however, they will likely have to pay state filing fees by going through the notice filing procedure.

Which of the following activities are prohibited under the Uniform Securities Act? Engaging in a practice not expressly forbidden by the act but defined as unethical by the Administrator in a rule Deliberately omitting a material fact when soliciting a client Selling recommended securities to a client from the investment adviser's own account without disclosing this and receiving consent of the client prior to completion of the transaction A) I, II, and III B) II and III C) I and II D) I and III

A...The USA gives the Administrator, and self-regulatory organizations, the power to define certain practices as unethical with the same force as those spelled out in the act. Omitting a material fact is specifically prohibited under the act. When an investment adviser sells securities from its own account, disclosure must be made and client consent obtained prior to completion of the transaction.

All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT A) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process B) if the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative C) the adviser's registration expires on December 31 each year D) the initial application must include a consent to service of process along with Form ADV and the appropriate fees

A...The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of the Securities Exchange Act of 1934 the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) II and IV B) II, III, and IV C) I and III D) I, II, and III

A...The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients.

Included in the fiduciary relationship between an investment adviser and client is the responsibility to A) disclose the tax consequences of a recommended investment B) recommend only nonaffiliated attorneys to clients seeking legal advice C) recommend only nonaffiliated broker-dealers for execution of portfolio transactions D) provide tax advice as an integral part of the client relationship

A...Whenever a recommendation is made to an advisory client, it is incumbent on the IA or IAR to make disclosure of the tax effects of that investment to the client. IAs are not to provide tax advice unless specifically qualified to do so and may recommend legal advisers who are or are not affiliated with the firm. There is no reason why an IA cannot recommend an affiliated broker-dealer, as long as disclosure of the relationship is made.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true? The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) I and III B) I, II, and III C) III only D) I only

A...Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered investment adviser.

One way to make money is to buy low and sell high. If 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, any advertisement about the system must A) indicate the length of time the system has been in play B) indicate that there are limitations and difficulties to using the system C) provide customer testimonials evidencing their satisfaction with the system D) show performance for at least the past 12 months, including both winners and losers

B...Anytime you see a question dealing with advertising a charting system (or investment formula, etc.), always look for limitations and difficulties in the answer.

Under the Uniform Securities Act, securities issued by charitable organizations are exempt if A) the net earnings from the organization are paid to fewer than 10 private stockholders B) the organization is a nonprofit company C) no commissions are paid on the distribution of shares D) the organization is funded by government grants

B....Charitable or religious organizations must be nonprofit in order to gain exemption from full registration.

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? Transaction-based compensation, such as commissions on recommended securities 12b-1 trails on no-load mutual funds in the client's portfolio Expenses reimbursed by third-party sources Compensation-sharing arrangements between the investment adviser and its representatives A) I and III B) I ,II, and III C) III and IV D) I, II, III, and IV

B...All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Form U-4 B) State licensing fee C) Consent to service of process D) Renewal notice to the SEC

B...All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

A federal covered investment adviser registered with the SEC that has offices in 5 states must do which of the following? 1Pay state filing fees if required by the Administrator 2Notify the Administrator within 1 business day if net worth falls below the required minimum 3Notice file in any of those states where required by the Administrator 4Become licensed as a broker-dealer A) II and IV B) I and III C) II and III D) I and II

B...Although exempt from state registration, federal registered investment advisers must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC.

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. B) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. C) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. D) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

B...An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? A) Material changes to wrap fee programs must be filed promptly with the Administrator. B) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. C) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. D) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end.

B...As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States B) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing C) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states D) this is permissible only if the broker-dealer is registered with the SEC

B...Canadian broker-dealers and their agents must be registered in any state in which they wish to do business with exisiting clients who are temporarily in the state. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client.

Under the NASAA Model Custody Rule, an investment adviser would be considered to have custody of client assets if that adviser inadvertently receives 1a check from a client made out to the IA and does not return the check within 24 hours 2a check from a client made out to a third party and does not forward the check within 3 business days 3stock certificates from a client and does not forward them within 3 business days 4stock certificates from a client and does not return them within 3 business days A) II and III B) II and IV C) I, II and IV D) I and IV

B...Checks made out to a 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.

Which one of the following is NOT among the powers granted to the Administrator under the Uniform Securities Act (USA)? A) The power to 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. B) The power to 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. C) The power to audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior. D) The power to 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.

B...IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business. 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.

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name a commission charge when a client buys a security on a listed exchange the interest charged by the firm on money owed by customers in their margin accounts fees for providing advisory services to high-net-worth individuals A) I and IV B) I and III C) II and III D) III and IV

B...If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would NOT be entitled to claim: A) attorney's fees B) the original consideration paid for the security or the current market value, whichever is greater C) court costs D) interest at the state's legal rate less any income received on the security

B...In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.

In which of the following third-party transactions would an investment adviser be required to make disclosure to the client of compensation received? An investment adviser recommends an affiliated realtor to a client and receives compensation from the realtor. An investment adviser, who is also an agent for an insurance company, sells policies from the company to his clients. An adviser who is affiliated with a broker-dealer receives commissions on sales recommended to clients through the broker-dealer. A) II only B) I, II, and III C) I only D) I and III

B...Investment advisers must disclose the amount of compensation received, or to be received, from any third party in connection with recommendations made to a client. This would include compensation from any broker-dealer, issuer, and nonsecurities entity (e.g., insurance companies, realtors, coin dealers).

An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required? A) Only the registered principal would need to be registered in the state(s) in which they do business. B) The firm must register as an investment adviser. C) Neither the broker-dealer nor the agent is required to have any license other than their regular securities license. D) The agent must be registered as an investment adviser.

B...Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives.

Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory, A) the order would have to be refused because of the potential conflict of interest B) consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent C) consent of the client would be necessary anytime an advisory client is sold securities out of the broker-dealer's inventory D) the commission charged on the trade would have to be fair and reasonable

B...Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory. In this case, unless there was a statement to the effect that the security had been recommended by Wimpton, this is just a brokerage transaction and consent is not necessary (although the principal capacity would have to be stated on the trade confirmation). Because this is a principal transaction, there is no commission, only a markup.

Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following? A security issued by a nonprofit organization Investment contracts of employee benefit plans An exempt transaction not involving a federal covered security A) I and III B) I, II, and III C) II and III D) I only

B...The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by nonprofit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.

Which of the following statements relating to Form ADV-E are CORRECT? The form is completed by an investment adviser who maintains custody of customer funds and/or securities. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. The form may be used to amend the IA's registration. A) I, II, and IV B) I and III C) I, III, and IV D) I and II

B...The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.

Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)? The United States or any territory A state or political subdivision of a state A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state Banks and savings institutions A) II and IV B) I, II, III, and IV C) I and II D) II and III

B...The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies.

Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT? A) SSI may remain SEC registered as long as AUM is at $90 million or more. B) SSI remains state-registered because its AUM is less than $100 million. C) SSI has the choice of remaining state-registered or registering with the SEC. D) SSI must become registered with SEC within 90 days of exceeding $110 million.

B...The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM - Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

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) engaging in an agency cross transaction B) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation C) the trade is being executed by an officer or partner of the firm D) directing securities transactions to an affiliated broker-dealer

B...There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares 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. In agency cross transaction, the firm is acting as an agent—that's the reason for the term.

One of the most prevalent schemes abusing seniors is one where the individual or couple receives an invitation to attend an educational seminar held at an upscale location. This scheme is commonly referred to as A) a lunch and learn seminar B) a free lunch seminar C) a wealth preservation session D) a senior seminar

B...There is probably no other area of abuse directed at seniors that has received the attention of the "free lunch" seminars. The problem is that too many of them graduate from a few minutes of education into a hard sell without the attendees being warned.

Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employees pension fund with assets of $4 billion. What are this firm's registration requirements? A) It does not have to register because its only client is the U.S. government. B) It may choose to register with either the D.C. Administrator or the SEC. C) It can only register with the SEC because the District of Columbia is not a state. D) It must register with the SEC because the AUM is so high.

B...Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW's only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.

According to the USA, the sale of a security to an insurance company is A) always a private placement B) an exempt transaction only if the insurance company is authorized to do business in this state C) an exempt transaction D) an exempt security

C...Sales of securities to financial institutions are exempt transactions. Insurance companies are a typical example of a financial institution used on the exam. The only relevance of the company being authorized to do business in this state applies to whether or not securities it issues are exempt in this state.

The Uniform Securities Act contains a number of exemptions from registration of securities. Which of the following do not qualify for any of those exemptions? A bond issued by a corporation A bond issued by the city of Athens, Greece A bond issued by the province of Manitoba A security issued by a credit union authorized to do business in the state A) I and IV B) III and IV C) I and II D) II and III

C.....Securities issued by political subdivisions of countries other than the U.S. and Canada are not exempt unless guaranteed by their federal government (and that government has diplomatic relations with the U.S.). The only way the corporate bond would be exempt is if it was issued by a company whose common stock was federal covered. Because the question does not tell us that, we must assume it is not.

