Quiz 7

Which of the following is responsible for administration of the Bank Secrecy Act?

The Financial Crimes Enforcement Network. Or FinCEN as it is more commonly printed. Reference: 1.11.1

Under the Uniform Securities Act, an offer to sell would NOT include: stock acquired through a merger. the issuance of warrants or convertible securities. the issuance of stock rights to existing shareholders.

I only An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell. Reference: 2.12.1.2 in the License Exam Manual

In defining an investment adviser under SEC Release 1A-1092, which of the following would meet the business standard? A person who advertises himself as an investment adviser. A person who provides securities-related advice on a frequent or regular basis. A person who receives separate or additional compensation for securities-related advice.

I, II and III. To meet the business standard, persons must meet three criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so. Reference: 3.2.1 in the License Exam Manual

Which of the following statements is (are) TRUE concerning wrap fee programs under the Uniform Securities Act? Wrap fee disclosure documents must be filed with the Administrator. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A.

I, II, III and IV. Wrap fee disclosure documents must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Amendments must be filed promptly with the Administrator if the disclosure document becomes inaccurate in any material way. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. Reference: 3.10.2

An Administrator has specific authority under the USA to: I. suspend the registration of a security if the suspension is in the public interest and the offering has excessive commissions. II. issue emergency injunctions to prevent a violation of the act. III. enforce subpoenas in the state at request of an Administrator of another state for alleged violations that occurred in another state. IV. require that the proceeds from an offering be held in escrow until issuer receives a certain percentage of the sale of the securities offered.

I, III and IV. The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced. Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator. Reference: 2.14.4.2 in the LEM

A broker-dealer with an office in this state must register as an investment adviser if it charges: commissions for selling securities. commissions for selling securities while offering investment advice incidental to the sale of the securities. a fee for selling investment research and additional fees in the form of commissions for the sale of securities. fees for investment research sold exclusively to institutions located in this state.

III and IV. A broker-dealer must register as an investment adviser if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm must register as an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer need not register as an investment adviser because it is not compensated for the research. Reference: 3.4 in the License Exam Manual

Which of the following activities would be prohibited for an agent? Executing a transaction in a discretionary account. Charging a larger than average commission on certain transactions. Soliciting sales of a non-exempt security not yet registered.

III only. An agent is prohibited from soliciting sales of a security that has not been registered. An agent is not prohibited from executing a transaction in an account over which he has been granted discretionary authority. An agent may also charge higher than average commissions on certain transactions typically involving low market volume securities and penny stocks among others. Reference: 2.8 in the License Exam Manual

Which of the following statements regarding matched orders is TRUE?

Matched orders violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur. Matched orders occur when market participants agree to buy and sell securities among themselves to create the appearance of activity or trading in a security. Increased volume in a security can induce unsuspecting investors to purchase the security, thereby bidding up the price. As the price rises, participants who initiated the matched orders sell their securities at a profit. Reference: 2.11.13

According to the USA, under which of the following circumstances may an Administrator cancel an agent's registration?

The agent is judged to be mentally incompetent. Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator. Reference: 2.14.5.2

A person is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to:

U.S. government securities. Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government. Reference: 3.2.2

Under the NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, investment advisers who advertise must comply with the rules of the Investment Advisers Act of 1940, which include:

a prohibition against testimonials from clients. Advertisements may not include testimonials from clients or others, refer selectively to past recommendations, or refer to a chart or device for evaluating securities without explaining its limitations and difficulties. There is no requirement for filing of advertising with the SEC, or anyone else for that matter. Introductory reduced-fee offers, while rare, are not prohibited as long as they are not discriminatory. Past performance may be used in advertising as long as it meets the requirements of the Rule. Reference: 3.13 in the License Exam Manual

Under the Investment Advisers Act of 1940, an investment adviser that operates in only one state has no private funds as clients, and restricts advice only to securities not listed on a national stock exchange:

is exempt from registration with the SEC under the act. While not excluded from the definition of investment adviser, some advisers are exempt from the requirement to register with the SEC. These include investment advisers whose clients are all residents of the state in which the adviser maintains its principal office and that confine their advice to securities not listed with a national exchange or that enjoy unlisted trading privileges on a national exchange; investment advisers whose clients are limited to insurance companies; and as long as none of their clients are private funds. Reference: 3.3.1

If a nonexempt company has authorized a stock split that will give each shareholder two shares for every one share owned without charge, this action

need not be registered because it is neither an offer to sell nor a sale 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. Reference: 2.12.1.4

Under the Uniform Securities Act, an investment adviser would be permitted to maintain custody of customer cash and/or securities if:

notification was given to the Administrator and custody was not prohibited by that state's rules. In order to maintain custody, notification must be given to the Administrator and, obviously, the state must not have a rule forbidding custody. Does the customer have to approve of the custody arrangement? Yes, but that is done AT the time of entering into the contract, not before. What about bonding or net worth? Under the USA, in order to maintain custody, an IA must have net worth of no less than $35,000, or provide a suitable surety bond. Reference: 3.11

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must

send a copy of its brochure to all clients within 120 days of the end of its fiscal year Whether a state or federal covered investment advisers, a copy of the IA's brochure, assuming there have been material changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year. Reference: 3.10.3.1 in the License Exam Manual

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested, but you will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if

the investment company has net worth of at least $2.1 million or will place at least $1 million in assets under management with the IA An investment adviser may enter into, extend or renew an investment advisory contract which provides for compensation to the investment adviser 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 if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company) - they need at least 100 investors and registration with the SEC. Reference: 3.14 in the License Exam Manual