Which of the following statements are TRUE? A federal covered adviser sells federal covered securities only. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers. A federal covered security is exempt from registration with the SEC. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940. A) I and II B) III and IV C) II and IV D) I and III

C....A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was an immediate family member of the adviser B) borrowing under the same terms and conditions as the client could find at a commercial bank C) who was an affiliate of the adviser D) who was in the money-lending business

C....Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money.

Which of the following may be required by the Administrator to post surety bonds? An agent who has discretion over client funds and securities A broker-dealer who has custody of, or discretion over, client funds and securities An investment adviser who has custody of, or discretion over, client funds and securities A) I and III B) III only C) I, II, and III D) I only

C...A broker-dealer, investment adviser, or agent who has discretion over or, in the case of broker-dealers and advisers, custody of funds or securities may be required to post a bond.

A sale or offer to sell would NOT include A) a stock dividend that requires only a nominal payment by the shareholder B) a sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer C) a purported gift of nonassessable stock D) any security given or delivered with, or as a bonus on account of, any purchase of securities

C...A gift of assessable stock would be an offer or a sale, but a gift of nonassessable stock is just a gift.

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

C...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.

Under the Investment Advisers Act of 1940, which of the following statements is not true regarding custody of a client's funds or securities? A) The adviser must be named as agent or trustee for a client's account or else use a qualified custodian. B) Client securities must be segregated and kept safe. C) The adviser must report the location of funds or securities at 6-month intervals. D) The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC.

C...Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange (hire the accounting firm) for an independent surprise audit of all custodied client accounts and the results must be forwarded to the SEC. Thus, the adviser reports to clients every 3 months, not every 6 months.

Which of the following securities is (are) exempt from registration under the Uniform Securities Act? Municipal securities Government securities Stock or bonds issued by an insurance company authorized to do business in this state A) I and III B) II and III C) I, II, and III D) I only

C...All government and municipal securities are exempt from registration requirements under the Uniform Securities Act, as are insurance company securities if the company is authorized to do business in this state.

As a federal covered security, the KAPCO Growth Fund is required to notice file under the laws of State A. State A's Administrator can require the issuer to provide copies of A) proxy statements B) a listing of the officers and directors of the issuer C) a report of the amount of the federal covered security sold in the state D) the schedule of compensation to the fund manager

C...Because those companies that are required to notice file are levied a fee based on the amount of securities sold in the state, information relating to the amount of sales in the state must be reported.

Broker-dealer A wants to promote and reward teamwork. The firm plans to pay out a small percentage of the firm's profits to the clerical staff as a bonus for their hard work. Under NASAA rules, is this permitted? A) No, this cannot be done. B) Yes, if all of the agents agree to it. C) Yes, no registration is necessary. D) Yes, if the entire clerical staff is registered as agents for the firm

C...Bonuses based on a broker-dealer's profits may be payable to nonregistered clerical help as long as there is no direct relationship to any specific sales.

According to NASAA's Statement of Policies Regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may A) not recommend a specific professional money manager to those clients who want professional investment management services B) borrow funds from a client only if the debt is formally documented and possesses a fixed maturity date, a stated rate of interest, and a schedule of repayment C) exercise discretionary investment authority over an account providing the client provides written discretionary authority D) not exercise discretionary authority until 30 days after receipt of a written power of attorney from the client

C...NASAA's Statement of Policy Regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents allows agents to exercise discretionary investment authority over an account, providing the client grants written discretionary authority. An agent may not borrow money from a client unless the client is a financial institution in the business of lending money. There is nothing in NASAA's policy that prohibits an agent from recommending money managers to clients who want their funds professionally managed. There is no requirement that discretionary authority cannot be exercised until a 30-day waiting period has transpired.

An individual has been hired by a person to assist in the selling of securities it is issuing to residents of State A. The individual would be defined as an agent under the Uniform Securities Act if the issuer is A) a trust company organized and supervised under the laws of State B. B) issuing commercial paper in minimum denominations of $100,000 with an AA rating and a 6month maturity. C) a credit union organized and supervised under the laws of State A. D) the city of Saskatoon, Saskatchewan (Canada).

C...Please remember the broad definition of person - it does not mean an individual unless preceded by the word, natural. When an individual represents the issuer of certain exempt securities in the sale of those securities to the public, that individual is not included in the USA's definition of agent. Credit unions are not in that list so those individuals are agents and must be registered as such. Individuals representing banks, including savings institutions and trust companies when organized and supervised under the laws of any state (not necessarily the state in which the securities will be sold), are not agents. If the agent represents the issuer of commercial paper meeting the exemption requirements of the USA ($50,000 minimum denomination, top 3 grades, and maximum 9-month maturity), that individual is not an agent. Finally, representing the United States or Canadian federal government, or any of their political subdivisions, excludes one from the definition of agent.

An elderly widower explains to his investment adviser representative that he requires his investments to provide the maximum current income. The IAR should recommend A) a zero-coupon bond B) a widow fund, structured specifically for this type of investor C) a mutual fund that matches the investor's stated objective D) a growth fund

C...Recommendations should always be investments that match the investor's stated objective. Growth funds are not designed to meet the requirement of providing maximum current income. Zero-coupon bonds do not pay out any interest until maturity and, therefore, are unsuitable for an investor looking for current income. Although the name of a fund should bear a resemblance to its objective, the investor and the IAR should read the fund's prospectus carefully to ensure that the fund's objective matches the investor's.

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative's registration? A) The Administrator determines it would be in the public interest. B) The investment adviser representative is the subject of an insider trading lawsuit. C) The investment adviser representative is judged to be mentally incompetent. D) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients.

C...Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Proprietary research reports analyzing the performance of a specific industry B) Software used to analyze client's portfolios C) Software used to simplify the investment adviser's preparation of its tax returns D) Research reports prepared by a third party other than the broker-dealer

C...Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser, but not the client.

Under the Regulation D, Rule 506(b) private placement offering exemption, which of the following statements is true? A) The issue may be sold to an unlimited number of nonaccredited investors. B) The rule allows general solicitations but no advertising. C) The issuer can use an online questionnaire to qualify potential investors D) The exemption is forfeited if there are any sales to nonaccredited investors.

C...Rule 506(b) permits a maximum of 35 nonaccredited investors and an unlimited number of accredited investors. The questionnaire is used by the issuer to determine the status of the potential investor. It is Rule 506(c) that permits general solicitation and advertising and requires that all investors be accredited.

When must an investment adviser disclose personal securities transactions to a client? If the adviser makes trades in his own account that are inconsistent with advice given to a client If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients Investment advisers must disclose all personal transactions to clients A) II only B) III only C) I and II D) I only

C...SEC Release 1A-1092 requires certain disclosures under the antifraud provisions of the Investment Advisers Act. They must disclose an affiliation with a securities broker-dealer if the advisory service is independent of the broker-dealer, if the adviser only recommends products offered by the broker-dealer, if the adviser will be compensated by the broker-dealer for the transaction, or if the products recommended by the adviser are available from other broker-dealers. The adviser must also disclose personal securities transactions if they are designed to take advantage of the market impact caused by recommendations to clients or if personal transactions are inconsistent with the advice given to clients. Advisers must disclose the amount of compensation received from transactions through any broker-dealer, from any issuer, and from sales of nonsecurities products. They are not required to disclose all personal transactions.

Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following? A security issued by a nonprofit organization Investment contracts of employee benefit plans An exempt transaction not involving a federal covered security A) I only B) I and III C) I, II, and III D) II and III

C...The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by nonprofit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.

An Administrator may deny or suspend a registration in all of the following situations EXCEPT A) if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years B) if the applicant was convicted of a misdemeanor involving securities within the last 10 years C) if the applicant is not qualified on the basis of experience D) if the registrant has failed to properly supervise agents and investment adviser representatives

C...The Administrator may restrict a registration on the basis of lack of training and knowledge, but not for a lack of experience alone. The Administrator may deny a registration if the applicant was convicted of a misdemeanor involving securities within the last 10 years. The Administrator may deny a registration if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years. Registrations may be suspended if agents or investment adviser representatives are not properly supervised.

The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) be properly registered prior to making the offer B) deliver a copy of the registration statement no later than with confirmation of the sale C) deliver an effective (final) prospectus no later than with confirmation of the sale D) deliver a preliminary (red herring) prospectus prior to the sale

C...The Securities Act of 1933, sometimes referred to as the "paper act," requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the "people act," the Securities Exchange Act of 1934.

Which of the following involves an offer or sale? A) A pledge of stock B) A stock dividend C) A gift of an assessable security D) An exchange of securities due to a reorganization

C...The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale.

Which of the following persons does NOT meet the definition of providing investment advice as a business outlined in SEC Release IA-1092? A) Attorney who advertises the availability of investment advice B) Accountant who charges clients an additional fee for providing investment advice C) A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky D) A financial planner who provides specific investment advice as part of his fee- based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer

C...The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other 3 choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers provided the advice is incidental to their regular profession.

According to the Uniform Securities Act, a sale is A) a solicitation of an offer to buy B) an attempt to transfer ownership of a security C) a contract to transfer ownership of a security for value D) an offer of an equivalent contract

C...There are 2 steps involved in a securities transaction, First comes the "offer". The USA defines that as follows: "Offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. Before a sale can happen, someone has to try to make that sale, make the attempt, and that is the offer. If the attempt (the offer) is successful, we have a sale, technically defined in the USA as follows: "Sale" or "sell" includes every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value. For value, sometimes referred to as for consideration, means that money changed hands. That is why, with the exception of assessable stock, a gift is not a sale.

With regard to the NASAA Model Brochure Rule Requirements for Investment Advisers, which of the following are not exempt from the delivery requirements of that rule? A) An adviser whose only clients are exchange-traded funds B) An adviser who only provides impersonal advisory services at an annual charge of less than $500 C) An adviser who deals with qualified clients only D) An adviser whose only clients are closed-end investment companies

C...There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1 million in assets with the investment adviser or net worth of at least $2.1 million, may be charged performance fees, but that has nothing to do with brochure delivery.

Under the SEC's Marketing Rule for Investment Advisers, which of the following is true with regard to advertising? A) The advertisement may refer to specific past recommendations if they reflect the actual performance of a client's portfolio. B) The advertisement may refer to any formula, charting device, or graphing method provided a disclaimer is included stating there is no assurance that the same results will be obtained in the future. C) The advertisement may offer free services for a nominal charge. D) The advertisement may use testimonials from clients with proper disclosures.

D....One of the key changes brought about by the Marketing Rule was the removal of prohibitions against testimonials. As long as it is from a client and discloses whether or not compensation was involved, the testimonial is generally permitted. Offers of free services are permitted but must be totally free with no strings attached. If past performance is included in the ad, it cannot cherry pick and use only selected recommendations; everything must be shown. Charts, formulas, or other devices may be referred to in an ad, but the ad must disclose the difficulties or limitations in their use.

Washington, Adams, and Jefferson, Inc. (WAJI) is a broker-dealer whose principal and only office is in Alexandria, VA. WAJI's sole business is trading in securities issued by the U.S. Treasury. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford is exempt from registration because he only deals with securities issued by the U.S. Treasury. B) Rutherford is exempt from registration because his only clients are institutions. C) Rutherford cannot register as an agent of WAJI because dealing exclusively with U.S. Treasury securities removes the firm from the definition of a broker-dealer. D) Rutherford must register as an agent of WAJI with the State of Virginia.

D....Rutherford represents a broker-dealer in dealing with clients and that requires registration as an agent in any state in which he maintains a place of business. The fact that WAJI only trades in U.S. Treasury securities is irrelevant. Perhaps you were thinking of an investment adviser who, under these circumstances, would be excluded from the definition of IA under the Investment Company Act of 1940. That has nothing to do with broker-dealers. Even if WAJI's only clients were banks and insurance companies, it would still have to register in the state where it is headquartered; the "institutions only" exemption applies when the broker-dealer does not have a place of business in the state.

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client B) if requested by a client, it must be sent within 5 days of the request C) it must be delivered to all new clients D) it is filed through the IARD system

D....The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.

Each of the following is not a prohibited practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) a broker-dealer placing an order in a customer's account that was received from an authorized third party B) a broker-dealer charging a higher-than-normal commission on a trade involving a thinly traded stock C) a broker-dealer obtaining a mortgage for its new building from a bank that is a client of the firm D) a broker-dealer failing to disclose that the firm is affiliated with the issuer of a recommended security

D....Watch out for the negatives. The question is looking for the prohibited practice, and failing to disclose the affiliation with the issuer of a recommended security violates the requirement to disclose any potential conflict of interest. Each of the other choices complies with the rules and would be permitted.

One of the terms defined in the Uniform Securities Act is "broker-dealer." Which of the following is NOT included in that definition? An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities A business entity seeking to raise additional capital using the regulated securities markets A person whose primary function is buying securities for his own account and for the accounts of others A person whose primary function is providing advice on what assets belong in clients' investment portfolios A) III and IV B) I, II, III, and IV C) II and III D) I, II, and IV

D...A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue, A) the firm would be straddling a commingled arbitrage B) the firm would be engaged in a dishonest or unethical business practice C) disclosure of the capacity in which the firms acts in the transaction must be made on the trade confirmation D) disclosure of the potential conflict of interest must be made

D...A classic example of a potential conflict of interest is when a broker-dealer has discretion over a client's account and purchases securities for that account that are issued by the firm or an affiliated company. There is nothing wrong with this, as long as disclosure is made, and in some cases (not tested), the client must give consent. What about disclosing capacity in the trade? Isn't that always required? Yes, it is, but this is an example of a question where there could be 2 correct answers, and you must choose the one that is closest to dealing with the point being made in the question.

Each of the following statements about postregistration provisions is true EXCEPT A) investment advisers must comply with recordkeeping rules B) a registered investment adviser may be required to file advertisements C) a correcting amendment to the Form ADV must be filed with the Administrator if any information filed becomes inaccurate or incomplete D) the securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state

D...Administrators have the authority to conduct an onsite examination of a registered investment adviser, even if there is no place of business maintained in the Administrator's state. Under the Act, Administrators may require the filing of advertising used by broker-dealers and investment advisers, who must also comply with certain recordkeeping requirements and file correcting amendments.

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Only unsolicited orders may be accepted until the signed receipt is received. B) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. C) Proceed with the account; the signature is not required. D) Proceed with the account, but make a supervisory person aware of this.

D...Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

Life insurance companies offer many different products. Which of the following would NOT be considered a security? Index annuity Modified endowment Variable annuity Variable life A) II and IV B) III and IV C) I and III D) I and II

D...Any insurance product that includes the word variable is a security. Otherwise, it is not.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) Zero-coupon bonds B) TIPS C) Cumulative preferred stock D) Insured bank CDs

D...Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.

Daphna works for Automated Asset Allocators (AAA), an investment adviser having offices in States D, E, and F and registered with the SEC. Daphna spends most of her time in an office in State D, but, once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an IAR in which of the following states? A) State E, where she has no retail clients B) States E and F C) Daphna would have to register in all three states D) State F, where she has 227 retail clients

D...As an IAR with a federal covered investment adviser, Daphna only has to register in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.

Under the Uniform Securities Act, which of the following persons has to register as an investment adviser? A) An agent of a broker-dealer who gives investment advice within the course of his duties with the firm for which a fee is charged B) An attorney who writes a legal opinion for a municipal bond indenture C) A broker-dealer who gives investment advice that is incidental to the course of its business and for which no special compensation is received D) A broker-dealer who gives advice for which he charges a specific fee

D...Broker-dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. If the advice is strictly incidental and without a separate charge, the BD is not an investment advisor. Attorneys are not investment advisers provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Agents giving advice for which a fee is charged must register as investment adviser representatives and their BDs as investment advisers.

Under the Uniform Securities Act, the Administrator has the authority to issue stop orders approve new issues review standard registration forms A) II and III B) I and II C) I, II, and III D) I and III

D...During the cooling-off period, the Administrator reviews registration statements and may issue stop orders. The Administrator does not approve securities; she only clears them for distribution to the public.

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) not deal with the client until the broker-dealer registers in Pennsylvania B) not conduct any business with the client C) only accept unsolicited orders D) conduct business with the client as usual

D...Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.

Which of the following statements relating to the general securities registration provisions of Section 305 of the Uniform Securities Act is most accurate? A) The registration is valid for 1 year from the effective date. B) The registration is valid until the next December 31. C) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. D) The registration statement may be amended to increase the number of shares in the offering, as long as the share price is not raised by more than 10%.

D...Every registration statement is effective for 1 year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed.

Which of the following statements is not true? A) Federal covered securities include securities listed on national exchanges. B) Federal covered securities include those registered under the Investment Company Act of 1940. C) Transaction exemptions must be established before each transaction. D) Exempt securities must reestablish their exemptions at least annually.

D...Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive and a security or transaction may qualify for 2 or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges.

Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth? A) Accounts payable B) Advances or loans to partners in the case of an IA organized as a partnership C) Copyrights D) Accounts receivable

D...For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.

Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092? A) A wealthy college professor gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed. B) The secretary of the U.S. Treasury, as part of his official duties, comments on conditions in the financial markets and their future investment implications. C) A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company. D) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.

D...If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.

An individual wishing to register as an agent with a broker-dealer may have to pass an examination post a bond maintain minimum net capital meet minimum state educational requirements A) III and IV B) I and III C) II and III D) I and II

D...In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

Profit Partners, LLC (PPL), a federal covered investment adviser, sends correspondence regarding its past performance to prospective retail clients in State A. PPL does not maintain a place of business and is not registered in State A. Because PPL is soliciting for new business there, the Administrator of State A A) would be able to bring a claim against PPL for soliciting without being properly registered in the state. B) would have no jurisdiction over PPL because the firm is a federal covered investment adviser. C) would be able to bring a claim against PPL for showing past performance in a communication with prospective clients. D) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated.

D...In general, Administrators have no jurisdiction over the activities of federal covered investment advisers. The situation is different, however, when a covered adviser pursues an activity in the Administrator's state that violates the antifraud provisions of the Uniform Securities Act. In that case, the Administrator can take action against the covered adviser. The showing of past performance is permitted as long as the required conditions are met; nothing in the answer choice indicates that the communication is not in compliance.

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? Stating material facts in such a manner that they may be easily understood by a prospective client Making unsuitable investment recommendations even when the client agrees with your assessment Exercising discretion without previous written authority Using inside information, but only if the client makes money as a result of the trade A) I and II B) I and III C) III and IV D) II and III

D...No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them.

It would be considered a prohibited activity for an agent to engage in any of the following activities EXCEPT A) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500 B) trading in the account of a conservative client exclusively in initial public offerings with proper trading authorization from the client C) failing to record exempt transactions on the broker-dealer's books and records D) executing a transaction in a nonexempt security in a discretionary account

D...Once a discretionary account has been properly documented, the agent handling the account can trade exempt and nonexempt securities. Nothing in this answer choice implies that the nonexempt security is unregistered. All transactions, no matter in exempt or nonexempt securities, must be recorded on the books of the broker-dealer. As a rule, initial public offerings tend to be on the speculative side, suitable for aggressive, not conservative investors. Therefore, even with the client's authorization, this trading profile would be unsuitable and, as a result, a prohibited activity. Sharing in profits of an account as a reward for exceeding the S&P 500 (or any other benchmark) is prohibited under any circumstance. This is not the same as sharing in the profits of an account with consent of the client and the employing broker-dealer, because this is based on the performance of the agent's recommendations and not on a mutually agreed sharing arrangement.​

Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A syndicated columnist who gives weekly reports and recommendations on investments B) The trust officer of a commercial bank who manages investment accounts for clients C) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities D) A lawyer who specializes in consulting on investing in securities

D...Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

The most common way in which to distinguish whether social media content is static or interactive is A) the ability for others to like it B) the ability for others to link to it C) the ability for others to comment on it D) the ability for others to change it

D...Static content can only be changed by the originator (or someone under that person's control).

An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his clients, who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of North Dakota Idaho Wyoming Illinois A) II and III B) I and IV C) I, II, III, and IV D) I, II, and III

D...The Administrator has jurisdiction from the state in which the offer was made (ND), received (WY), and accepted (ID). Mailing of the certificate is of no consequence.

Which of the following is (are) TRUE regarding violations of the Uniform Securities Act? The Administrator may issue a cease and desist order without a prior hearing. Violators may incur a criminal penalty of a $5,000 fine or 3 years in jail, but not both. There is no statute of limitations on the return of criminal indictments. A) I and II B) I, II, and III C) II and III D) I only

D...The Administrator may issue a cease and desist order with or without a prior hearing. The statute of limitations on criminal violations is 5 years, not unlimited. Regarding the criminal penalties described, the amounts are correct—a $5,000 fine, 3 years in prison—but violators may face both, not just one or the other.

As specified in the Dodd-Frank Act of 2010, which of the following would NOT qualify for the private fund exemption? A) A non-U.S. based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients B) An investment adviser who limits its advisory services to private funds with less than $150 million in assets under management in the United States C) An investment adviser who limits its advisory services to venture capital funds D) An investment adviser who limits its advisory services to insurance companies

D...The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration, that is not the private fund exemption the question is asking about.

Nobody Walks Motor Company, a licensed automobile dealer, is running a promotion offering anyone who purchases a car over the weekend to receive a $1,000 corporate bond at no additional cost. Under the Uniform Securities Act, in order to make this offer, A) there are no specific requirements as the company is a licensed automobile dealer and, because of the free offer, no sale of securities is involved B) it must be made available to anyone who purchases a car during the specified period C) Nobody Walks Motor Company may not pay a commission on the sale of a car to any salesperson who is not registered with the Administrator as an agent D) Nobody Walks Motor Company must be registered as a broker-dealer in the state

D...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 to constitute part of the subject of the purchase and to have been offered and sold for value." Therefore, Nobody Walks Motor Company would have to be registered as a broker-dealer in this state.

Under the USA, the Administrator may do all of the following EXCEPT A) prescribe form and content of financial statements required under the act B) conduct hearings in public, unless at the Administrator's discretion and with agreement of all parties, the Administrator decides otherwise C) take jurisdiction over any person who sells or offers to sell either when the offer is made in the state or when an offer to buy is made and accepted in the state D) mandate the method used to maintain and file records

D...The Uniform Securities Act does not grant the Administrator the power to make any specific bookkeeping method mandatory. The only requirement is that the books and records must accurately reflect the nature of the firm's business.

Which of the following statements regarding an agent's registration is most accurate? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. B) Registration of a broker-dealer in a specific state automatically registers all the firm's agents in that state as well. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. D) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration.

D...The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act. Therefore, when the broker-dealer's registration is revoked, the agent's license is no longer in effect. The Administrator does not "hold" licenses. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers and partners when the firm first registers.

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) the trade was being executed by an officer or partner of the firm B) engaging in an agency cross transaction C) directing a securities transaction to an affiliated broker-dealer D) selling shares from its proprietary account to an advisory client

D...There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account 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. In agency cross transaction, the firm is acting as an agent; that's the reason for the term.

Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract EXCEPT A) a provision prohibiting the adviser from being compensated based on a share of capital gains B) the manner in which the advisory fee will be computed C) a provision prohibiting the adviser from assigning the contract without client consent D) other states in which the adviser is registered

D...There is no requirement to advise clients of any other states in which the adviser is represented. Assignment may never occur without client consent. Unless the question specifically refers to the rare cases when performance fees are permitted, always read the question as if they are prohibited.

If two agents of a broker-dealer agree to work together as a partnership in soliciting business and they agree to split commissions, this practice is A) in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account B) permitted only if the broker-dealer's compliance department audits the partnership's financial performance C) permitted, but only with the prior written consent of the affected clients D) permitted

D...There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, the compliance department need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions.

Using the powers granted under the Uniform Securities Act, the Administrator would have the right to deny the registration of a broker-dealer A) if the broker-dealer had agents registered in the state B) if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules, but only if the activity involved was a violation of the Uniform Securities Act C) if the broker-dealer's net capital only met SEC requirements, but not those of the state D) if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules

D...This is tricky because the USA only permits an Administrator to take action against a person convicted of a securities violation in another state if that action would be a violation in his state. However, when the license is revoked on a federal basis, whether through the actions of the SEC or a national SRO like FINRA (the exam may still use NASD), it would be cause for denial by the Administrator even when the action involved is not a violation in his state. As long as BD meets the SEC's net capital requirements, the state cannot impose a higher one.

Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in A) States X and Y B) States X, Y, and Z C) States Y and Z D) State Y

D...Those who supervise the activities of investment adviser representatives are themselves defined as IARs. An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located. Remember, when it comes to federal covered advisers, registration of their IARs is dependent on the IAR's place of business, not the location of their clients.

As a result of an SEC hearing, an investment adviser's penalty is $5,000 and a 50-day suspension. If the IA wishes to appeal this verdict, a request for review must be filed with A) the Administrator within 60 days of the order B) the SEC within 45 days of the order C) the U.S. Court of Appeals within 45 days of the order D) the U.S. Court of Appeals within 60 days of the order

D...Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.

If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE? The solicitor must be a registered investment adviser representative with the state. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940. There must be a separate written agreement between the solicitor and the registered investment adviser. The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure. A) I and IV B) I and III C) II and IV D) II and IIIIf a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE?

D...Under federal regulations, if an investment adviser intends to pay a third party (nonemployee) solicitor to solicit clients for investment advisory services, the investment adviser must be properly registered with the SEC, there must be a written agreement between the investment adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty. The solicitor does not have to be registered as a registered investment adviser representative because he is not representing the registered investment adviser in the giving of investment advice, in the management of accounts, or in the supervision of anyone else working for the registered investment adviser in these areas. The solicitor is being paid a fee for the solicitation of business for the registered investment adviser with a requirement of full disclosure to the client of the relationship with the adviser. There is no provision in the Uniform Securities Act that permits an individual to solicit business on behalf of a state-registered investment adviser without IAR registration.

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include each of these except A) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated but not accredited investors B) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering C) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b) D) securities issued under Rule 506(c) are federal covered, while those under Rule 506(b) are not

D...Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered a federal covered security. Rule 506(c) permits advertising (general solicitation) but requires that the issuer take reasonable steps to assure all purchasers meet the accredited investor standard. In a Rule 506(b) offering, up to 35 non-accredited investors are permitted with no limit placed on the number of accredited investors.

Which of the following would be an agent as the term is defined in the Uniform Securities Act? 1An individual representing a registered broker-dealer in the sale of securities to the general public 2An assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners 3A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public 4An issuer of nonexempt securities registered in the state and sold to the general public A) III and IV B) I, II, III and IV C) I, II and III D) I and II

D...Under the USA, only individuals can be agents. A person who sells securities for a broker-dealer is an agent. An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if he takes securities orders from clients. Corporate entities are excluded from the definition of an agent. Broker-dealers and issuers are not agents.

Under SEC Release IA-1092, a financial planner would not be considered an investment adviser when A) he is a licensed insurance agent and credits the commission earned on the sale of insurance policies included in a comprehensive financial plan against the fee charged for the plan B) there is an up-front fee charged for creating a comprehensive financial plan, even when the plan is not put into place C) he does financial planning as part of offering a wrap fee program as a licensed agent of a broker-dealer D) the extent of his planning is limited to wills, estates and trust creation

D...Wills, estates, and trusts are not securities, so any advice given on them does not make one an investment adviser. Look for the term "comprehensive financial plan" because that always includes securities advice and, as long as a fee is charged, even when the advice is not followed, registration as an IA (or perhaps IAR) is required. Wrap fee programs may only be offered by IAs or IARs.

Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser? A) Attorneys who advise on securities (only) for a fee B) Insurance companies C) Accountants who advise on securities (only) for a fee D) Banks and trust companies

D..The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Excluded from that listing would be A) securities issued by a credit union authorized to do business in the state B) bonds issued by the District of Columbia C) corporate debentures D) bonds issued by a Canadian province

c...Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of, state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.

Under the Uniform Securities Act, the Administrator can require which of the following from broker-dealers and investment advisers? Filing of sales literature Maintaining of records Filing of financial statements Filing of amendments to registrations A) I, II, III, and IV B) II, III, and IV C) I and II D) II and III

...The act requires the filing of sales literature and advertising (as well as a prospectus) addressed or intended for clients or prospective clients, unless exempt under the act. In addition, it requires that books and records be kept for a minimum of 3 years for broker-dealers and 5 years for investment advisers and provides that an Administrator may require the filing of financial reports regarding the net worth of the firm. The act also requires broker-dealers and investment advisers to update any information filed with the state regarding any material change that takes place. Even federal covered investment advisers may be required to file copies of their SEC registration and amendments with state Administrators, along with filing fees.A

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state B) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state C) Equipment trust certificates issued by a regulated common carrier D) Bonds issued by the Province of Alberta

A....Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.

According to the Uniform Securities Act, each of the following is a security EXCEPT A) a contract in soybean futures B) an interest in a condominium project with a rental pool C) a U.S. Treasury bill D) a limited partnership in an oil and gas exploration program

A....Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term "security," such as term and whole insurance policies, commodity futures contracts, and collectibles.

MaryBeth Williamson is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) registration. B) qualification. C) authorization. D) material information.

A....Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here.

The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT 1when the service provided is an individual supervisory service 2when the client is an investment company 3when the contract is for an impersonal advisory service requiring payment of less than $500 4when the client is an individual with a net worth of more than $1 million A) II and III B) II, III, and IV C) I and II D) I, III, and IV

A...A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements.

A transactional exemption would be offered when a sale is made by A) a court-appointed guardian for a minor B) a broker-dealer C) an investment adviser D) a custodian for a minor appointed under the Uniform Transfer to Minors Act

A...Among the list of exempt transactions are sales made by fiduciaries, such as court-appointed guardians. Because there is no legal paperwork required, the custodian for a minor under UTMA (or UGMA) is not considered a fiduciary for purposes of this rule.

Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is A) a nonexempt transaction B) an exempt security C) an exempt transaction D) a violation of the trustee's fiduciary responsibility

A...Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question.

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

A...As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. 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.

In which of the following situations did an agent commit fraud? A) An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved. B) An agent sold an excellent growth company to a client by omitting immaterial information​ during the discussion, so as not to distract the client from purchasing a suitable security. C) On review of his files, an agent discovered he had sold a nonexempt, unregistered security​ to a retail client​. D) A client claims an agent sold him unsuitable securities.

A...Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or noninstitutional clients.

Unless the subject of a summary order, disciplinary proceedings under the Uniform Securities Act require the Administrator to provide which of the following? 1An opportunity for a hearing 2Written findings of facts and conclusions of law 3Appropriate prior notice A) I, II, and III B) I and II C) I and III D) II and III

A...In the event of a disciplinary action not involving a summary order, an Administrator must provide appropriate prior notice, an opportunity for a hearing, and written findings of facts and conclusions of law. In the case of a summary order, a hearing must be granted within 15 days of a written request.

All of the following must be disclosed by an investment adviser EXCEPT A) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations B) the president of the investment adviser was found liable in a civil action involving unsuitable advice in a state where the adviser does not have an office C) a senior officer of the firm was convicted of a felony 6 years ago D) a senior officer's suspension from the securities industry

A...Legal and disciplinary action successfully brought against an investment adviser must be disclosed to customers, as well as disciplinary actions that resulted in a fine in excess of $2,500. Convictions for a misdemeanor or felony involving securities or money within the past 10 years must also be disclosed.

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies B) they have assets of less than $150 million C) their advisers are exempt from filing reports on Form ADV D) they have no more than 100 investors

A...Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? 1Broker-dealers must maintain customer ledgers for 3 years. 2Investment advisers must keep partnership records for 3 years after 3the partnership is terminated. 4Agents must keep customer records for 3 years. Investment adviser representatives must maintain records for 5 years. A) I and II B) II and IV C) I, II, III, and IV D) III and IV

A...Recordkeeping requirements for broker-dealers are 3 years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.

Which of the following is (are) TRUE regarding violations of the Uniform Securities Act? The Administrator may issue a cease and desist order without a prior hearing. Violators may incur a criminal penalty of a $5,000 fine or 3 years in jail, but not both. There is no statute of limitations on the return of criminal indictments. A) I only B) II and III C) I and II D) I, II, and III

A...The Administrator may issue a cease and desist order with or without a prior hearing. The statute of limitations on criminal violations is 5 years, not unlimited. Regarding the criminal penalties described, the amounts are correct—a $5,000 fine, 3 years in prison—but violators may face both, not just one or the other.

Under the USA, an exemption from registration is available to a security listed on any of the following EXCEPT A) the Montreal Stock Exchange B) the New York Stock Exchange C) the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) D) the Nasdaq Stock Market

A...The federal covered security exemption applies to securities listed on the major stock exchanges in the United States, including the Nasdaq Stock Market.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. B) because Sharon has a client in State X, registration as an IAR would be required in State X. C) because Sharon's client is a bank, she does not have to register as an IAR in State X. D) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X.

A...The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office.

All of the following describe exempt transactions EXCEPT A) Joe Smith, an employee in the consumer lending department of Amalgamated National Bank, buys securities from ABC Securities, a broker-dealer registered in the state B) First National Bank sells its entire publicly traded bond portfolio to Amalgamated National Bank C) ABC Securities, a registered broker-dealer functioning as an underwriter, purchases securities from XYZ Corporation D) Amalgamated National Bank sells its publicly traded bond portfolio to ABC Insurance Company

A...The purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction because it is a sale of a security by a broker-dealer to a member of the public. Transactions between broker-dealers and issuers, transactions between banks, and between banks and insurance companies are exempt because they occur between financial institutions. Exempt transactions are most often identified by the transaction's parties, rather than the type of security involved.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) advisory fees B) charges for late payments C) issuance of a stock certificate D) account inactivity fee

A...There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

A registered investment adviser has a fiduciary duty to disclose all real and potential conflicts of interests to clients. Which of the following are examples of conflicts that would require disclosure? A registered investment adviser spends about 25% of its time on investment advisory activities and the balance on managing rental real estate projects A registered investment adviser spends about 25% of its time supervising the activities of its investment adviser representatives An investment adviser representative, who is also an insurance agent, may decide to recommend a particular insurance product based on an incentive to sell the product An investment adviser representative, who is also an agent with an unaffiliated broker-dealer, directs transactions to that firm A) I, III, and IV B) III and IV C) I and II D) II and IV

A...There is nothing wrong with an investment adviser devoting time, even a majority of the time, to nonadvisory pursuits, as long as it is disclosed. Recommending products based on an incentive is fine as well, as long as disclosure is made. Finally, IARs can be agents of affiliated or nonaffiliated broker-dealers, but the existence of that relationship must be disclosed. One would hope that the investment adviser devotes enough time to supervising its IARs, but that is not something that is disclosed to clients.

Under both state and federal law, the definition of investment adviser excludes certain publishers. To qualify for that exclusion, the publication must meet which of the following criteria? 1It must be bona fide, containing disinterested commentary without promotional material. 2It must be published on a schedule to coincide with market events. 3It must be of a general and impersonal nature. 4It must contain enough specific advice to enable the targeted recipient to construct an appropriate portfolio. A) I and III B) II and III C) I and II D) II and IV

A...Under a decision of the U.S. Supreme Court, for a publisher to qualify for the exclusion, the publication must satisfy the following 3 elements: "(1) the publication must offer only impersonal advice, i.e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio; (2) the publication must be 'bona fide,' containing disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities, advertised lists of stocks 'sure to go up,' or information distributed as an incident to personalized investment services; and (3) the publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry".

Mary, who is licensed as an agent in State A, got a promotion and will turn her clients over to Julie, who is licensed only in State B. Under the registration requirements of the Uniform Securities Act, before Julie can take over the accounts, she must A) register with State A B) receive permission from each of those clients C) register with FINRA D) register with the NYSE

A...Unless an exemption applies (and there is nothing in the question that would indicate such), for an individual to sell securities in a particular state, she must be licensed in that state. This question is specifically about registration requirements, not whether client permission is needed. There is nothing in the USA that requires client consent when the agent of record on the account changes. Do not confuse this with the contract assignment rules applying to investment advisers.

Willful violations under the Investment Advisers Act of 1940 may result in which of the following punishment(s)? $10,000 fine A prison term of up to 10 years Being barred from association with any investment adviser A) I and III B) I only C) I, II, and III D) II and III

A...Violations of the Investment Advisers Act or SEC rules carry penalties of up to $10,000 in fines and prison terms of up to 5 years. The SEC also has the power to suspend the violator for up to 12 months or bar individuals from the industry. This is in addition to any disciplinary actions that may be imposed by SROs, state Administrators, or civil actions brought by clients or regulatory authorities.

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within A) 15 days B) 60 days C) 45 days D) 30 days

A...When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day and an appeal for review of an Administrator's order must be filed within 60 days.

An agent for a broker-dealer member of FINRA may exercise his judgment as to which of the following without written authorization from the customer? Quantity Time Security Price A) I and II B) II and IV C) I and III D) III and IV

B....Agents (or any of the other securities professionals) have the authority to decide the timing and price of a trade. Under prevailing securities law, time or price does not constitute discretion. Decisions involving the quantity and security require written trading authorization from the client.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding civil liability of advisers and broker-dealers? The statute of limitations for civil liability is five years. A lawsuit against a broker-dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. If restitution is made to a client by a broker-dealer, the Administrator may not prosecute the securities violation. A) I and II B) II only C) II and III D) I only

B....Do not confuse the statute of limitations for criminal prosecution (5 years) with the statute of limitations for civil liability (3 years from the date of the event or 2 years from discovery, whichever occurs first). Because civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecution for violating the provisions of the act.

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the broker-dealer would have to be registered as an investment adviser B) the agent would be defined as an investment adviser C) the agent would now come under a greater fiduciary responsibility D) the agent would be defined as an investment adviser representative

B....Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.

Under the USA, each of the following materials may be distributed if an issuing company has applied for registration but is not yet cleared for sale EXCEPT A) a preliminary prospectus B) an application with a request for a down payment C) tombstone advertising D) a red herring

B....Prior to clearance, a red herring or preliminary prospectus (a disclosure document) may be distributed in response to those customers who express interest in the offering. While rarely used before the effective date, a tombstone advertisement may be published while the issue is in registration. The red herring is only used to solicit indications of interest; no orders or funds may be accepted before the effective date.

Which of the following statements is true about the compensation of a registered investment adviser? A) The investment adviser may be compensated on the basis of a share in the capital appreciation of the funds of the client as long as the client meets the accredited investor standard. B) The investment adviser may be compensated on the basis of the average total assets of the portfolio over a period of time. C) With written consent of the client, the investment adviser is permitted to share in the gains or losses in the client's account. D) It is not necessary to disclose compensation received from the sale of nonsecurities products to advisory clients.

B....The Investment Advisers Act of 1940 (as well as the Uniform Securities Act) permits an investment adviser to be compensated on the basis of the average total value of the client's funds between specified dates. It may not be based on a share of portfolio appreciation or capital gains. The most common way to compensate the adviser is based on a percentage of average assets under management each month or quarter. As with any rule, there are exceptions. Because this question does not address the exceptions, it should be answered from the basic premise that performance-based fees are prohibited. Furthermore, performance-based fees are applicable to qualified clients, a standard more rigorous than that of an accredited investor. The ability to share in profits and losses in an account is unique to agents of broker-dealers and no other securities professional.

Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) changes to the fee schedule must be announced in advance. B) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. C) it must be up-to-date. D) changes to the fee schedule may be shown on the firm's website.

B....There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm's website is one of them.

A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A) Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. B) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. C) Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program. D) Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program.

B....Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have either $1.1 million in assets managed by the adviser or a net worth in excess of $2.2 million. This requirement is described in Rule 205-3 of the Investment Advisers Act of 1940 and the NASAA Model Rule makes reference to the federal rule. If using joint assets, only those with a spouse are allowed. Please note: This differs from meeting the net worth standard as an accredited investor. Under Rule 501 of Regulation D of the Securities Act of 1933, one can use assets owned jointly with persons other than a spouse to qualify as an accredited investor, but only to the extent of the percentage ownership of the

Under the Uniform Securities Act, the Administrator has the power to do all of the following EXCEPT A) subpoena witnesses B) indict offenders C) take evidence D) administer oaths

B....While the Administrator is authorized to refer violations for possible criminal prosecution, the actual powers of criminal prosecution belong to others. For example, indicting offenders is the function of a grand jury. The Administrator has the power to administer oaths, subpoena witnesses, and take evidence. The Administrator also has the power to compel testimony and require the production of books and records.

Which of the following is TRUE regarding a state Administrator's authority? A) The Administrator may suspend an agent's license based solely on the public good doctrine. B) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating. C) If a specific securities transaction meets the USA's definition of "exempt transaction," the Administrator does not have the power to void that exemption. D) The Administrator's subpoena power covers that state only where officiating.

B....With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public's interest. A person's license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption.

Under the Investment Advisers Act of 1940, cash referral fees may be paid by an investment adviser to a promoter for soliciting for new accounts A) with no restrictions. B) when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. C) only if the referring party is registered as an investment adviser representative. D) under no circumstances.

B...A cash referral fee may be paid under the terms of a written agreement spelling out the terms and conditions of the arrangement and making the required disclosures. That written agreement is required only when the compensation exceeds the de minimis amount.

The definition of a federal covered security excludes which of the following securities? A) PMT Manufacturing common stock, traded on the Nasdaq Stock Market B) Jonesy Gold Stock, a common stock traded OTC, but not on the Nasdaq Stock Market C) U.S. U.S. government Treasury notes sold at auction D) Arctic Blue Preferred stock traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX])

B...A federal covered security is one that is exempt from state registration because of either one or both of the following reasons. There exists a federal exemption from registration under the Securities Act of 1933, and that exemption must flow through to the state also. The NSMIA created a second type of exemption by declaring that any company that is listed on certain exchanges, such as the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market, or any company registered under the Investment Company Act of 1940 are exempt from state registration requirements.

Under the Uniform Securities Act, which of the following constitutes an offer of a security? A) Tombstone advertisement B) The delivery of a prospectus to a prospective purchaser C) Stock dividend distributed to current shareholders D) Agreement between an issuer and an underwriter

B...A prospectus is the document that offers a security for sale. A tombstone advertisement always states that in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained. The key to this question is that the delivery is being made to a prospective purchaser; that is what makes it an offer.

Which of the following securities is most likely to register by qualification in the state of Virginia? A) An offering of common stock by a Virginia-based corporation to residents of Virginia and the Carolinas B) An offering of common stock by a Virginia-based corporation to Virginia residents only C) An offering of common stock by a Virginia-based corporation that will be simultaneously registered at the federal level D) An offering of common stock by a Virginia-based corporation that will be offered on a nationwide basis

B...Although any issuer may register its securities at the state level by qualification, this cumbersome means of registration is mainly used in conjunction with intrastate (single state) offerings. If a security is offered by a corporation beyond its own home state, the issuer must register with the SEC at the federal level. Registration by qualification, while permitted, would be an unlikely choice.

One of the distinguishing characteristics of an investment adviser is that of fiduciary responsibility to clients. That responsibility specifically requires the IA to A) charge fees that are reasonable under the circumstances of the account B) always place the client's interest ahead of its own C) disclose all potential conflicts of interest D) be sure that all recommendations to clients are suitable

B...Although each of these is a requirement for acting ethically as an investment adviser, the only choice that specifically reflects the obligation as a fiduciary is to place the interest of the clients first.

Which of the following is NOT true regarding the Securities Exchange Act of 1934? A) The act proscribes the use of wash trades. B) The act bars the use of arbitrage by broker-dealers. C) The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading. D) The act prohibits the spread of false rumors to induce others to trade.

B...Arbitrage is a legal activity, usually performed by traders at broker-dealers, which takes advantage of momentary discrepancies in the price of a security in different markets. The act prohibits any form of manipulation of securities prices or any practices that would influence the market price of a security. This includes wash trades, which are simultaneous purchases and sales that create the appearance of trading activity, and the use of rumors to induce others to trade.

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? A) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. B) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. C) Material changes to wrap fee programs must be filed promptly with the Administrator. D) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end.

B...As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.

Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be A) registered with the SEC and in the state of issue B) registered in the state or exempt from registration in the state C) registered in one other state and with the SEC D) exempt from registration in other states in which it is issued

B...Before issuing a security in a state, the issuer must either register the security in the state or be exempt from registration under the Uniform Securities Act.

All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) using deceptive or misleading advertising or sales presentations B) charging higher commissions than normal for executing thinly traded foreign securities C) backdating a customer's records to save the client a substantial amount of income tax D) effecting any transaction in a security that involves no change in beneficial ownership

B...It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other activities are unethical business practices prohibited by the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

Under the USA, it is unlawful to sell A) a security of a commercial bank not registered in the state B) a nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations C) a security registered in the state under the USA but not registered in any other state D) a federal covered security not registered in the state

B...Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities.

If a nonexempt company has authorized a stock split that will give each shareholder 2 shares for every 1 share owned without charge, this action A) need not be registered because the shares of the corporation have already been registered B) need not be registered because it is neither an offer to sell or a sale C) must have the prior written approval of each state Administrator in which the shares trade D) must be registered because it is the issuance of new nonexempt securities

B...Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved.

Under the Uniform Securities Act, prepaid advisory fees 1must be detailed in the advisory contract 2may not exceed 2% of the customer's deposited assets in excess of $500 for 6 months or more of service require the 3adviser's balance sheet to be included in the brochure 4may never be accepted A) II and IV B) I and III C) I, II, and III D) I, II, III, and IV

B...Under the Uniform Securities Act, prepaid fees are permitted if they are detailed in the advisory contract and there is a refund of the fees if the contract is canceled prematurely. If an adviser accepts more than $500 in prepaid fees, 6 months or more in advance of services, a balance sheet must be included in the brochure (Part 2 of Form ADV) given to customers.

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days B) the disclosure brochure must be signed by an officer or a general partner of the firm C) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right D) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B.

B...When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right B) the disclosure brochure must be signed by an officer or a general partner of the firm C) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. D) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days

B...When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding registration of broker-dealers and agents? Those defined as broker-dealers must be registered with the state before transacting any securities business. An agent of a broker-dealer must become registered with the state before transacting business. Agents of a broker-dealer are not required to be registered. A) I only B) III only C) I and II D) I and III

C.....All persons defined as broker-dealers or agents under the act must register as such before transacting any securities business. It is unlawful for a broker-dealer to employ an agent unless the agent is registered.

Which of the following is NOT classed as a security under the Uniform Securities Act? A) Bonds issued by a foreign country B) Stocks C) Heating oil futures D) Options on stocks

C....Commodity futures on items such as gold, silver, wheat, heating oil, and pork bellies are not securities. Options on stocks, and stocks and bonds are securities.​

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? A sofa in the reception area The value of the copyright on an investment manual authored by the investment adviser The reputation of the investment adviser Patents held by the investment adviser on a stock tracking software program A) II, III, and IV B) I, II, and III C) I only D) IV only

C....For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.

Under the Uniform Securities Act, which of the following statements regarding private placements is TRUE? A) A prospectus must be provided before the offering. B) Being an exempt transaction, the antifraud provisions do not apply. C) The security ​that is the subject of the private placement ​need not be registered. D) The offering must be made to fewer than 15 noninstitutional persons.

C....Private placements are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements. The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities. Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding period, and no restrictions on payment of commissions.

​​​As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A) a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed B) a portfolio manager who limits advice to municipal securities exclusively C) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors D) a tax attorney who manages investment portfolios for 50 clients

C....The plumber would not be considered an investment adviser because two of the three "prongs" are missing—advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition, provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.​

The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) the purchase could only be made with prior disclosure to the client B) the broker-dealer has the right to purchase shares of XYZ whenever it wishes. C) this would be the prohibited practice of front running D) this would be considered market manipulation

C....The practice of entering an order for the firm in front of a previously received customer order, known as front running, is prohibited. Customer orders always take priority over firm orders, assuming they were not received after the firm entered its orders.

Under the Securities Act of 1933, an accredited investor may be a bank, insurance company, investment company, or employee benefit plan valued in excess of $5 million a wealthy person, in some cases partners, officers, and directors of the issuer for a particular issue A) II only B) I only C) I, II, and III D) I and III

C...Accredited investors are financial institutions, wealthy persons meeting specific requirements, and (for a particular issue) persons involved in the management of the issuer.

As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material, but has no part in its creation, it is known as A) usage. B) retail communication. C) adoption. D) entanglement.

C...Adoption is the term used to describe material posted to a securities professional's social media site by a third party where the securities professional explicitly or implicitly endorses or approves of the content, but plays no role in its development. Where the firm is involved in the preparation of the content, it is known as entanglement.

In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for A) obligations of the Canadian government B) stock issued by regulated insurance company C) equipment trust certificates issued by a regulated common carrier D) corporate common stock listed on the NYSE

C...Although each of these is considered an exempt security under the Uniform Securities Act (state laws), only the securities of a regulated common carrier carry an exemption from federal registration.

An Administrator may deny or revoke a security's exemption A) for a federal covered security if its issuer is in violation of state law B) if the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law C) without a hearing if the issuer is given an opportunity for a hearing after the revocation D) if the Administrator, in a court of competent jurisdiction, proves that a security does not qualify for an exemption

C...An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A) the adviser must state that the client may be subject to certain limitations because of this arrangement B) the adviser may collect fees for investment advice and commissions for executing trades C) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment D) this practice is ethical if full disclosure is made to all clients

C...Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed.

Under the USA, all of the following are exempt transactions EXCEPT A) isolated nonissuer transaction B) transaction executed by a trustee in bankruptcy C) a sale of a primary offering registered with the SEC D) unsolicited customer orders

C...In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transactions; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements.

Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) the name, title, and telephone number of the individual supervising any listed person B) disciplinary information about material events within the past 10 years C) compensation earned on dealings with clients D) the fact that any listed person has no formal education after high school

C...It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.

First Growth Securities, Inc., a member of the Financial Industry Regulatory Authority (FINRA), has its main office in Illinois and is therefore A) a registered investment adviser licensed to sell securities in Illinois B) registered by FINRA to sell securities in Illinois C) required to register as a broker-dealer in the state of Illinois D) automatically registered as a securities agent in Illinois

C...Securities firms that are members of FINRA must register as broker-dealers in the states in which they conduct business. Under the USA, broker-dealers are firms engaged in the business of effecting security transactions in customer or proprietary accounts. A broker-dealer is not a registered investment adviser, although many broker-dealers own separate legal subsidiaries that are investment advisers. FINRA does not license its members to conduct business in the states; the state securities licensing agent is the state securities Administrator. Also, a broker-dealer is not an agent; an agent is a person who is employed by a broker-dealer to conduct securities transactions as a representative of the broker-dealer.

If a nonexempt company has authorized a stock split that will give each shareholder 2 shares for every 1 share owned without charge, this action A) must be registered because it is the issuance of new nonexempt securities B) must have the prior written approval of each state Administrator in which the shares trade C) need not be registered because it is neither an offer to sell or a sale D) need not be registered because the shares of the corporation have already been registered

C...Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved.

Regarding the use of testimonials in advertising, all of the following are true except A) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial B) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm C) an investment adviser may use a testimonial, but only if it comes from someone who is not an existing client D) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial

C...Testimonials from exisiting clients are permitted for use by investment advisers. Certain disclosures are needed, such as the fact that the person giving the testimonial is a client and the extent of any compensation paid for the testimonial. Those who are not clients of the advisory firm give endorsements. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. One of the most common forms of testimonial is the public comment by a celebrity about an existing relationship with a financial firm, IA, or BD.

A state securities Administrator may do all of the following except A) issue interpretive opinions B) require the use of specific forms C) issue a subpoena to registrants who are out of state D) issue an injunction after a hearing

D....A state securities Administrator may not issue injunctions, which are issued by courts, not administrative agencies. Administrators may require specific forms to be used, issue subpoenas to registrants who are out of state, and issue interpretive opinions.

Which of the following statements (is)are TRUE? An Administrator can suspend a pending registration on a summary basis. An Administrator may not issue a stop order without prior notice and opportunity for a hearing. An Administrator may cancel a registration for the same reasons he revoked or suspended a registration. A) I only B) II and III C) III only D) I and II

D...An Administrator can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located.

Under the USA, a sales agent's registration may be suspended by the Administrator for all of the following reasons EXCEPT A) it has been discovered that the agent is not properly supervised B) the agent is enjoined by a court of law from engaging in the securities business C) the agent is convicted of willful violations of the USA D) the agent is accused of violations of the antifraud provisions of the USA

D...An accusation is not grounds for suspension, unlike convictions, court injunctions, and lack of supervision.

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? A) Material changes to wrap fee programs must be filed promptly with the Administrator. B) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. C) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end. D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.

D...As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States D and M. B) States P, D, and M. C) States P and O. D) State P.

D...As an IAR for a federal covered investment adviser, Stillman is required to register only in those states in which he (Stillman) has a place of business. Although Stillman has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

The Administrator may require which of the following from a federal covered adviser? 1copy of the IA's Form ADV 2filing of the IA's advertising in the state 3a listing of the IA's fee schedule 4a filing fee A) I, II, III, and IV B) II and III C) I and II D) I and IV

D...Even though Administrators have limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (the Form ADV), as well as a filing fee.

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) The sale of ABCD common stock, traded on the OTC Link, to an insurance company B) The sale of an unregistered nonexempt security to an individual client at that client's request C) An executor liquidates the estate's portfolio D) An agent sells U.S. treasury bonds to an individual client

D...Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.

Form PF must be filed by A) state-registered private fund managers, regardless of the amount of assets under management B) SEC-registered advisers with no more than $150 million in private fund assets under management C) SEC-exempt reporting advisers D) SEC-registered advisers with at least $150 million in private fund assets under management

D...Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.

An adviser wishes to use in its advertising the testimonial of a client who is a famous sports figure. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, this action is permitted A) if the client is not compensated for the testimonial B) if the information in the testimonial is correct C) if the client is compensated for the testimonial D) if the sports figure is a client and disclosure is made regarding any compensation paid for the testimonial

D...NASAA's Model Rule requires compliance with SEC Rule 206(4) under the Investment Advisers Act of 1940. Under the SEC Model Marketing Rule for investment advisers, testimonials are limited to clients. Non-clients may give endorsements. There is no requirement to compensate the client for giving the testimonial, but if any compensation is paid, it must be disclosed. The investment adviser should make a reasonable attempt to be sure the testimonial is fair and balanced.

Parsimonious Planning Associates (PPA), an investment adviser with over $250 million in assets under management, is accused of violating the antifraud provisions of the Uniform Securities Act. Which of the following statements is true? A) Because PPA is a federal covered adviser, only the SEC has the jurisdiction to investigate the charge. B) The Administrator of the state where PPA's principal office is located is the only person authorized to investigate the charge. C) No investigation may take place until the charges are proven true. D) The Administrator of the state where the alleged fraud occurred may investigate the charge.

D...Once an investment adviser's AUM reaches $110 million, registration with the SEC is required. That makes PPA a federal covered adviser. Although covered advisers are exempt from the jurisdiction of the state for most things, one area in which they are not is when the antifraud provisions of the USA are breached. In that case, jurisdiction will usually rest with the Administrator of the state where the alleged fraudulent activity took place. In some states, the Administrator will refer the charges to the Administrator of the state where the IA's principal office is located, but that is not mandatory. Because the violation is of the USA, the SEC has no jurisdiction. Without an investigation, how can the charges be proven true (or false)?

The Uniform Securities Act contains a number of actions potentially leading to revocation of an agent's registration. Not included in that list would be when the individual is A) convicted of a non-securities-related felony B) convicted of a securities-related misdemeanor C) declared insolvent D) accused of murder in the first degree

D...Once registered, an agent's license can be revoked if the agent is convicted of a securities-related misdemeanor or any felony. Insolvency is a cause for revocation of the registration of any securities professional. However, merely being accused of a crime, no matter how serious it is, does not lead to action until there is a conviction.

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit business, it would be correct to state that A) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. B) referral fees may be paid only if the solicitor is also registered with the SEC. C) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. D) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification.

D...One of the important requirements when hiring a solicitor is making sure that the person is not statutorily disqualified from registration. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. Promoters do not have to prepare (much less deliver) a brochure. If the promoter is to be compensated more than the de minimis amount, there must be a written, not oral, agreement.

The Investment Advisers Act of 1940 addresses the issue of investment advisers (IA) maintaining custody of client funds and/or securities. In which of the following cases would that act consider the IA to have custody? 1Possession of client funds or securities 2Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian 3Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities 4Receipt of a check made out to a third party A) I and II B) I and III C) I, II, III, and IV D) I, II, and III

D...One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a third party other than the IA is not considered to be custody.

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. A) II and IV B) I and III C) II and III D) I and IV

D...One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to A) charge fees in advance of services performed B) have discretion over a client's assets C) charge commissions D) charge fees based on performance

D...Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

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

D...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.

If a federal covered adviser's fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than A) March 30, 2018 B) December 31, 2017 C) January 18, 2018 D) February 28, 2018

D...The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

Under Regulation D, accredited investors in a private placement must meet minimum standards that may include which of the following? Annual income in excess of $200,000 for at least the last 2 years Annual income in excess of $100,000 for at least the last 2 years Net worth, excluding the primary residence, in excess of $1 million Net worth, excluding the primary residence, in excess of $200,000 A) II and IV B) I and IV C) II and III D) I and III

D...The requirement for an accredited investor under the private placement exemption is either a net worth, excluding the primary residence, in excess of $1 million, or annual income in excess of $200,000 in the last 2 years and the same or more income expected this year, or $300,000 for joint incomes.

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

D...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 exempt, 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.

Under the USA, which of the following are exempt transactions? A transaction between an issuer and an underwriter An unsolicited customer order to buy an exempt security U.S. Treasury bonds Municipal securities A) III and IV B) II and IV C) I and III D) I and II

D...Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.

When a new issue of common stock is registered under qualification, the Uniform Securities Act states that the Administrator may require an agent to present the prospectus for the issue to the offeree A) no later than the mailing of the certificates B) after the settlement date C) prior to making the offer D) prior to making the sale

D...Under Section 305(l) of the Uniform Securities Act, the Administrator may require that a prospectus be sent or given to each person to whom an offer is made before the sale of the security, but not prior to the offer. Remember, the offer is the attempt to sell and that always precedes the sale itself.

Under the Uniform Securities Act, the Administrator may institute an action if an agent borrows money from his wealthy clients' accounts solicits orders for nonexempt unregistered securities buys and sells securities in accounts to generate a high level of commissions alters market quotations to induce a client to invest in an attractive growth stock A) I and IV B) I and III C) I, II, and III D) I, II, III, and IV

D...Under the Uniform Securities Act, the Administrator may institute an action if an agent borrows money from his wealthy clients' accounts solicits orders for nonexempt unregistered securities buys and sells securities in accounts to generate a high level of commissions alters market quotations to induce a client to invest in an attractive growth stock A) I and IV B) I and III C) I, II, and III D) I, II, III, and IVD...An Administrator may deny or revoke an agent's registration if the agent engages in practices that are prohibited. Borrowing money from clients who are not in the money-lending business, churning, and manipulating market quotes are all prohibited or fraudulent. The solicitation of a nonexempt security that has not been registered is also a violation.

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction except A) a sale of securities to a bank B) a sale of unregistered nonexempt securities in an unsolicited transaction C) a sale of nonexempt securities to a broker-dealer D) a sale of securities to an individual investor with a net worth of more than $5 million

D...Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.

Under both federal and state law, an exemption from registration is granted to municipal bonds. Qualifying for that exemption would be all of the following EXCEPT A) bonds issued by a city B) bonds issued by a school district C) bonds issued by the U.S. Treasury D) bonds issued by a state

c....Municipal bonds are those issued by any governmental unit from the state level on down. This would include political subdivisions and local entities such as school, park, and road districts. Treasury bonds are government, not municipal, bonds.

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3) B) General obligation bonds issued by a city located in this state C) Variable annuities issued by an insurance company authorized to do business in this state D) Common stock issued by a public utility company whose rates are subject to state regulation

c....Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.